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All Medicare beneficiaries entitled to benefits under Medicare Part A or enrolled in Part B are eligible to enroll in Medicare Part D. Medicare beneficiaries who qualify for full coverage under their state’s Medicaid program, as well as Medicare beneficiaries who qualify for more limited Medicaid coverage, Supplemental Security Income (SSI), or state Medicare Savings Programs are automatically enrolled in a prescription drug plan by CMS, automatically qualify for the full subsidy of their premium and deductible, and do not need to file an application. They are referred to as “deemed.” Other Medicare beneficiaries who do not automatically qualify for the subsidy (i.e., who are not deemed) must apply and meet the income and resource requirements. These beneficiaries generally qualify if they have incomes below 150 percent of the federal poverty level and have limited resources. Generally, in 2007, individuals qualify if they have an income of less than $15,315 and have resources of less than $11,710; couples qualify if they have a combined income of $20,535 and resources of $23,410. The amount of the subsidy for premiums, deductibles, copayments, and catastrophic coverage varies, depending on income and resources. Subsidy benefits are provided to these individuals on a sliding scale, depending on their income and resources. Individuals generally apply for the benefit directly through SSA, although they may also apply through their state Medicaid office. The agency that receives an application, whether SSA or a state Medicaid agency, is responsible for making initial subsidy determinations and deciding appeals and redeterminations. Those who apply through SSA may submit their subsidy application using SSA’s paper application or an Internet application form. Applicants may also have their information entered electronically by visiting an SSA field office or by calling SSA’s toll-free phone line. Under the MMA, beneficiaries may also apply for the subsidy through their state Medicaid office. However, according to state Medicaid officials we spoke with, they encouraged beneficiaries to apply for the subsidy through SSA whenever possible. As of March 2007, only the Colorado and Kansas state Medicaid agencies had made Part D subsidy determinations. Under the MMA, the Congress provided SSA with a $500 million appropriation from the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund to pay for the initiation of SSA’s Part D responsibilities, and the activities for other MMA responsibilities for fiscal years 2004 and 2005, but later extended the appropriation to fiscal year 2006. Since January 2006, SSA officials told us that the agency has had to draw on its overall administrative appropriation to support its Part D activities. SSA has approved 2.2 million applicants for the subsidy as of March 2007, despite some barriers, but measuring their success is difficult because no reliable data are available to identify the eligible population. SSA officials told us that their outreach goal was to inform all individuals potentially eligible for the subsidy and provide them an opportunity to apply for the benefit. Because the agency lacked access to reliable data that might help target their outreach efforts more narrowly, SSA used income records and other government data to identify a broad group of potentially eligible individuals. Outreach efforts were further limited by several barriers to soliciting applications. Since its initial outreach campaign, SSA has not developed a comprehensive plan to identify its continued outreach efforts apart from other activities. SSA conducted its initial outreach campaign from May 2005 to August 2006, but has decreased its efforts since then. SSA sent targeted mailings, which included an application for the subsidy and instructions on how to apply, to the 18.6 million individuals it had identified as potentially eligible. After the subsidy applications were mailed, a contractor then made phone calls to 9.1 million beneficiaries who had not responded to the initial mailing. SSA also conducted other follow up efforts, including sending notices to individuals whom the contractor was unable to contact and to specific subgroups that it identified as having a high likelihood of qualifying for the subsidy, such as the disabled; individuals 79 years of age and older living in high-poverty areas; and individuals in Spanish-speaking, Asian-American, and African-American households. The outreach efforts also included over 76,000 events conducted in collaboration with federal, state, and local partners, such as CMS, state Medicaid agencies, state health insurance programs, and advocacy groups for Medicare beneficiaries. Events were held at senior citizen centers, public housing authorities, churches, and other venues. As figure 1 shows, the number of outreach events has declined significantly, from a high of 12,150 in July 2005 to 230 at the completion of the campaign in August 2006. Although the initial campaign has ended, SSA is continuing to solicit applications. For example, SSA has conducted various activities to inform individuals in rural and homeless communities about the subsidy, and is planning to launch a new strategy this week for Mother’s Day to inform relatives and caregivers—the sons, daughters, grandchildren and family friends---about the subsidy. SSA has incorporated its strategy for continuing outreach efforts for the subsidy into its National Communications Plan. However, it has not developed a comprehensive plan that specifically identifies those efforts separate from other agency activities. As a result, SSA has a limited basis for assessing its progress and identifying areas that require improvement. SSA did not have access to data that might have helped to narrowly target the eligible population. Because of the lack of reliable data for identifying the entire population, SSA broadly targeted 18.6 million individuals who might be eligible for the subsidy. SSA identified the target population by using income data from various government sources to screen out Medicare beneficiaries whose income made them ineligible for the Part D subsidy. SSA realized that using these data sources would result in an overestimate of the number of individuals who might qualify for the subsidy, because the data provided limited information on individuals’ resources or nonwage income. SSA officials said they took this approach to ensure that all Medicare beneficiaries who were identified as potentially eligible for the subsidy were made aware of the benefit and had an opportunity to apply for it. SSA officials said that they would have preferred to specifically target Medicare beneficiaries who were likely to be eligible for the subsidy by using tax data from IRS on individuals’ wage, interest, and pension income. Current law permits SSA to obtain income and resource data from IRS to assist in verifying income and resource data provided on subsidy applications. The law, however, prohibits IRS from sharing such data with SSA to assist with outreach efforts. According to SSA officials, such data would allow SSA to identify individuals to target for more direct outreach and to estimate how many individuals qualify for the subsidy. In November 2006, the HHS Office of Inspector General reported that legislation is needed to provide SSA and CMS access to income tax data to help the agencies more effectively identify beneficiaries potentially eligible for the subsidy. SSA officials believe IRS income tax data could provide access to information on individuals’ income and resources. However, IRS officials told us that its data have many limitations. For example, IRS officials said that they have limited data on resources for individuals whose income is less than $20,000, because these individuals do not typically have interest income, private pensions, or dividend income from stocks that could assist SSA in estimating an individual’s potential resource level. Also, the officials said that many people with low incomes do not have incomes high enough to require them to file taxes, and therefore, IRS might not have information on them. IRS also explained that its tax data would most likely identify individuals that would not qualify for the subsidy, rather than individuals that would qualify. Moreover, the IRS officials said that the data it would provide to SSA to determine eligibility could be almost 2 years old. For example, for subsidy applications filed in early 2007, the last full year of tax data the IRS could provide would be for 2005. Given these factors, IRS officials stated that summarily sharing private taxpayer data to identify individuals who could qualify for the subsidy, and the potential cost of systems changes, would have to be weighed against the added value of the data. No effort has been undertaken to determine the extent to which IRS data could help SSA or improve estimates of the eligible population. Legislation is currently pending before the Congress to permit IRS to share taxpayer data with SSA to assist the agency in better identifying individuals who might be eligible for the subsidy. SSA’s efforts to solicit applications were hindered by beneficiaries’ confusion about applying for subsidy and the drug benefit. According to SSA field office staff and state Medicaid and advocacy group officials, many individuals were confused about the difference between the prescription drug benefit and the subsidy, and did not understand that they involved separate application processes. Consequently, some individuals thought that once they were approved for the subsidy, they were also automatically enrolled in a prescription drug plan. Additionally, some individuals were reluctant to apply because they did not want to share their personal financial information for fear that an inadvertent error on the application could subject them to prosecution under the application’s perjury clause. Though individuals have become more educated about the subsidy, concerns remain about eligibility requirements and the overall complexity of the application. SSA field office staff and advocacy group officials have concerns that the eligibility requirements set by the MMA may be a barrier. For example, they said that the subsidy’s resource test may render some low-income individuals ineligible because of retirement savings or the value of other resources. Legislation has been proposed to increase the resource limit. Advocacy group officials have also said that the application may be too complex for many elderly and disabled beneficiaries to understand and complete without the assistance of a third party. SSA headquarters officials told us they worked with various focus groups to develop the subsidy application and that they have revised the application several times to address such concerns, but that much of the information that applicants may view as complex is required by the MMA. The success of SSA’s efforts is uncertain because no reliable data exist on the total number of individuals potentially eligible for the subsidy. Using available estimates of the potentially eligible population, SSA approved 32 to 39 percent of the eligible population who were not automatically deemed by CMS for the subsidy. According to these estimates by CMS, the Congressional Budget Office, and other entities, about 3.4 million to 4.7 million individuals are eligible for the subsidy, but have not yet enrolled (See table 1.) In developing these estimates, however, these entities faced the same data limitations as SSA in identifying potentially eligible individuals. SSA officials said that it is unfair to judge the success of its outreach efforts for the subsidy in relation to the estimates of the total eligible population, given the limitations in identifying it. SSA officials stated that their efforts have been successful in meeting their outreach goals. In fact, after almost 2 years of implementation efforts, SSA’s participation rate compares favorably to that of the Food Stamp Program, which had a participation rate of 31 percent after its second year of implementation. The low-income subsidy participation rate compares less favorably, however, to that of the Supplemental Security Income program, which had a participation rate of approximately 50 percent among the aged a year after the program began. SSA officials noted that the SSI participation rate included individuals who were automatically transferred from state government programs to SSI, which is somewhat similar to the “deemed” population that was automatically transferred to the low-income subsidy. SSA has collected data and established some goals to monitor its progress in implementing and administering the subsidy benefit, but still lacks data and measurable goals in some key areas. To enable agencies to identify areas in need of improvement, GAO internal control standards state that agencies should establish and monitor performance measures and indicators. Accordingly, agencies should compare actual performance data against expected goals and analyze the differences. SSA monitors various aspects of its determination process, such as the number of applications received and their outcomes and length of processing, but did not establish a performance goal for processing times until March 2007. SSA largely relies on an automated process to determine individuals’ eligibility for the subsidy. Income and resource data provided by the applicant are electronically compared to income data provided by IRS and other agencies to determine if the individual meets income and resource requirements. SSA field office staff follow up with individuals in cases where there are conflicting data or questions. SSA tracks the number of eligibility determinations, the outcome of those determinations, and the length of time for completing the determinations. SSA also tracks denials and periodically samples denied claims to examine the reasons for such actions. As of March 2007, approximately 6.2 million individuals had applied for the subsidy. SSA received the heaviest volume of applications when the public outreach campaign was the most active. Figure 2 provides data on the cumulative number of subsidy applicants and approvals from November 2005, when SSA began tracking the data, to December 2006. While SSA has captured data on the length of time it takes to make eligibility determinations, it did not develop the capability to report the data, and did not establish a performance goal for processing times until March 2007. SSA has now established a goal of processing 75 percent of subsidy applications in 60 days. Of the approximately 6.2 million individuals who had applied for the subsidy as of March 2007, SSA approved 2.2 million, denied 2.6 million, and had decisions pending for 80,000 applicants. SSA officials determined that no decision was required for 1.4 million because they were duplicate applications, applications from individuals automatically qualified for the subsidy, or canceled applications. To identify reasons for subsidy denials, SSA conducted three separate studies that sampled a total of 1,326 denied claims. These studies showed that 47 percent of applicants were denied due to resources and 44 percent because of income that exceeded allowable limits set by the MMA. SSA officials stated that they plan to conduct a longitudinal study to examine the reasons for all denied claims. SSA tracks data on the total number of appeals, the reason for appeals, the time it takes to process them, the method used to resolve them, and their final disposition. Individuals may appeal denied claims, as well as the level of the subsidy, by calling SSA’s national toll-free number, submitting the request in writing, or visiting any Social Security field office. Individuals may also complete an appeals form available on SSA’s Web site and mail it to SSA. Individuals have the choice of having their appeal conducted through a telephone hearing or a case file review. According to SSA, about 79,000, or 3 percent of denied subsidy applications were appealed from August 2005 to February 2007. SSA completed about 76,000 appeals in that time frame. On the basis of an SSA sample of 781 appeals, SSA reversed its decision for 57 percent of the cases and upheld its decision for the remaining 43 percent. SSA data show that the overall volume of appeals received was the highest between November 2005 and July 2006, declined between August and November 2006, and rose again between December 2006 and February 2007. During the decline, SSA closed all but one of its six Special Appeals Units by October 2006. Further, the time it took SSA to process appeals varied widely, and did not necessarily decrease when the caseloads grew smaller. SSA tracks various results from the redeterminations process, such as the number of decisions made, and number and level of continued subsidies. However, SSA does not track processing time for redetermination decisions and has not established a performance time target for processing such actions. According to the MMA and SSA regulations, all recipients of the subsidy are required to have their eligibility redetermined within 1 year after SSA first determines their eligibility. Future redeterminations are required to be conducted at intervals determined by the Commissioner. SSA’s regulations provide that these periodic redeterminations be based on the likelihood that an individual’s situation may change in a way that affects subsidy eligibility. Additionally, SSA’s regulations provide that unscheduled redeterminations may take place at any time for individuals who report a change in their circumstances, such as marriage or divorce. SSA officials stated that since the redeterminations process is conducted within a certain period of time, it is unnecessary to track the processing time for individual redetermination decisions. SSA initiated its first cycle of redeterminations in August 2006, which including all of the approximately 1.7 million individuals who were determined to be eligible for the subsidy prior to April 30, 2006. SSA excluded from the redeterminations process about 562,000 individuals who were either deceased, automatically deemed eligible for the benefit by CMS, or whose subsidy benefit had been terminated. SSA data show that as of February 2007, SSA had completed approximately 237,000 redeterminations. About 69,000 individuals remained at the same subsidy level, another 69,000 had a change in their subsidy level, and 98,000 individuals had their subsidies terminated, based on a change in their circumstances. SSA has monitored some aspects of the increased workload and found that implementing the low-income subsidy was manageable overall, due to increased funding for its MMA startup costs. Although the subsidy program affected SSA’s workload and operations, SSA officials told us that implementing the subsidy did not significantly affect the agency’s workload and operations. SSA hired a total of 2,200 field office staff to assist with subsidy applications, as well as an additional 500 headquarters staff to support its MMA activities. SSA officials attribute the light impact of the subsidy program to various factors, including the automation of the subsidy application process and the $500 million appropriation it received for administrative startup costs to implement its MMA responsibilities. SSA officials pointed out that as they implemented the subsidy, the processing times for other workloads improved. Officials explained that they were able to manage the other workloads because the peak increases in subsidy applications and inquiries were short-lived, allowing SSA’s operations to return to a more normal operating level after handling these peak work volumes. SSA officials stated that they expect small increases in its low-income subsidy workload during future prescription drug plan open seasons, which are typically held from November to December. Although SSA can track expenditures for implementing its various MMA responsibilities overall, it cannot track expenditures related specifically to low-income subsidy activities. For example, SSA cannot calculate how much of the $500 million appropriation it received for MMA startup costs was spent on the subsidy program versus its other MMA responsibilities. Although SSA could not provide documentation of the total amount of its subsidy-related expenditures, it estimates that its costs related to administering the subsidy are about $175 million annually, based on workload samples. However, SSA is planning to develop a tracking mechanism to more accurately capture the data. Recent increases in SSA’s administrative resources may have also been a factor in limiting the impact of the subsidy program workload. The amount of SSA’s administrative costs covered by the Medicare Trust Funds is projected to increase by about 37 percent between fiscal year 2003 and fiscal year 2008. This increase occurred despite the transfer of the Medicare appeals processing function from SSA to CMS in 2005. While this increase has helped SSA to carry out its various Medicare responsibilities (such as taking applications for Medicare benefits and withholding Medicare premiums, among others), it may have also helped to cushion the impact of the subsidy program. Reaching the millions of people who are forgoing the government’s help in paying for their prescription drug benefit remains a significant challenge. Using the $500 million appropriation for its MMA start up costs, SSA was able to initiate the Part D subsidy and sign up 2 million people for the subsidy without adversely affecting SSA’s overall operations. However, while it is not clear how to reach the remaining eligible people, the momentum of the initial outreach campaign should not be lost. The barriers to identifying eligible people and convincing them to sign up remain. For some, the subsidy application is complicated, which is due in part to the low-income subsidy eligibility requirements. Further, no one has yet studied whether or not IRS data can help identification efforts. While advocacy groups have called for a more personalized outreach approach to encourage additional enrollments, it may be unrealistic to expect SSA to conduct such efforts, given its resource limitations. Both a better understanding of who is eligible and a plan for continued outreach could help SSA make efficient use of limited staff resources by targeting outreach more narrowly to the eligible population. Further, a timely and reliable process for deciding initial determinations, hearing appeals, and making redeterminations is essential to effective management of the subsidy. SSA has focused on developing and improving the processes for serving its customers in a timely manner. As SSA moves forward, it may need better information to ensure that the subsidy program serves its target population as efficiently and effectively as possible. We are considering recommendations for SSA to work with IRS to assess the extent to which taxpayer data could help identify individuals who might qualify for the subsidy, and help improve estimates of the eligible population; and for SSA to develop a plan to guide its continuing outreach efforts and develop key management tools to measure the results of its subsidy application processes. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the committee may have at this time. For further information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues, on (202) 512-7215. Blake Ainsworth, Jeff Bernstein, Mary Crenshaw, Lara L. Laufer, Sheila McCoy, Kate France Smiles, Charles Willson, and Paul Wright, also contributed 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. | To help the elderly and disabled with prescription drug costs, the Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003, which created a voluntary outpatient prescription drug benefit (Medicare Part D). A key element of the prescription drug benefit is the low-income subsidy, or "extra help," available to Medicare beneficiaries with limited income and resources to assist them in paying their premiums and other out-of-pocket costs. To assess Social Security Administration's (SSA) implementation of the Medicare Part D low-income subsidy, GAO was asked to review (1) the progress that SSA has made in identifying and soliciting applications from individuals potentially eligible for the low-income subsidy, and (2) the processes that SSA uses to track its progress in administering the subsidy. This statement is drawn from GAO's ongoing study for the committee on the Medicare Part D low-income subsidy, which is expected to be published at the end of May. To conduct this work, GAO reviewed the law, assessed subsidy data, and interviewed officials from SSA, the Centers for Medicare and Medicaid Services, the Internal Revenue Service, state Medicaid agencies, and advocacy groups. SSA approved approximately 2.2 million Medicare beneficiaries for the low-income subsidy as of March 2007, despite barriers that limited its ability to identify individuals who were eligible for the subsidy and solicit applications from them. However, the success of SSA's outreach efforts is uncertain because there are no reliable data to identify the eligible population. SSA officials had hoped to use Internal Revenue Service (IRS) tax data to identify the eligible population, but the law prohibits the use of such data unless an individual has already applied for the subsidy. Even if SSA could use the data, IRS officials question its usefulness. Instead, SSA used income records and other government data to identify 18.6 million Medicare beneficiaries who might qualify for the subsidy, which was considered an overestimate of the eligible population. SSA mailed low-income subsidy information and applications to these Medicare beneficiaries and conducted an outreach campaign of 76,000 events nationwide. However, since the initial campaign ended, SSA has not developed a comprehensive plan to distinctly identify its continuing outreach efforts apart from other agency activities. SSA's efforts were hindered by beneficiaries' confusion about the distinction between applying for the subsidy and signing up for the prescription drug benefit, and the reluctance of some potential applicants to share personal financial information, among other factors. SSA has collected data and established some goals to monitor its progress in administering the subsidy, but still lacks data and measurable goals in some key areas. While SSA tracks various subsidy application processes through its Medicare database, it has not established goals to monitor its performance for all application processes. For example, SSA tracks the time for resolving appeals and the outcomes of its initial redeterminations of subsidy eligibility, but does not measure the amount of time it takes to process individual redetermination decisions. According to SSA officials, implementing the low-income subsidy was manageable overall due to increased funding for the outreach and application processes and did not significantly affect the agency's workload and operations. GAO is considering recommendations for SSA to work with IRS to assess the extent to which taxpayer data could help identify individuals who might qualify for the subsidy, and help improve estimates of the eligible population; and for SSA to develop a plan to guide its continuing outreach efforts and develop key management tools to measure the results of its subsidy application processes. |
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DOD’s primary medical mission is to maintain the health of 1.6 million active duty service personnel and provide health care during military operations. Also, as an employer, DOD offers health care to 6.6 million other military-related beneficiaries, including dependents of active duty personnel and military retirees and their dependents. Most care is provided in about 115 hospitals and 470 clinics—referred to as military treatment facilities, or MTFs—worldwide, operated by the Army, Navy, and Air Force. DOD’s direct care system is supplemented by care paid for by DOD but provided in civilian facilities. In fiscal year 1997, DOD expects to spend about $12 billion providing care directly and about $3.5 billion for care in civilian facilities. In response to increasing health care costs and uneven access to care, in the late 1980s, DOD initiated, under congressional authority, a series of demonstration programs to evaluate alternative health care delivery approaches. On the basis of this experience, DOD designed TRICARE as its managed health care program. The TRICARE program uses regional managed care support contracts to augment its MTFs’ capacities by having contractors perform some managed care functions, including arranging civilian sector care. Altogether, seven managed care support contracts will be awarded covering 11 TRICARE regions (see app. II). To coordinate MTF and contractor services and monitor care delivery, each region is headed by a joint-service administrative organization called a “lead agent.” Thus far, DOD has awarded five contracts to three health care companies covering eight TRICARE regions. The contracts are competitively awarded and fixed price, although the price is subject to specified adjustments for changes in beneficiary population, MTF workload, and other factors beyond the contractor’s control. DOD officials believe that care provided to its patients at military facilities is less expensive than such patients’ care at civilian facilities. Resource sharing arrangements are designed to permit DOD and the contractor to share contractor-provided personnel, equipment, supplies, and other items in an effort to maximize savings. To identify resource sharing opportunities, contractors analyze such data as historical health care costs, workload, and care use, and visit military facilities. They then project the expected savings from providing care in military facilities rather than in potentially more expensive civilian settings. The contract is designed so that the contractor’s expected savings over the contract’s life from the resource sharing are deducted from the contractor’s final offer when bidding on a contract. The contract price thus reflects such anticipated savings through shared resources. The contract also is subject to a risk-sharing arrangement under which the government and the contractor share responsibility for health costs that overrun the contract price. Contractors are at risk for their bid amount of health care profit plus up to 1 percent of the bid health care price. Beyond that, the contractor and the government share in losses until an amount prepledged by the contractor, called “contractor equity,” is depleted. At that time the government becomes fully responsible for any further losses. Thus, DOD’s initially realized savings in the form of a lower contract price could be reduced or lost if actual health care expenses are higher than anticipated. Accordingly, DOD encourages MTFs to help the contractor achieve projected resource sharing volume and savings. Resource sharing savings, along with expected savings from other sources, such as negotiated provider discounts; better health care utilization management; and better claims management, including collections from other health insurance plans, contribute to government and contractors’ overall financial gains. The combined expected savings from resource sharing and other sources are important as offsets to the increased costs of managing care under TRICARE. Also, statutorily, TRICARE costs cannot be greater than the health costs DOD otherwise would have incurred under CHAMPUS and the direct care system in the program’s absence (National Defense Authorization Acts for Fiscal Years 1994 and 1996, P.L. 103-160 and P.L. 104-106, 10 U.S.C. 1073 note). We reported last year that lack of resource sharing progress was one area that could impair efforts to contain related TRICARE costs and achieve savings. We reported that resource sharing was a complex and difficult process and that the process’ details were not well developed or understood, including uncertainty about how resource sharing agreements may affect contract price adjustments. DOD and the contractors are not attaining major new savings through resource sharing agreements, and the potential for new agreements and further savings appears limited. On the basis of progress to date and discussions with DOD and contractor officials, achieving overall projected resource sharing savings appears highly unlikely. For the contracts under way, DOD projected saving about $700 million, including $116 million through the current operating years. The contractors’ projections were similar. But by March 1997, after 9- to 24-month contract operating periods, new resource sharing agreements represented only about 5 percent of the savings needed to achieve DOD’s projected savings. In addition to the new agreements, contractors have also converted into resource sharing agreements previously existing agreements that MTFs had with civilian providers before TRICARE became operational. At one MTF, for example, on the day the support contract became operational, seven existing agreements were converted to resource sharing agreements. But savings associated with those converted agreements do not represent new TRICARE savings and thus were not part of DOD’s new projected savings. Support contractors and DOD are aware of the lack of progress in resource sharing. One contractor’s representative told us that achievements so far are just previous agreement conversions and that a more aggressive approach toward new agreements is needed. Another said lack of progress in negotiating new agreements remains their greatest TRICARE contract concern. DOD officials expressed mixed views ranging from optimism that resource sharing momentum will build to the belief that the approach simply will not work as envisioned. At this time, the potential for further resource sharing savings appears limited. In March 1997, the contractors had about 170 new resource sharing possibilities in some stage of cost and workload data gathering or analysis, or in some way being considered as potential agreements. For example, one region had 39 resource sharing possibilities under development, covering an array of services such as cardiology, radiology, and internal medicine. Officials told us, however, that considerable analysis was needed before potential savings could be reliably estimated and that some of the proposals likely would not prove cost-effective. Meanwhile, additional proposals are being added and existing ones deleted as the proposal and evaluation processes continue. But, as previously indicated, savings to date show that not enough is being done to reach DOD’s projected resource sharing savings levels. In addition to agreements already implemented or under consideration, by March 1997, over 260 other resource sharing proposals had been either rejected or otherwise not further pursued. Our analysis indicated that various impediments exist to resource sharing, including lack of clear policies, program complexity, lack of MTF incentives, and military downsizing. Issued in December 1994, DOD resource sharing guidance stated that MTFs had an obligation to help contractors reach the bid amount of resource sharing savings. But the guidance also instructed MTFs to look for other, possibly more cost-effective ways to increase MTF resource use, such as by reallocating existing resources, referring patients to other MTFs, or directly contracting with civilian care providers other than the support contractor. When some MTFs pursued such alternatives, one contractor objected, stating its belief that resource sharing was the first alternative for increasing MTF use. In November 1996, DOD issued new guidance stating that resource sharing was the first alternative and that MTF commanders should make good faith efforts to work with contractors to execute such agreements. MTF and contractor officials cited the resource sharing approach’s complexity as another factor limiting progress. The agreements require considerable financial analysis to assess their cost-effectiveness potential (see app. IV). Also, the agreements involve intricate issues of how much credit contractors should receive for adding to the MTFs’ workload and how that credited workload will affect the contract price. MTF officials told us they did not understand all of the agreements’ financial implications, largely because they did not control or understand all the data and analyses used. They were concerned that workload shifts between MTFs and contractors, and ensuing bid price adjustments, would enable contractors to gain at MTFs’ workload and budgetary expense. At two MTFs, for example, proposed gastroenterology assistance agreements, projected to save over $400,000, were rejected because of unresolvable MTF concerns about possible effects on the overall contract price. Both contractor and MTF officials expressed concerns—and resulting hesitance to enter into agreements—about the reliability of data used to analyze agreements’ potential cost-effectiveness. According to contractors, for example, several MTFs supplied inappropriate data, such as personnel salaries and hospital maintenance, that hampered their analyses of the proposals’ likely costs and other effects. At one of the MTFs, eight proposed agreements were rejected because of data problems. Tied to the complexity and data problems, a lack of incentive to enter into agreements because MTFs do not share in resulting savings was also cited by MTF officials. DOD and the Services have not established a savings return policy for MTFs that have resource sharing agreements. Instead, after consideration, the Services decided that any such savings are to be retained at the Service level for reallocation as needed within the system. Still another MTF resource sharing disincentive is that the agreements can actually increase facility costs. For example, an agreement to provide an anesthesiologist, so the MTF can do more surgeries, will in turn result in related radiology, laboratory, and pharmacy costs. Unless contractors compensate MTFs for such costs, MTFs’ overall costs may increase. While the contracts provide for such contractor compensatory payments, a July 1996 DOD policy clarification was issued to help facilitate such payments. A remaining challenge has been MTF and contractor negotiations on what costs to apply to individual agreements. Both DOD and the contractors cited military downsizing, including at the MTFs, as another limiting factor. Resource sharing opportunities identified during the contract bidding process may no longer exist as military forces are reduced or relocated and as MTFs are closed, downsized, or converted to clinics. For example, one MTF rejected five proposals because it had subsequently reduced its operating rooms from eight to four, thus obviating the need for agreements. Resource sharing problems have prompted one contractor to request a contract price adjustment. In June 1996, near the start date of health care delivery, the contractor reported that while the other care delivery preparations had progressed well, the lack of resource sharing progress was a major problem. Projecting millions of dollars in financial losses, the contractor requested a price renegotiation. In a letter to DOD, the contractor complained about changing DOD rules on how the approach was to work, inadequate data, improper MTF incentives, insufficient MTF training in developing agreements, and postaward MTF workload and capacity changes that reduced resource sharing opportunities. DOD generally agreed that problems existed, committed to work collaboratively to resolve them, and scheduled meetings with the contractor to pursue the issues in more detail. DOD said, however, that a price renegotiation was premature at the time. As of May 1997, the contractor was still pursuing a price adjustment. DOD has acted to increase resource sharing under current contracts. For the latest two contracts, soon to be awarded, DOD will be applying an alternative approach, referred to as “revised financing,” that relies less on resource sharing for savings but adds other challenges. For the future, DOD is planning far broader changes in MTF budgeting and support contracting, which are expected to further reduce reliance on resource sharing. DOD has worked to facilitate resource sharing through policy issuances and provision of analytical tools. Since issuing resource sharing guidance in December 1994, DOD headquarters officials visited the regions to provide briefings, used a focus group to help make resource sharing easier to use, developed standardized training, and attempted to promote better DOD and contractor cooperation. Also, the contractors have continued to work with the MTFs to identify and pursue resource sharing opportunities. In November 1996, DOD issued clarifying policy stating that resource sharing is to be the first alternative for recapturing private sector workload into the MTF. Lead agents and MTFs are to ensure that any other MTF actions to add or retain workload do not prevent the TRICARE support contractor from entering into cost-effective agreements and reaching their resource sharing bid amounts. In July 1996, DOD clarified its policy regarding cash payments by support contractors to MTFs for marginal costs stemming from agreements. In a related move, DOD recently made available $25 million to the Services to help pay such marginal costs, or for the MTFs to otherwise invest in agreements, and asked the Services to submit potential projects for the funds’ use. In April 1997, DOD told us that some funds had been approved for only two or three requests. To help reduce resource sharing complexities, DOD provided a financial analysis worksheet for determining whether an agreement might be cost-effective and whether the amount of recaptured workload credited to the contractor is appropriate (see app. IV). DOD later revised the worksheet to, among other things, account for different agreement types. DOD also provided an analytical model further showing the MTFs’ resource sharing’s potential financial effects. The model was introduced to the MTFs in July 1996. DOD created a resource sharing focus group after a lead agent reported in January 1996 that resource sharing was complicated and presented MTFs with disincentives. The group worked for about 6 months and recommended improvements in such areas as training, the financial analysis worksheet, and the data used to make agreements. In early 1996, DOD began developing a TRICARE Financial Management Education Program curriculum that included resource sharing and the bid price adjustment process. Program testing was completed in December and presentations have begun. In November 1996, DOD initiated a new “partnering” effort with the contractors. DOD saw a need to help MTFs and contractors work through data problems, contract ambiguities, resource constraints, and other TRICARE difficulties. The partnering approach calls for a more cooperative, trusting, teamwork relationship between MTFs and support contractors, including ways to avoid disputes and to informally resolve, rather than possibly litigate, those that occur. Early actions included DOD meetings with contractors at headquarters and regional levels, contractor participation in a national TRICARE conference, and consideration of assigning representatives of lead agents and the contractors to work together at each other’s locations. The bottom-line measure of DOD’s and the contractors’ efforts is in the progress made entering new resource sharing agreements. But progress remains slow, and the prospects for additional agreements are questionable. These outcomes, along with one contractor’s request for financial relief and DOD’s recognized need to improve teamwork, indicate a need for more concerted efforts under the current contracts to reach the agreements that are pending while seeking acceptable alternatives to resource sharing. DOD’s revised financing approach, conceived before the first support contract began operating but applied only in the latest two, is intended to strengthen MTF health care management. Under this approach, MTFs’ direct funding and financial responsibilities will be increased. The funding increase will be determined by the amount of previous CHAMPUS expenditures for MTF-based TRICARE Prime enrollees, which DOD expects will include most MTF service areas’ beneficiaries. Thus, rather than sharing responsibility for Prime enrollees with the support contractor, the MTFs will have full funding and full responsibility for their Prime enrollees and will pay the contractor for care required from the contractor’s network. One result of this approach will be to reduce reliance on resource sharing to lower support contract costs; but it also adds new challenges and does not eliminate, and may even exacerbate, resource sharing problems. Giving the MTFs direct financial control for TRICARE Prime enrollees is aimed at providing them with clearer incentives to efficiently manage care use and to behave more like private sector HMOs. DOD saw the need for this while still arranging the earlier contracts and later viewed it as a way to relieve emerging resource sharing problems. But, under revised financing’s current approach, DOD will continue sharing care costs with the contractor for beneficiaries not enrolled with the MTFs. Also, the MTFs will continue working with the new contractor toward signing resource sharing agreements. Thus, to the extent contractor reliance on resource sharing continues, the difficulties already experienced are also likely to continue. DOD believes revised financing gives MTFs added cost-saving incentives to engage in resource sharing by reducing the need for referral of their enrollees to the TRICARE support contractor. However, revised financing may add further complexity to resource sharing’s use. Because the new approach’s potential effects on resource sharing are not now known, TRICARE contract offerors must make their own assumptions and projections about such effects. Much will depend, for example, on how MTFs’ funding levels may change and the consequent alterations in their beneficiary service priorities. And the added extent of funding going to MTFs rather than to contractors will in turn depend on the MTFs’ capacities and ability to enroll beneficiaries and serve as their primary care manager—all of which have yet to be determined. Revised financing’s effects on resource sharing are uncertain and were at issue during the two affected contracts’ bidding processes. One bidder, a current TRICARE contractor, wrote to DOD to clarify what portion of the funds the MTFs and contractor respectively would control and how revised financing would affect resource sharing. In earlier discussions, the bidder told DOD the company could be creative and assume resource sharing opportunities would still exist or assume none would exist. DOD replied that the new approach’s effects on resource sharing were uncertain but that the successful bidder should work creatively with the MTFs to achieve resource sharing. DOD also amended the request for a bid proposal to provide more description and examples of how revised financing and resource sharing might be integrated. But, as with resource sharing under the current contracts, the new approach’s actual effects will not be known until it is implemented. While DOD officials in regions with contracts generally favored revised financing, they expressed concerns about poor accounting systems and lack of data on patient care costs and outcomes that MTFs will need to become effective, cost-competitive providers. Some had concerns about the general lack of MTF health care management experience and control over their staffing. MTF officials in regions about to apply revised financing have stated that they recognize their increased need for accountability, adequate staffing to support their enrollees, and better information systems to support resource sharing decisions. While theoretically possible, revised financing’s potential has yet to be demonstrated. Also, while revised financing reduces reliance on resource sharing, it does not eliminate or necessarily alleviate resource sharing problems and may exacerbate such problems under the new contracts. For the future, DOD plans other changes to simplify TRICARE contracting and MTF budgeting. The changes would incorporate revised financing and further reduce reliance on resource sharing but also would have far broader implications for current and future contracts. Adding to such TRICARE initiatives’ challenges are changes in DOD’s top leadership in Health Affairs. DOD is now considering alternative structures for future contracts, on the basis of our recommendations and those from lead agents, contractors, and others in the health care industry. The alternatives include smaller, shorter, and less prescriptive contracts, allowing contractors to rely more on their own “off-the-shelf” commercial practices. DOD has held several forums to discuss ideas and the alternative approaches’ potential advantages and disadvantages. The issues involved include effects on beneficiary choice of providers, assurance of contractor qualifications, quality of care, DOD and contractors’ risk sharing, administrative complexity, adequacy of bid competition, and DOD costs. No final decisions have been made yet. The new contract structures likely will include an approach similar to revised financing. Basically, each MTF would be funded to cover all its enrollees in TRICARE Prime, and the contractor would be funded for all other beneficiaries. Thus, each MTF and contractor would be responsible for its share of the beneficiary population’s care costs, and would reimburse each other when one provides services to the other’s beneficiaries. For example, the contractor would reimburse an MTF for caring for a nonenrollee, and one MTF would reimburse another upon referring its own enrollee for care there. One aim of the funding approach would be to eliminate reliance on resource sharing as a major source for TRICARE savings. In April 1997, DOD accelerated the planned change in MTF budgeting and contract financing and announced it would be effective at the start of fiscal year 1998. This means that not only will the changes apply to future contracts but also current contracts will have to be amended. DOD expects that changing the current contracts may have cost implications of unknown extent at this time for both the government and the contractors. Commenting on a February 1997 DOD policy draft, one contractor said that any change that would avoid reliance on resource sharing, bid price adjustments, and resulting MTF disincentives would be positive. The contractor added, however, that DOD needs to involve the contractors in weighing the new budgeting and financing approach’s assumptions and risks to ensure it will work; otherwise contract prices may increase to cover the unknown risks. Another contractor said that many of the details had yet to be worked out and that two remaining questions are how funding will be split between MTFs and contractors and how resource sharing will be affected. Such budgeting and contracting changes reach far beyond an expectation that they will reduce the need for resource sharing. This notwithstanding, DOD lacks a simple, stable, long-term approach to TRICARE budgeting and contracting that provides clear managed care incentives and accountability and avoids the complexities and disincentives of resource sharing. As the contractors indicated, whether the contemplated system changes succeed will depend upon how these details are worked out and how well DOD and the contractors manage the system and support each other. In addition, both the Assistant Secretary of Defense (Health Affairs) and the Principal Deputy Assistant Secretary, who have actively and forcefully led TRICARE since its beginning, have left their positions. The former Principal Deputy has taken the Assistant Secretary position in an acting capacity. The Principal Deputy position has been filled, but to date no successor to the Assistant Secretary has been nominated. These top DOD leadership changes may add to the challenge of successfully reducing reliance on resource sharing and adopting broader budgeting and contracting changes. DOD officials acknowledged that resource sharing has not achieved the expected savings, but told us that lower than expected contract award amounts have led to more than $2 billion in other savings. They explained that the contract award amounts consistently have underrun DOD’s projections, required before each contract is awarded, of what CHAMPUS costs would be over the contracts’ lives. As an example, one region’s estimated CHAMPUS costs without the contract would have been about $2.1 billion, compared with the contract award amount of $1.8 billion; so, according to DOD, the savings would be $0.3 billion. These officials also said that overall health care data show downward MTF cost trends, further supporting managed care’s cost-saving effects—despite resource sharing’s limited showing. For example, they provided a graph showing that both direct care and CHAMPUS total costs declined steadily—by 10 percent overall—from fiscal years 1991 through 1996. While assessing TRICARE’s overall cost-effectiveness was beyond our review’s scope, there are reasons at this time to question the currency and analytical completeness of DOD’s savings claims. First, DOD’s preaward estimates of CHAMPUS costs, a key component of its savings claim, may now be outdated. The first estimate—for the Northwest Region contract—was based on cost data prior to August 1993. Over the 4 years since then, changes in such areas as benefits and allowed payments to providers would affect the results of that estimate. Second, in a separate review, we found that as of May 1997, the existing five contracts had been modified as many as 350 times, with the resulting potential for substantial contract cost increases attributable to TRICARE. These potential cost increases, just like the potential losses from lack of resource sharing, also would offset DOD’s projected savings. Furthermore, we recently questioned DOD’s cumulative 5- to 7-percent utilization management savings estimate in its near $15 billion to $18 billion health care budget totals for fiscal years 1998 to 2003. We reported that DOD lacked a formal methodology for developing the estimates, and we concluded overall that future health care costs likely would be greater. Lastly, DOD’s available health care cost data do not indicate whether apparent downward shifts might be due to managed care effectiveness or to such other factors as reductions in allowed provider payments that would have occurred in TRICARE’s absence. Thus, we support DOD’s plans to undertake a more current and complete cost analysis of MTF direct and contractor-provided care, based on recent program data, to bottom-line TRICARE’s current and future-year cost-effectiveness. At their present results levels, for the existing contracts, DOD and the support contractor will achieve only about 5 percent of the expected $700 million in new savings, potentially causing shared financial losses and higher TRICARE costs. Progress in achieving new agreements is slow, and neither DOD nor the contractors know what resource sharing potential remains under these contracts. While DOD now seems to be moving toward a view that the approach will not work as designed, the contractors and DOD are still pursuing about 170 resource sharing possibilities in an effort to discover additional savings with which to reduce their costs. Many problems have contributed to resource sharing’s lack of success. DOD’s policies, processes, and tools for use at the local level as well as the degree of DOD and contractor collaboration have not yet been sufficient to effectively resolve the approach’s obstacles. While revised financing is feasible though unproven, its potential effects on resource sharing and on other expected savings under the latest two contracts remain to be seen. Under the new approach, resource sharing may be reduced, but its problems will remain and may become more complex as new MTF and contractor management responsibilities are introduced. DOD’s more broadly proposed MTF budgeting and support contracting changes would greatly affect future and current contracts, including further reducing resource sharing. Clearly, a simple, accountable, incentive-based approach is lacking, yet the potential effectiveness of DOD’s considered changes will largely depend on how well they are designed and implemented. As such changes further reduce resource sharing as a potential savings mechanism and as DOD looks to alternative savings sources, lessons learned from resource sharing will need to be carefully heeded and skillfully incorporated. Carrying such lessons forward may be particularly challenging as DOD changes the top leadership in Health Affairs. DOD officials acknowledged that resource sharing has not, and likely will not, produce the projected savings, but contended that TRICARE’s managed care approach has produced offsetting savings in other ways. We question, however, the currency and analytical completeness of these claims and thus believe it is important that DOD proceed with its plans to reestimate TRICARE costs versus projected costs without TRICARE. We recommend that the Secretary of Defense direct the Assistant Secretary of Defense (Health Affairs) to determine whether any further resource sharing savings remain under the current contracts and, as appropriate, consummate promising agreements while seeking other mutually acceptable alternatives to resource sharing; determine, to the extent the new contracts with revised financing use resource sharing, whether any such agreements are available and, as appropriate, enter promising agreements while seeking effective alternatives to resource sharing; and incorporate, while planning for and implementing the next wave of MTF financing and contract management initiatives, such resource sharing lessons learned as the need for coherent, timely policies; clearly understood procedures; mutually beneficial incentives; and effective collaboration. DOD agreed with our recommendations and said, without elaborating, it had already implemented each of them. Nevertheless, while agreeing with the recommendations, DOD disagreed with the way we presented certain issues. DOD said, for example, that the report does not note the tremendous resource sharing success during the “CHAMPUS Reform Initiative” (CRI) in California and Hawaii (which preceded TRICARE) and does not note the continued success in region 9 (Southern California). Thus, DOD said the reader is led to assume that problems occurred in other regions because resource sharing was implemented on a broad scale without the requisite examination. We did not evaluate CRI resource sharing because our focus was whether resource sharing under TRICARE was producing new savings to help offset added TRICARE costs. Also, as the report notes, DOD’s reference to continued success in region 9 is basically a conversion of CRI resource sharing agreements, which do not reflect new savings under TRICARE. Furthermore, DOD said the resource sharing program as currently structured was based on the best available information at the time and that the report should note that the TRICARE support contractors came to the same conclusion as DOD regarding resource sharing’s potential cost-effectiveness, even with their years of experience with managed care. But our report does not question whether DOD’s structure for TRICARE resource sharing was based on the best information available at the time. Instead, the report discusses the complex issues that arose during the implementation of resource sharing. Also, the report notes that the contractors as well initially concluded that resource sharing would be cost-effective. Also, DOD said the report treats resource sharing in isolation, as opposed to one component of a comprehensive system that has proven to be cost-effective. While we focused on resource sharing because it was expected to be a major cost-saving mechanism, we also noted that it was one of several ways in which DOD expected to achieve savings to offset TRICARE’s costs. DOD went on to state that efficiencies not achieved through resource sharing were otherwise achieved by increased MTF capability and efficiency brought about by TRICARE. As the report points out, during our review DOD presented information showing downward MTF cost trends, but these data do not show whether the trends were due to TRICARE managed care efforts or whether the costs would have declined anyway in TRICARE’s absence. DOD said managed care support (MCS) contracts have resulted in savings of $2.3 billion when compared with projected costs without the contracts. It said that we acknowledged this savings estimate but that our placement of it in the report diluted its significance. While a detailed review of overall TRICARE savings was beyond the scope of our review, as our report states, we question that savings estimate’s currency and analytical completeness, and we support DOD’s plans to undertake more current and complete analysis of TRICARE’s cost-effectiveness. We have revised the report to discuss DOD’s overall savings estimate in a separate section. DOD took issue with the report statement that, while revised financing reduces reliance on resource sharing, it does not eliminate or necessarily alleviate resource sharing problems and may exacerbate such problems under the new contracts. DOD said revised financing, in conjunction with its planned change to enrollment-based capitated budgeting for MTFs, increases incentives for MTFs to engage in resource sharing by expanding MTF funding while reducing support contractor costs. We agree that revised financing, in conjunction with enrollment-based capitation, has the potential to create more incentive for the MTFs to engage in resource sharing and may similarly provide incentive to the support contractors. Still, those approaches add their own complexities and do not automatically eliminate the difficulties experienced with resource sharing. As we said in the report, the approaches are still being defined and are yet to be tested. Nonetheless, we revised the relevant text to better recognize DOD’s views on revised financing’s potential. DOD’s comments in their entirety are included as appendix V. We also obtained comments from the three current TRICARE support contractors. All expressed general agreement with the report’s overall content and completeness of subject coverage. In its comments, one contractor also offered a minor technical comment about lack of clarity in a statement defining limits on resource sharing agreement profits, which is part of the procedural description in appendix IV. The contractor pointed out, however, that there is no misunderstanding between it and DOD as to what is intended. We made no change because the appendix was presented to illustrate DOD’s guidance as it was offered. A second contractor expressed concern about its limited progress in resource sharing and about the problems and lack of success in resource sharing elsewhere, as conveyed in our report, and expressed hope that the report would help bring about favorable resolution of the problems. While stating that the report otherwise accurately portrays the resource sharing situation, the third contractor disagreed with the report’s statement that the prospects for additional resource sharing agreements are questionable. The contractor informed us that it had recently made a presentation to DOD on resource sharing shortfalls, but it also asserted that, with the right incentives and education at the MTF commander level, resource sharing is still an extremely viable program with current savings opportunities. On the basis of our analysis of the problems and overall limited resource sharing progress, the prospects for reaching new agreements seem to us to be limited. Still, the report urges DOD to identify and pursue promising resource sharing opportunities while also seeking other mutually acceptable alternatives to resource sharing. We are sending copies of this report to the Secretary of Defense and interested congressional committees, and will make copies available to others upon request. Please contact me at (202) 512-7111 or Dan Brier, Assistant Director, at (202) 512-6803 if you or your staff have any questions concerning this report. Other major contributors are Elkins Cox, Evaluator-in-Charge; Allan Richardson; Beverly Brooks-Hall; and Sylvia Jones. To assess the Department of Defense’s (DOD) experiences with resource sharing, we visited 5 (of the 7) regions where TRICARE support contractors had begun delivering health care and 11 military treatment facilities (MTF) within those regions. We also met with the two civilian TRICARE contractors that were providing health care support to the MTFs. A third contractor began providing health care on April 1, 1997, in two other regions (since combined into one region), but because of the newness of the operations, we met with this contractor briefly but did not include it in our detailed assessment of resource sharing progress and problems. Two other contracts, covering the remaining three regions, were still pending at the time of our review. We reviewed DOD and contractor projections of resource sharing costs and savings, TRICARE policies and guidance, and various efforts by DOD to promote the overall resource sharing effort. This included discussions with officials of the Office of the Assistant Secretary of Defense for Health Affairs, DOD’s TRICARE cost consultant, and contractor officials. At the contractors’ offices, we reviewed individual resource sharing project files to analyze the progress being made and determine the specific reasons why some potential agreements were not being implemented. The project files consisted of both agreements existing before TRICARE, referred to as “partnerships,” and new resource sharing agreements. Many of the partnership agreements were converted to resource sharing agreements as TRICARE became operational. To assess progress in achieving new savings under TRICARE, we identified the expected savings from the new agreements and compared the result to DOD’s overall projected TRICARE savings. We discussed information, training, and other needs with DOD officials at DOD’s Washington, D.C., headquarters and at regional and MTF levels, focusing on the factors that affected progress in resource sharing. Especially at the MTF level, we discussed officials’ understanding of, and amount of confidence in, the financial aspects of resource sharing agreements, including effects on the MTF workload and bid price adjustment. Through discussions with DOD and contractor officials and examination of records, we reviewed their experiences with planning and establishing resource sharing agreements, including the problems they encountered. We also discussed with DOD and contractor officials alternatives DOD has undertaken for the current contracts as well as policies and plans DOD has devised or is considering that will affect the future of resource sharing. At the completion of our work, we briefly reviewed DOD-provided data suggesting that TRICARE savings other than from resource sharing were occurring that more than offset the resource sharing savings shortfalls we had found. Determining TRICARE’s overall cost-effectiveness was beyond the scope of our review. Nonetheless, upon reviewing the data, we asked follow-up questions of DOD, obtained status information on DOD’s planned and under way internal and contracted studies aimed in whole or in part at determining TRICARE’s cost-effectiveness, and reviewed pertinent information from our other work in process and our issued reports. We conducted our review between June 1996 and May 1997 in accordance with generally accepted government auditing standards. To further explain the resource sharing agreement development process, the following information was condensed from selected guidance offered by lead agents. The guidance includes preparation of proposals, a chart showing the flow of agreement development (fig. IV.1), and application of a financial analysis worksheet. The Resource Sharing Program is a mechanism for providing contracted civilian health care personnel, equipment, and/or supplies to enhance the capabilities of MTFs to provide necessary inpatient and outpatient care to beneficiaries of the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS). Resource sharing is a cooperative activity between the contractor, the lead agent, and the MTF commander. A variety of information sources and databases may be examined in looking for and evaluating resource sharing opportunities that may subsequently be developed into resource sharing proposals and agreements. Analysis of CHAMPUS utilization and cost data may identify diagnoses, procedures, or specialty health care, which account for significant numbers of patient encounters or high costs. A variety of reports may be useful in this regard. CHAMPUS Cost and Utilization Reports. These reports are generated by the Office of the Civilian Health and Medical Program of the Uniformed Services from health care service record data to show CHAMPUS costs and utilization, by type of health care service, for each catchment area. Those services showing high costs and/or utilization may be excellent candidates for resource sharing considerations. Non-Availability Statement (NAS) Reports. NASs authorize beneficiaries to seek certain care in civilian facilities when the MTF cannot provide the care. These reports show the numbers and types of NASs generated by each MTF. Those health care services showing large numbers of NASs being issued over time may be excellent candidates for resource sharing consideration. Health Care Finder (HCF) Referral Reports. These reports show the numbers and types of referrals of CHAMPUS-eligible beneficiaries to both MTF and civilian health care providers. High numbers of referrals to civilian providers for specific health care services may indicate resource sharing opportunities. CHAMPUS Ad Hoc Claims Reports. CHAMPUS historical data may be obtained from claims data files. These data can be tailored to provide greater detail for the types of services being provided under CHAMPUS. Information from CHAMPUS Cost and Utilization Reports, NAS Reports, and HCF Referral Reports may indicate those health care specialties that warrant more detailed examination to identify potential resource sharing opportunities. MTF Capability Reports. These reports are developed by HCFs and indicate MTF capabilities. They are used by the HCFs to guide referrals into and out of MTFs. They may also provide insight into potential resource sharing opportunities. Composite Health Care System Professional Activity Study Reports. These reports may be used to identify gaps in MTF services or high referral patterns from the MTF to outside health care providers. These gaps and referral patterns may indicate additional opportunities for resource sharing. Network Provider Directory. This directory provides the numbers and types of health care providers by location. Gaps and shortages in the civilian provider network may be identified that may indicate resource sharing opportunities. MTF capabilities, staffing, workload, and backlog—both current and projected—should be identified and evaluated to determine potential opportunities for resource sharing. MTF capabilities may be assessed using the following reports: MTF Capability Reports. (See prior description of reports.) MTF Staffing Reports. These reports are developed by MTFs and show the numbers and types of personnel assigned to, and employed by, the MTF. Careful review of staffing reports over time may indicate staffing trends, which may provide insight into both current and future resource sharing opportunities. A baseline report of regionwide staffing, by MTF, was compiled from computer tapes provided by the government to the contractor for fiscal year 1993. MTF Operations Study. This report shows the historical number of health care services provided by MTFs for both inpatient and outpatient services. This report is derived from data compiled on a computer tape provided to the contractor by the government for fiscal year 1993. This information can be used to identify both current and future opportunities for resource sharing. Potential Resource Sharing Opportunities List. This list, developed during site visits at each MTF, provides resource sharing opportunities that had been identified by the MTF, after examining the demand for services and identifying shortfalls in meeting those demands. Once a resource sharing opportunity has been identified, the MTF completes a written request for consideration of the potential resource sharing agreement (RSA). The proposal is to show the project title, requesting MTF, point of contact, and desired start date. The expected accomplishment is to be described. For example, “This project is intended to expand Family Practice services within the hospital. This MTF currently averages 200 ambulatory care visits a month, and the implementation of this project should increase the monthly visits by an additional 200 visits. This should decrease the number of NASs issued and the concomitant CHAMPUS visits and costs.” The proposal is to include the estimated resources required, including personnel, equipment, and supplies, along with the following: Direct Workload. Provide the number of outpatient visits and/or inpatient admissions, by type of CHAMPUS beneficiary (active duty dependent [ADD], or nonactive duty dependent [NADD]) that the project is expected to provide per year. Note that the NADD category includes retirees, family members of retirees, survivors of deceased service members, and others. If possible, provide a detailed breakdown of workload numbers by current procedural terminology (CPT) or diagnosis-related group (DRG). If possible, provide the estimated cost to the MTF for each CPT and DRG code. Ancillary Workload. Provide the anticipated additional ancillary workload that the project will develop for the MTF, by type of CHAMPUS beneficiary (ADD or NADD), per year. If possible, provide a detailed breakdown of ancillary workload numbers by CPT or DRG. If possible, also provide the estimated cost to the MTF for each CPT and DRG code. MTF Cost/Expense Data. Provide specific Medical Expense and Performance Reporting System (MEPRS) cost elements for the clinical function of the project. If possible, provide a detailed breakdown of MEPRS cost elements by CPT or DRG. CHAMPUS Workload Data. Provide CHAMPUS workload, within the catchment area, currently being accomplished for the clinical function of the project. If possible, provide a detailed breakdown of CHAMPUS workload and cost data by CPT or DRG. Signature and Date. Provide signature of the MTF commander, or his agent, and the date the document was signed. Project Title. Internal Medicine Augmentation and Support. Purpose. The MTF had three internists assigned in fiscal year 1994, two in fiscal year 1995, and will decrease to one by June 1996. MTF workload has shown a concomitant decrease in the average number of outpatient visits, admissions, and occupied bed days. The number of NASs and visits to civilian providers under CHAMPUS has risen to absorb the demand for internal medicine services in the face of decreasing supply within the MTF. This proposed RSA, if approved, would expand the internal medicine services within the MTF and should increase the number of monthly outpatient visits by approximately 900 per month and the number of inpatient admissions by 37 per month. These increases should avoid a shift of approximately 425 outpatient visits per month to CHAMPUS with the loss of a military provider. They should also add an additional 475 outpatient visits per month to the MTF workload. Recognizing that approximately 44 percent of our CHAMPUS beneficiaries are ADDs and that 56 percent are NADDs, and using the appropriate volume trade-off factors, it should also reduce the number of visits that had previously been paid for through CHAMPUS by approximately 212 visits per month. Resources Required. To implement the proposed RSA, additional providers and support personnel will be required. Also, a financial offset for increased costs in ancillary services and supply costs will be necessary. Facility space and equipment are adequate to support the additional workload. Personnel. Internist (board certified or eligible), Nurse (Licensed Vocational Nurse), with attached example of position description. Equipment. None. Supplies. No direct supplies, but, based on fiscal year 1995 MEPRS data, reimbursement for the costs of ancillary services and supplies for outpatient visits above that achieved during the data collection period, fiscal year 1995 (10,188 outpatient visits per year). Estimated at up to 5,700 visits. (For outpatient visits, example shows costs per procedure and per visit for pharmacy, laboratory, radiology, medical supplies, and other supplies.) Also, reimbursement for the cost of ancillary services and supplies for inpatient admissions above that achieved during the data collection period, fiscal year 1995 (404 admissions per year). Estimated at up to 226 admissions. (Example shows ancillary service and supply costs—based upon fiscal year 1995 MEPRS data—per procedure and per admission for same categories as for outpatient admissions.) MTF Workload Data. (Example shows internal medicine direct workload, based on fiscal year 1995 MEPRS data, in terms of outpatient visits and inpatient admissions. It shows also the internal medicine ancillary workload, based on fiscal year 1995 MEPRS data, in terms of pharmacy prescriptions, laboratory procedures, and radiology films per year for outpatient visits and inpatient admissions.) MTF Cost/Expense Data. (Example refers to attachments for MEPRS data for outpatient and inpatient care, based on fiscal year 1995 MEPRS data.) CHAMPUS Workload Data. (Example refers to attachment for CHAMPUS claims data for this catchment area based on claims data from September 1994 through August 1995.) The standardized Internal Resource Sharing Financial Analysis Worksheet is structured to take into account three different types of proposed agreements: (1) the recapture of new workload, (2) the conversion of a partnership agreement, and (3) the replacement of a lost provider. For all of these different situations, the resource sharing worksheet is designed to help the MTF answer two questions: (1) Is the proposed agreement projected to be cost-effective and (2) is the proposed contractor workload credit appropriate? An agreement is deemed cost-effective from the Military Health Services System (MHSS) perspective if the MHSS cost for the agreement (the sum of the MTF’s marginal expenditures and the contractor’s expenditures for the proposed RSA) is less than the government’s share of projected CHAMPUS savings. Assuming the cost-effectiveness test is satisfied, there are two additional criteria for evaluating whether the contractor’s workload credit is appropriate. First, the contractor credit shall not exceed the full credit (that is, 100 percent credit) that would be counted under the Guidelines for Resource Sharing Workload Reporting. Second, a prospective profit rate limit applies to RSAs for which the savings exceed those assumed in the contractor’s best and final offer. For these agreements, the contractor’s projected profit rate on resource sharing expenditures (as calculated by the worksheet) should not exceed the contractor’s overall proposed health care profit rate (on a prospective basis). For example, if a contractor proposed a 5-percent profit rate for health care costs, then the projected contractor profit on resource sharing expenditures exceeding the up-front bid price assumptions should also not exceed 5 percent. A prospective profit limit also applies to an RSA that converts an inpatient partnership agreement that existed in the data collection period (DCP) and for which CHAMPUS admissions were not counted in the DCP data. (In this case, workload credit should be negotiated as necessary to produce a projected contractor net gain approximately equal to zero, since otherwise the contractor would receive an upward price adjustment for additional NASs simply for maintaining the same workload done in the DCP under the partnership agreement.) If both of the previous questions cannot be answered “yes” for the proposed RSA, then the MTF should either renegotiate some of the terms of the proposed agreement (for example, the contractor’s workload credit) or consider other alternatives to the proposed agreement (for example, the task order resource support option). In addition to answering both previous questions for resource sharing in isolation, the resource sharing worksheet is designed to project the cost impact of implementing the agreement under task order resource support rather than resource sharing, including a summary comparison of cost-effectiveness under the two options. Similarly, the worksheet shows the relative financial impact on the managed care support (MCS) contractor of resource sharing versus resource support. (Details on resource support analysis are excluded from this condensed version of the guidance.) Under the MCS contracts, resource sharing savings can accrue to the government in three ways, each of which is addressed in the worksheet. First, for those resource sharing savings investments assumed as part of the contractor’s best and final offer proposal, the contractor’s bid price includes a cost-per-eligible trend factor for resource sharing savings (that is, claims avoidance). Net of the contractor’s expected expenditures on resource sharing, this creates a lower up-front bid price (claims avoidance - resource sharing expenditures = net savings). These net savings are calculated in section I of the worksheet on an average basis (that is, using the contractor’s best and final offer assumption about the average savings to cost ratio for resource sharing). Second, if partial contractor workload credit is negotiated, the government will realize savings in the bid price adjustment for MTF utilization (the “O” factor). This can result in a more favorable bid price adjustment for the government. These savings are calculated in section II of the worksheet. Third, the government will also realize 0, 80, 90, or 100 percent of any residual savings in the risk-sharing corridor, depending on which tier of the risk-sharing corridor applies to the bid price adjustment for the option period. (The contract’s risk-sharing provisions are specified in detail in section G-5 and in appendix C in the Bid Price Adjustment Procedures Manual.) This will result in the government sharing any risk-sharing savings realized by the contractor. These savings are calculated in section IV of the worksheet. MTF commanders or their designated representatives are required to complete the standardized Resource Sharing Financial Analysis Worksheet in negotiating each proposed RSA, in addition to any other analyses prepared by the contractor or the MTF (as specified in section G-5g(2) of the contract). In completing the resource sharing worksheet, users should not be lulled into a false sense of security by focusing on numerical results rather than on underlying assumptions. The accuracy of assumptions such as the number of admissions and/or visits to be recaptured, the MTF’s marginal costs in recapturing these units, and the costs avoided in CHAMPUS are crucial to the accuracy of the spreadsheet’s projections. If estimates are too optimistic, even though the spreadsheet may project net gains for the government, in reality the government may experience net losses. Of course, overly pessimistic estimates can lead the government to miss out on cost-effective opportunities. To use the Financial Analysis Worksheet, the MTF must enter the boxed values on the “MTF Inputs” page. These include (1) the type of RSA, (2) whether the agreement converts an inpatient partnership agreement that previously existed, (3) the option period (year) covered by the proposed agreement, (4) the number of outpatient visits or inpatient admissions enabled by the agreement, (5) the expected government risk-sharing responsibility percentage, (6) the estimated volume trade-off factor used to estimate CHAMPUS avoidance savings, (7) the estimated average government cost per unit for admissions and/or outpatient visits avoided in CHAMPUS for care covered by the agreement, (8) the expected contractor expenditure under the agreement, (9) the projected MTF marginal expenditures, (10) the contractor resource sharing workload credit assumed in the analysis, (11) the sum of the projected resource sharing expenditures for those agreements approved for the lead agent region as a whole, and (12) the expected MTF payment for the contractor’s costs and the MTF’s marginal costs if the resource is acquired under task order resource support rather than resource sharing. As part of the negotiation of the RSA, the MTF commander and the contractor must agree on each estimate or assumption entered on the “MTF Inputs” page before the worksheet is finalized. The remaining sections of the Financial Analysis Worksheet do not require the MTF to enter any data or assumptions. Depending on the results shown on the “summary” page for resource sharing, however, it may be appropriate to revise some of the MTF inputs (for example, the contractor workload credit) on an iterative basis. The “Summary—Resource Sharing” page lists the key results for the proposed agreement under resource sharing. This summary shows (1) whether the proposed contractor workload credit is appropriate, (2) whether government gains exceed government expenditures, (3) the projected contractor net gain under the RSA, (4) the projected government net gain, and (5) whether the proposed agreement reduces the contractor’s actual costs even if the contractor’s net gain is negative due to the average savings assumed up front in the contractor’s best and final offer. (Because the contractor reduced its best and final offer bid price based on an assumption about average savings for each RSA, some actual agreements are expected to produce savings that are smaller than this assumed average, but are still positive. This perspective is particularly relevant for conversion of partnership agreements, since the contractor is not likely to achieve new savings simply for continuing previous partnership agreements under the same terms as RSAs. The net contractor gain after taking account of average up-front savings from the best and final offer is likely to be negative, yet converting a cost-effective partnership agreement allows the contractor to avoid an increase in CHAMPUS claims costs that would otherwise result.) If the “Summary—Resource Sharing” page shows that the contractor workload credit is not appropriate and/or government gains do not exceed government expenditures, then one option for the MTF is to adjust the proposed contractor workload credit on an iterative basis until the proposed agreement satisfies both requirements. It may also be appropriate for the MTF to renegotiate other terms of the proposed agreement (for example, the level of resources to be provided by the contractor). If it is not possible to determine a workload credit percentage that results in a “yes” response to both questions, given all of the other input assumptions agreed upon by the MTF commander and the contractor, then the proposed RSA should not be approved (unless the lead agent determines that the proposed agreement still warrants approval due to compelling circumstances). The resource sharing worksheet page has five sections. Section I estimates the net resource sharing savings under this agreement that would already be reflected in the contractor’s proposed bid price, based on the average-savings-to-cost ratio used to develop the resource sharing savings trend factor in the contractor’s best and final offer. Section II estimates the effect of the RSA, including the contractor’s workload credit, on the MTF utilization adjustment in the bid price adjustment formula (that is, the “O” factor adjustment). Section III estimates the actual savings (that is, cost avoidance) in CHAMPUS health care costs as a result of the RSA. Section IV estimates the residual gain in CHAMPUS (that is, the difference between the adjusted bid price for health care costs and the actual health care costs) under the proposed RSA. The section also estimates the government and contractor portions of these gains, since the gains would be subject to risk sharing between the government and contractors. Section V provides the two necessary results of this analysis (for an assessment of resource sharing in isolation). First, is the contractor credit for resource sharing workload assumed in the analysis appropriate? Second, does the analysis indicate that the proposed RSA would be cost-effective for the government from the MHSS perspective? The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) use of support contracts to help deliver health care and to control costs, focusing on: (1) whether resource sharing savings are meeting DOD's projections and thus helping control TRICARE costs; (2) what problems DOD might be encountering in pursuing resource sharing; and (3) actions and alternatives pursued by DOD to overcome those problems. GAO also considered the implications of resource sharing within the broader context of TRICARE's overall cost-effectiveness. GAO noted that: (1) DOD and the contractors have made agreements likely to save about 5 percent of DOD's overall resource sharing savings goals; (2) new agreements are being considered, but neither DOD nor the contractors are confident that pending agreements will be reached or that further cost savings can be attained; (3) because resulting TRICARE contract costs may be greater than anticipated, both parties may experience related financial losses; (4) problems impeding progress on resource sharing agreements and the related savings have included lack of clear program policies and priorities, uncertainty about cost effects on military hospitals, lack of financial rewards for the hospitals entering into such agreements, and changes in military hospital capacities after contractors developed bids; (5) in response, DOD has revised policies, improved training and analytical tools, and taken other steps to promote resource training under the contracts, but to date, these efforts have not been sufficient to bring needed results; (6) for the last two contracts, DOD is applying a revised financing approach that includes resource sharing but at a reduced level; (7) the new approach allocates more funds to the military hospitals and less to the contractors, enabling the hospitals to directly acquire and use outside resources rather than use resource sharing with the contractor; (8) how the military hospitals, other sources, and contractors interact under the new approach is still being defined and has not been tested; resource sharing problems will not be automatically eliminated and may be exacerbated when used in combination with revised financing; (9) for the future, DOD plans even broader changes intended to simplify military hospital budgeting and support contract operations; (10) while the military hospitals and contractors could still use resource sharing, it no longer would be the basis for projecting major savings and lowering bids at the contract's outset; (11) DOD officials acknowledged their resource sharing savings problems but told GAO that lower than expected contract award prices have led to over $2 billion in unexpected, offsetting savings; (12) while TRICARE's overall cost-effectiveness was beyond GAO's review scope, there are reasons to question the currency and analytical completeness of DOD's preliminary savings claims; and (13) GAO supports DOD's current plans to undertake a detailed analysis, based on more up-to-date cost data and estimates, of TRICARE's overall cost-effectiveness. |
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U.S. Attorneys prosecute criminal cases brought forward by the federal government, prosecute and defend civil cases in which the United States is a party, and collect debts owed to the federal government that are administratively uncollectible. EOUSA was established in 1953 as a component of the Department of Justice to, among other things, provide general executive assistance and administrative and operational support to the 93 USAOs located throughout the 50 states, the District of Columbia, Guam, the Marianas Islands, Puerto Rico, and the U. S. Virgin Islands and to coordinate with other Department of Justice organizational units and other federal agencies on behalf of the U.S. Attorneys. One of EOUSA’s key responsibilities is managing the USAOs’ IT resources, including preparing their annual IT budget submissions and supporting their acquisition and maintenance of IT assets. IT plays an important role in helping the USAOs meet their mission objectives and, according to EOUSA planning documents, the USAOs’ reliance on IT is to increase in response to expected growth in the number and complexity of their cases. Currently, EOUSA manages an IT environment consisting of central and distributed computing and communication resources in Washington, D.C., and 93 USAOs, respectively. Connectivity among these offices, Justice headquarters, and Justice’s Data Center in Rockville, MD, is through a virtual private network (VPN) connection on the Justice Consolidated Network (JCN), with such security safeguards as firewalls between USAO local area networks and JCN. The VPN/firewall combination, which provides the foundation for secure communications between EOUSA and the sites mentioned above, is currently being replaced. Figure 1 generally depicts EOUSA’s network topology. The USAOs’ support is also provided by such application systems as the Legal Information Office Network System, which is a case management system that compiles, maintains, and tracks information about defendants, crimes, criminal charges, court events, and witnesses, and the Victim Notification System, which notifies crime victims of the status of their cases and assists with checking compliance with regulations and policies concerning victim notification. Recognizing the importance of IT to achieving the USAOs’ mission, EOUSA appointed a Chief Information Officer (CIO) in May 2001 and assigned the CIO accountability and responsibility for managing central and distributed IT resources and services, including managing the IT budget for the office and all of the USAOs; developing and acquiring new systems, including case management systems, and providing support for existing systems; managing network, telephone, and video communications; and securing IT assets (data, applications, and supporting networks). In fiscal year 2003, EOUSA reports that it plans to spend approximately $125 million on about 20 initiatives. Roughly $110 million of this amount is to be spent on IT infrastructure and office automation projects (e.g., telecommunications programs). The remainder is to be spent on acquiring mission support systems (e.g., Enterprise Case Management System (ECMS), Victim Notification System) and maintaining existing ones. Figure 2 shows the breakdown of estimated expenditures for fiscal year 2003. Research into the IT management practices that are employed by leading public- and private-sector organizations has identified key institutional IT management disciplines that are interrelated and critical to ensuring, among other things, the integrity, security, and efficiency of IT systems. These disciplines are also addressed in legislation and federal guidance. 1. enterprise architecture management, which involves defining, maintaining, and implementing an institutional blueprint that defines both the business and the supporting technology of the organization’s current and target operating environments and a roadmap to achieve the target environment; 2. IT investment management, which involves selecting, controlling, and evaluating a portfolio of investments within the context of an enterprise architecture; 3. IT security management, which involves protecting the integrity, confidentiality, and availability of an organization’s IT assets (e.g., data, application systems, and networks) and reducing the risks of tampering, unauthorized intrusions and disclosures, and disruption of operations. 4. system acquisition management, which involves managing selected investments (system projects) in a manner that increases the probability of promised system capabilities being delivered on time and within budget. As we have previously reported, to successfully institutionalize these disciplines, organizations should develop integrated plans to guide their efforts that (1) specify measurable goals, objectives, and milestones; (2) specify needed resources; and (3) assign clear responsibility and accountability for accomplishing well-defined tasks. In addition, these plans should be approved by senior management. In implementing these plans, it is important that organizations allocate adequate resources and measure and report progress against planned commitments and that appropriate corrective actions be taken to address deviations. EOUSA has defined and implemented each of the four IT management disciplines mentioned above to some degree. However, none has been institutionalized, meaning that they are not fully defined in accordance with best practices and what has been defined has not been fully implemented. While these disciplines have been given attention since the recent appointment of the CIO, they have not been treated as priorities, in that action plans needed for successful institutionalization have not been developed or resourced. As a result, EOUSA is currently limited in its ability to meet Justice’s strategic goal of improving its IT systems, and the USAOs will be challenged in their ability to effectively and efficiently meet their mission goals and priorities. An enterprise architecture (EA) is an investment blueprint that defines, both in logical terms (including business functions and applications, work locations, information needs and users, and the interrelationships among these variables) and in technical terms (including hardware, software, data communications, and security) how an organization operates today (“as is”), how it intends to operate tomorrow (“to be”), and a roadmap for transitioning from today to tomorrow. The development, maintenance, and implementation of architectures are recognized hallmarks of successful public and private organizations. According to a guide published by the federal CIO Council,effective architecture management consists of a number of core elements. In February 2002, we published version 1.0 of our EA management maturity framework, which arranges the core elements of the CIO Council’s guide into five hierarchical stages. The framework provides an explicit benchmark for gauging the effectiveness of architecture management and provides a roadmap for making improvements. Table 1 summarizes the framework’s five stages of maturity. EOUSA has satisfied many of the framework’s core elements. Specifically, it has satisfied about 80 percent of the elements associated with building the EA management foundation—stage 2 of our EA management maturity framework—and half of the 12 core elements associated with higher maturity stages. At stage 2, it has established a chief architect and has selected a framework (the Federal Enterprise Architecture Framework) and, according to officials, selected a tool (the Enterprise Architecture Management System) to serve as a repository for its EA artifacts. At the higher stages of our framework, the CIO, for example, approved a version of an EA in May 2002 that describes the “as is” and “to be” environments for its core business functions. However, the office has yet to satisfy several of the core elements that are critical to effective EA management. For example, a committee or group representing the enterprise has not yet been established to guide and oversee the development of future versions of the architecture. Instead, the current version of its architecture has been primarily guided and directed by the CIO’s office. Until a committee or group representing the enterprise is established, there is increased risk that the architecture will not represent a corporate decision-making tool and will not be viewed and endorsed officewide as such a tool. Another example is the absence of a written or approved policy for maintaining the EA. Without a documented, approved policy for EA maintenance that, for example, assigns responsibility and accountability for configuration management and version control, EOUSA risks allowing its architecture to become outdated and irrelevant, thus limiting its effectiveness in selecting and guiding IT investments. EOUSA does not have a written plan of action for strengthening EA management and evolving the current version of its EA, because, according to the CIO, developing such a plan is not a priority. Table 2 shows EOUSA’s performance in addressing the core elements of our maturity framework. Effective IT investment management provides for evaluating each proposed and ongoing investment, based on EA alignment and measurable risks and returns and for selecting and controlling these investments as a portfolio of competing investment options. We have developed a framework that defines and measures an organization’s maturity in IT investment management (ITIM) and provides a basis for improving investment management. This framework, which is based on the IT investment management practices of leading private- and public-sector organizations, is structured to permit progression through five maturity stages (shown in table 3). Each maturity stage consists of critical processes and key practices that should be implemented for an organization to become more effective in managing its IT investments. According to the framework, the first key step toward an effective investment management process is to build the investment foundation. An organization with this foundation (stage 2 maturity) has attained repeatable, successful investment control processes and basic selection processes at the project level. Successful management at this level allows an organization to measure the progress of existing IT projects and to identify variances in cost, schedule, and performance expectations by following established, disciplined processes. The organization should also be able to take corrective action, if appropriate, and should possess basic capabilities for selecting new project proposals. To accomplish this level of basic control, an organization should establish an investment board, identify the business needs and opportunities to be addressed by each project, and use this knowledge in the selection of new proposals. The office has satisfied two of the critical processes for stage 2, but it has not satisfied the other three. Specifically, it has established an investment governing board, known as the Investment Review Board (IRB) and developed a guide to direct its operations. It is also defining project needs in alignment with the agency’s mission goals. However, the office has not, for example, defined procedures for project oversight. In addition, while an IT project and systems inventory exists as part of its “as is” architecture, a policy specifying how it will be used for investment management purposes has not been defined. Until EOUSA satisfies all critical processes for stage 2, it will not have the foundation it needs to build its investment management capability and it will not have an effective investment process. Table 4 summarizes our assessment of stage 2 capabilities. EOUSA has not demonstrated that maturing its IT investment management process is a priority by developing a plan for doing so and devoting resources to execute the plan. Until the office develops and implements a plan for establishing mature IT investment management processes (including all critical processes for building the investment management foundation), EOUSA will not have the full suite of capabilities it needs to ensure that project selection and control processes are repeatable or that it has the best mix of investments to meet agency priorities. Effective information security management is critical to EOUSA’s ability to ensure the reliability, availability, and confidentiality of its information assets, and thus it is fundamental to its ability to perform its mission. Our research into public- and private-sector organizations with strong information security programs shows that leading organizations’ programs include (1) establishing a central security focal point with appropriate resources, (2) continuously assessing business risks, (3) implementing and maintaining policies and controls, (4) promoting awareness, and (5) monitoring and evaluating the effectiveness of policies and controls. Currently, EOUSA is not fully satisfying any of these tenets of effective security. In addition, it has not demonstrated that institutionalizing effective security practices is a priority by developing a plan to guide its efforts to address security weaknesses and committing resources to perform essential security functions. Until such a plan is developed and effectively implemented, data, systems, and networks are at risk of inadvertent or deliberate misuse, fraud, improper disclosure, or destruction—possibly without detection. For example, the reliability and integrity of case information may be compromised, or sensitive crime victim information may be improperly disclosed. According to our framework, central management of key security functions is the foundation of an effective information security program, because it allows knowledge and expertise to be incorporated and applied on an enterprisewide basis. Having a central security focal point supported by appropriate resources is especially important for managing the increased risks associated with a highly connected computing environment, such as JCN, where security weaknesses in one segment of an organization’s network can compromise the security of another segment’s IT assets. In addition, centralizing the security management function provides a focal point for coordinating the activities associated with the other four elements of a strong information security program. In June 2001, EOUSA appointed a security officer with responsibility for centrally managing all aspects of IT security. However, EOUSA has not assigned sufficient staff to adequately carry out these responsibilities. For example, no staff has been assigned to monitor firewall logs or support the development of a centrally managed IT security training program— activities that fall under the security officer’s purview. Each of these activities is discussed further in the following sections. Officials said that they recognize the need for additional staff resources to perform these activities. They also stated that they were in the process of hiring two people to support security functions, but they agreed that this would still not allow for performance of key security responsibilities. Without an appropriately resourced security program, security breaches may not be detected or addressed in a timely manner, awareness of security requirements across the organization may be inconsistent, and vulnerabilities in the current IT environment may not be appropriately addressed. According to our framework, identifying and assessing business risks is an essential step in determining what IT security controls are needed and what resources should be invested in these controls. Federal guidance advocates performing risk assessments at least once every 3 years—or when a significant change in a system or the systems environment (e.g., new threats) has occurred. These assessments should address the risks that are introduced through connections to other networks and the impact on an organization’s mission should network security be compromised. In line with this guidance, EOUSA’s certification and accreditation process requires that a risk assessment be completed for each system before any office can use it. According to EOUSA, a major system that recently underwent EOUSA’s certification and accreditation process is the replacement for the existing firewall/VPN system. This system is intended to be the foundation for secure communications between EOUSA, Justice, and the geographically dispersed USAOs. Accordingly, we analyzed this system and found that while the firewall/VPN replacement system has been certified and accredited, the existing firewall/VPN system—which was deployed in 1996 and, as of May 9, 2003, was operating at 75 of the 240 sites—had not had a risk assessment performed and had not been certified and accredited. Officials told us that they have not performed such an assessment on this network because (1) it is not cost-effective to use limited resources to perform an assessment on a network that is to be fully replaced by June 30, 2003, and (2) the risks inherent in the network are minimal, given that it resides on Justice’s JCN, for which they said they assume Justice had performed risk assessments. We agree that it does not make sense at this point to perform a risk assessment on the existing firewall/VPN system given that the replacement system is expected to be fully deployed by the end of June 2003. However, this does not change the fact that EOUSA has operated the network for about 7 years without understanding its exposure to risk. This is particularly important, because EOUSA officials could not provide us with evidence to support the assumption that Justice had performed a risk assessment for JCN. Moreover, previous studies have shown that Justice has had long-standing weaknesses in several aspects of its IT security program. According to EOUSA, its recently established certification and accreditation program will not allow this to happen again. According to our framework, risk-based, cost-effective security policies and related technology controls (such as firewalls configured to explicit rules and intrusion detection devices located to monitor key network assets) and procedural controls (such as contingency plans) are needed to protect a system from compromise, subversion, and tampering. Federal and Justice guidance also advocate establishing these policies and controls. While EOUSA is guided by many Justice security policies, it has not yet implemented key security controls that are needed to satisfy them. For example, CIO officials told us that the existing firewall/VPN system, which, as of May 9, 2003, was operating at 75 sites, is not based on explicit firewall rules. Moreover, according to these officials, no intrusion detection devices monitor the wide-area network (WAN) routers, firewalls, and VPN devices. Rather, the intrusion detection devices that are currently implemented are located only within the local area network environment (i.e., within a USAO). Also, the contingency plan developed for the replacement firewall/VPN system was not prepared according to federal guidelines. For example, the contingency plan does not specify procedures for notifying recovery personnel or assessing damage to systems. CIO officials told us that they had not implemented these security controls because, as previously noted, they believe the risks inherent in the network are minimal given that it resides on Justice’s JCN, for which they said they assumed Justice had performed risk assessments. However, as previously stated, EOUSA provided no evidence to support this assumption, and Justice has had longstanding security weaknesses. Until EOUSA implements security controls, it may be unaware of vulnerabilities, increasing the risk that intruders may take control of network devices or that data passing through its firewalls can be read or manipulated. In addition, EOUSA may not be able to respond to security breaches adequately and in a timely manner. This is particularly threatening given the sensitivity of the information used by the USAOs in performing their work. According to our framework, promoting user awareness through education and training is essential to successfully implementing information security policies, achieving user understanding of security policies, and ensuring that security controls are instituted properly. This is because computer users—and others with access to information resources—are not able to comply with policies of which they are unaware or which they do not fully understand. Our framework suggests that a central group be tasked with educating users about current information security risks and helping to ensure consistent understanding and administration of policies. As previously mentioned, the security officer is responsible for promoting awareness of computer security. However, the security officer does not carry out this responsibility because provision of the resources to do so has not been viewed as an agency priority. According to the security officer, each district is thus responsible for managing its own IT training program, and the security officer does not know to what extent these programs address awareness of computer security. Without a centralized approach to security education and training, the security officer cannot adequately ensure that users are consistently aware of or fully understand the organizational policies and procedures with which they are expected to comply, thus risking the integrity, reliability, and confidentiality of data and systems. According to EOUSA officials, they plan to hire staff to develop and implement a centralized program by August 2003. Our framework recognizes the need to continuously monitor controls, through tests and evaluations, to ensure that the controls have been appropriately implemented and are operating as intended. Further, Justice’s policy requires annual testing of security controls and requires EOUSA to (1) verify that the policies and procedures in component organizations are consistent with this policy and (2) enforce compliance with component and Justice security policies, including identifying sanctions and penalties for noncompliance. In addition, our framework and related best practices—as well as Justice’s own policy—advocate keeping summary records of security incidents, to allow measurement of the frequency of various types of violations and the damage suffered from these incidents. This type of oversight is critical because it enables management to identify problems and their causes—and to make the necessary corrections. CIO officials told us that testing has never been conducted to determine whether EOUSA’s policies and procedures are consistent with Justice’s and whether security controls are generally effective. According to these officials, testing has not been a priority because they assumed that Justice was performing tests of the WAN environment. However, Justice officials told us that, although they had evaluated the contractor’s management of the WAN’s circuits, they had not performed any tests to determine the effectiveness of technical and other controls associated with the WAN. The lack of testing heightens the risk that individuals both within and outside Justice could compromise EOUSA’s external and internal security controls to gain extensive unauthorized access to its networks and to networks to which it is connected. EOUSA officials also told us that, contrary to Justice’s policy, they do not maintain summary records of security incidents. Specifically, the production firewall/VPN software and routers at over 240 locations do not have audit logs that are activated, and the replacement routers, firewalls, and VPN devices are being implemented with no audit logs activated. According to these officials, they have not activated the audit logs because resources have not been allocated to provide for this security control. This lack of auditing heightens the risk of undetected intruders using EOUSA’s systems to modify, bypass, or negate its firewalls and routers. Additionally, without these audit logs the office would be unable to reconstruct security- related incidents. Rigorous and disciplined system acquisition processes and practices can reduce the risk of fielding systems that do not perform as intended, are delivered late, or cost more than planned. The Software Engineering Institute (SEI), recognized for its expertise in acquiring software-intensive systems, has published models and guides for determining an organization’s acquisition process maturity. One of those models, referred to as the Software Acquisition Capability Maturity Model (SA-CMM), addresses an organization’s acquisition management ability. The SA-CMM model defines organizational maturity according to five levels (see table 5). According to SEI, level 2 (the repeatable level) demonstrates that basic management processes, known as key process areas, have been established to track performance, cost, and schedule, and that the organization has the means to repeat earlier successes on similar projects. An organization that has these processes in place is in a much better position to successfully acquire software-intensive systems than an organization that does not. As a Justice component, EOUSA must comply with all departmental policies and procedures, including Justice’s system development life-cycle management guidance. Since EOUSA officials told us that the Enterprise Case Management System (ECMS), which is intended to be the enterprise solution for managing and tracking case workload within the USAOs, is the first acquisition effort to follow Justice guidance from its inception, we compared this project, and the Justice guidance used to manage it, against SEI’s SA-CMM, and we found that the project was being managed in accordance with the majority of the applicable level 2 practices. Table 6 represents a summary of our findings for this acquisition (see app. I for an expanded analysis). More specifically, the office has performed all of the key practices in the requirements development and management and project management key process areas. These include (1) establishing a written policy for developing and managing system-related contractual requirements; (2) having bi-directional traceability between the contractual requirements and the contractor’s work products and services; (3) measuring and reporting to management on the status of requirements development and management activities; (4) designating responsibility for project management; (5) keeping plans current during the life of the project as re- planning occurs, issues are resolved, requirements are changed, and new risks are discovered; and (6) tracking the risks associated with cost, schedule, resources, and the technical aspects of the project. EOUSA has also performed the majority of the key practices in the remaining four process areas. However, it does not have written policies for either the contract tracking and oversight or the software acquisition planning key process areas. Policies in general are key to establishing well-defined and enduring processes and procedures. In these two areas, policies would ensure that the office’s approach to tracking and overseeing contractors and planning the acquisition is defined in a repeatable and measurable fashion. In addition, during the solicitation process, the office did not document its plans for solicitation activities, which would provide those involved with objectives for the solicitation process and a defined way to manage and control solicitation activities and decisions. In evaluation, the office has yet to satisfy 9 of the 15 required practices. Officials told us that they intend to satisfy them but that they do not have a plan for addressing those practices or for implementing all of the required practices on future system acquisitions. According to these officials, developing such a plan is currently not a priority. By developing and implementing a plan for satisfying all of these key process areas on ECMS and future acquisitions, EOUSA can increase its chances of successfully acquiring needed system capabilities on time and within budget. EOUSA has taken important steps to define and implement four key IT management disciplines. Nevertheless, key aspects of each discipline have yet to be institutionalized, leaving the office challenged in its ability to achieve the department’s strategic goal of improving the integrity, security, and efficiency of its IT systems. Critical to the office’s success going forward will be treating institutionalization of each of these management disciplines as priority matters by developing integrated plans of action for addressing the weaknesses that we identified in each and effectively implementing these plans—including assignment of appropriate resources and measurement and reporting of progress. Without taking these steps, EOUSA is unlikely to fully establish the IT management capabilities it needs. To strengthen the office’s IT management capacity and increase its chances of improving the integrity, security, and efficiency of its IT systems, we recommend that the Attorney General direct the EOUSA Director to treat institutionalization of EA management, IT investment management, IT security management, and system acquisition management as priorities by developing and implementing action plans to address the weaknesses in each discipline that are identified in this report. These plans should, at a minimum, provide for accomplishing the following: establish a committee or group representing the enterprise that is responsible for directing, overseeing, or approving the EA; ensure that EA products are under configuration management; define, approve, and implement a policy for IT investment compliance specify metrics for measuring EA benefits; and define, approve, and implement a policy for maintaining the EA. For IT investment management, regularly oversee each IT project’s progress toward cost and schedule milestones, using established criteria, and require corrective actions when milestones have not been achieved; define and implement a policy for using the IT project and systems inventory for managerial decision making; and ensure that an established, structured process is used to select new IT proposals. For IT security management, allocate the appropriate resources to enable the responsibilities of the security officer to be fully performed; ensure that risk assessments are performed on all existing and future implement intrusion detection devices to monitor activity at the routers, firewalls, and VPN devices, and implement other network security controls as noted in the report; develop and implement a centralized approach to security education and training; and perform regular tests to determine compliance with policies and procedures and the effectiveness of security controls. For system acquisition management, develop and implement a policy for contract tracking and oversight; develop and implement a policy for system acquisition planning; and address the remaining key practices associated with evaluation as ECMS progresses in the life cycle; and ensure that the Software Engineering Institute acquisition practices identified in this report are used in future system acquisitions. In developing these plans, the Director should ensure that each plan (1) is integrated with the other three plans; (2) defines clear and measurable goals, objectives, and milestones; (3) specifies resource needs; and (4) assigns clear responsibility and accountability for implementing the plan. In implementing each plan, the Director should ensure that the needed resources are provided and that progress is measured and reported periodically to the Attorney General. In written comments on a draft of this report signed by the EOUSA Director (reprinted in app. III), the office agreed with our findings relative to enterprise architecture management, IT investment management, and system acquisition management. EOUSA also agreed with our recommendations in these three areas and stated that it intends to implement the recommendations. However, EOUSA stated that it disagreed with our findings and our recommendations regarding information security management, although at the same time it cited certain actions that it intends to take, such as implementing a centralized security training program and monitoring security audit logs, that are consistent with our security findings and associated recommendations. Further, the office disagreed that the state of its efforts to institutionalize best management practices in the four areas is due to it not treating each area as an office priority. It also disagreed with our conclusion that the state of its efforts to institutionalize best practices currently limits its ability to meet Justice’s strategic goal of improving its IT systems, and that the USAOs will be challenged in their ability to effectively and efficiently meet mission goals and priorities. Each of these three areas of disagreement is addressed below. First, with respect to information security management, EOUSA stated that it has one of the strongest security programs in Justice, and perhaps the federal government. To support this statement, the office cited 10 security initiatives it has implemented, such as certification and accreditation of more than eight systems, real-time encryption of all data in laptops and handheld devices, and conduct of vulnerability assessments and penetration testing. It also noted, among other things, that it had added 10 field security positions and 2 headquarters positions, and that its data are monitored 24 hours a day, seven days a week, and have never been compromised. We do not question these statements concerning the office’s information security program and associated activities because (1) the purpose and scope of our review was not to compare EOUSA to other Justice component organizations or other federal agencies, and thus EOUSA’s relative standing is not relevant to the findings in our report and (2) the message of our report is not that EOUSA has not taken steps to improve its information security posture, but rather that the office’s information security management efforts, including ongoing and complete improvement steps, are weak in a number of areas relative to information security management best practices. Accordingly, we make recommendations aimed at addressing identified weaknesses, including a recommendation to implement network intrusion detection devices and other security controls. While EOUSA’s comments cited plans that are consistent with many of our security-related recommendations, it disagreed with the recommendation relative to its wide area network on the grounds that this network is managed, secured, and monitored by Justice and Sprint. We understand that the WAN is not managed by EOUSA, and accordingly our recommendation was aimed at actively monitoring the network routers, firewalls, and VPN devices, which are managed by EOUSA. To avoid any confusion about this recommendation, we have clarified its wording to better reflect our intentions. Similarly, in light of the recent progress that EOUSA has made replacing its VPN system, we have adjusted our finding and recommendation concerning the office’s exposure to risk from its old VPN system. Second, with respect to our statements that EOUSA has not treated institutionalization of each of the four IT management disciplines— enterprise architecture management, IT investment management, system acquisition management, and information security management—as agency priorities, the office stated that these statements were unfair and that it did not agree with them. To support its position, EOUSA made the following two points: (1) it has made tremendous progress, as evidenced by our report recognizing those best practices that it is satisfying, and (2) it has received the highest level of support from Justice, as evidenced by the establishment of the EOUSA CIO position in 2001, the progress that has been made in the last 2 years compared to other Justice component organizations, and EOUSA’s being viewed by Justice senior management as a leader in IT management. We do not challenge EOUSA’s two points because they are not relevant to our position regarding treating institutionalization of each of the four IT management disciplines as agency priorities. Our position is based on two facts that EOUSA did not dispute: (1) plans for addressing the weaknesses cited in our report do not exist and (2) limitations in resources to address these weaknesses were cited by EOUSA officials as the reason why the weaknesses exist. In our view, if each of these areas were an agency priority, then plans would be in place to address the weaknesses, and resources to execute the plans would be committed. Third, with respect to our conclusion that EOUSA is currently limited in its ability to meet Justice’s strategic goal of improving its IT systems, and that the USAOs are thereby challenged in their ability to effectively and efficiently meet their mission goals and objectives, the office disagreed but did not offer any comments to counter our conclusion beyond those cited above. Given that any organization’s ability to effectively leverage technology is determined in large part by its institutionalized capabilities in these four IT disciplines, we have not modified our conclusion. EOUSA provided additional comments that have been incorporated in the report as appropriate. EOUSA’s written comments are reproduced in appendix III, along with our detailed evaluation of each comment. 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. We will also send copies to the Director of the Office of Management and Budget, the Attorney General of the United States, the EOUSA Director, and the EOUSA CIO. We will also send copies to others upon request. In addition, copies will be available at no charge on our Web site at www.gao.gov. Should you or your offices have questions on matters discussed in this report, please contact me at (202) 512-3439. I can also be reached by E-mail at [email protected]. An additional GAO contact and staff acknowledgments are listed in appendix IV. Our objective was to determine the extent to which the Executive Office for United States Attorneys (EOUSA) has institutionalized key information technology (IT) management capabilities to achieve the Department of Justice’s strategic goal of improving the integrity, security, and efficiency of its IT systems. To meet this objective, we focused on whether EOUSA had institutionalized four key IT management disciplines: enterprise architecture management, IT investment management, information security management, and system acquisition management. To evaluate EOUSA’s enterprise architecture (EA) management, we first solicited responses to an EA management questionnaire, reviewed EA plans and products, and interviewed officials to verify their responses. Next, we compared the information that we had collected with GAO’s February 2002 EA management maturity framework to determine the extent to which EOUSA was employing effective EA management practices. This framework is based on the Practical Guide to Federal Enterprise Architecture, published by the Chief Information Officers’ (CIO) Council. We did not use the revised framework issued in April 2003 because, by then, we had already completed our work. To evaluate EOUSA’s IT investment management (ITIM), we used GAO’s ITIM framework and assessed the extent to which EOUSA had satisfied the critical processes associated with stage 2 of the five-stage framework—building the investment foundation. We focused on stage 2 processes because officials told us that they had only recently begun defining and implementing the specific practices that are associated with this stage. To conduct our assessment, we reviewed relevant EOUSA and Justice policies, procedures, guidance, and documentation—including the office’s investment management guide and associated memorandums, project proposals, and budget documents. We also interviewed the CIO and the senior official who is responsible for implementing IT investment management. We then compared this information with our maturity framework to determine the extent to which the office was employing effective IT investment management practices. To evaluate EOUSA’s information security management, we used our executive guide for information security management, as well as Justice policy and guidance and relevant EOUSA U.S. Attorney Procedures.We reviewed internal Justice and other reports identifying security weaknesses at Justice and EOUSA and information on how these weaknesses will be addressed. We also reviewed the certification and accreditation package and the deployment schedule for the virtual private networkthat the office is currently deploying, because EOUSA and the USAOs rely on this network to carry out its mission. We interviewed Justice officials and EOUSA officials within the Office of the CIO about the office’s security management. To evaluate EOUSA’s system acquisition management, we used the Software Engineering Institute’s Software Acquisition Capability Maturity Model, focusing on six of the seven key process areas that are defined for level 2 of the model’s five-level maturity scale. We focused on level 2 processes because they represent the minimum level of maturity needed to effectively manage system acquisition projects. We used the office’s acquisition of the Enterprise Case Management System as a case study because officials stated that it is representative of how they intend to acquire systems. In addition, this system will be critical in providing fundamental support to the U.S. Attorneys as they work to achieve mission goals. We reviewed key project documentation, such as the concept of operations, project plan, and requirements traceability matrix, and we interviewed system acquisition officials. We also reviewed the Justice guidance used to manage the project. We then compared this information to the Software Acquisition Capability Maturity Model to determine the extent to which the office was employing effective system acquisition management practices. We performed our work at EOUSA headquarters in Washington, D.C., from November 2002 to May 2003, in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of Justice’s letter dated June 16, 2003. 1. We disagree. Our position that institutionalization has not been a priority is based on two facts that EOUSA did not dispute: (1) plans for addressing the weaknesses cited in our report do not exist and (2) limitations in resources to address these weaknesses were cited by EOUSA officials as the reason why the weaknesses exist. If each of these areas were an agency priority, then plans would be in place to address the weaknesses, and resources to execute the plans would be committed. 2. We do not question EOUSA’s statement that it has made “tremendous progress.” Our work focused on determining the extent to which EOUSA currently satisfies key practices in the four IT management disciplines. It did not include developing a baseline from which to measure progress. To EOUSA’s credit, our review showed that the office has satisfied many key practices in each discipline, and we have noted this in our report. 3. We agree and include both of these facts in our report. 4. We disagree. EOUSA’s comments did not include any information to refute our conclusion. Given that it did not have a plan for fully implementing best practices for each discipline, and had not allocated adequate resources to support such a plan, we have not modified our conclusion. 5. We do not question these statements about the position of EOUSA and the USAOs relative to other Justice components. Such a comparison was not part of the scope of our work. 6. We disagree. EOUSA has not gained this maturity level. Rather, according to EOUSA, the contractor that maintains its LIONS application is certified as a level 3 software developer. In contrast, our work focused on EOUSA’s capabilities as a software acquirer, and thus addresses a different organization, discipline, and maturity model. 7. See comment 1. 8. We do not question this statement because the position of EOUSA and the USAOs relative to other Justice components or other law enforcement entities was not part of the scope of our work. 9. As noted in our report, EOUSA satisfied about 80 percent of the elements of just stage 2 of the EA management framework. It has satisfied about 60 percent of the elements (12 out of 19) of the entire framework. 10. We have modified the report to reflect this comment. 11. We agree. However, according to GAO’s IT Investment Management Framework, to satisfy the proposal selection critical process, EOUSA would need to demonstrate the use of the criteria it has defined. Because it has not yet done so, it is not satisfying the critical process and thus has met two out of five elements of stage 2 of the framework. 12. We disagree. Our assessment is based on EOUSA’s satisfaction of key practices laid out in our executive guide for information security management. This assessment showed that EOUSA has not fully satisfied any of these key practices. For example, EOUSA does not (1) have a central security focal point with appropriate resources, (2) adequately promote user awareness, and (3) regularly monitor the effectiveness of security controls. Until EOUSA addresses these and other security weaknesses we identify in our report, it will not have implemented effective security practices. 13. See comment 8. 14. We do not question this statement because determining whether the data of the United States Attorneys have never been compromised and are monitored 24 hours a day, 7 days a week was not within the scope of our work and EOUSA did not provide any evidence supporting its assertions. 15. See comment 1. Additionally, our finding is that the institutionalization of information security management has not been an agency priority. 16. We do not question these security initiatives. Additionally, we emphasize that our message is not that EOUSA has not taken steps to improve its information security posture, but rather that the office’s information security management efforts, including ongoing and completed improvement steps, are weak in a number of areas relative to information security management best practices. 17. We agree, but would add that our recommendation could be addressed by actively monitoring activity at the routers, firewalls, and wide area network devices, which we understand are remotely managed by EOUSA. To avoid any potential confusion on this point, we have clarified our recommendation. Implementing an intrusion detection system to monitor activity at the routers, firewalls, and other network devices would enable EOUSA to detect hostile attempts to manage those devices. 18. We do not question EOUSA’s statement that it has been working to resolve vulnerabilities identified during a security audit conducted by the Justice Inspector General. The scope of the Inspector General’s audit, however, was narrower than ours in that it focused on EOUSA’s local area network environment. 19. We agree that given EOUSA’s recent progress in deploying the replacement network its exposure to risk is currently limited. We have modified the security risk assessment section of the report and the associated recommendation to reflect this change in circumstances. 20. We agree and thus do not conclude that EOUSA’s risk assessment program is inadequate. Rather, based on the fact that a risk assessment was not performed on the network that EOUSA has operated since 1996 and, until recently, relied exclusively on, we conclude that EOUSA has not always performed risk assessments. Additionally, to recognize the recent change in circumstances we have modified our recommendation concerning risk assessments. 21. We do not question these statements. We support the use of automated tools to review audit logs, particularly because these logs were not being reviewed, and EOUSA attributed this to a lack of resources. We also support EOUSA’s plan to conduct regular tests to determine compliance with policies and procedures. Both of these planned actions are consistent with our recommendations. 22. We do not question this statement. However, as noted in our report, the office did not have a plan to address the issues that are discussed in our report. 23. We do not question these statements because our review did not address contingency plans for all certified and accredited systems. As stated in the report, while a contingency plan was developed for the replacement network, it was not prepared in accordance with federal guidelines. For example, the plan did not specify procedures for notifying recovery personnel. To clarify our position, we have added examples to the report of this plan’s noncompliance with federal guidelines. 24. We support EOUSA’s stated commitment to establish a centralized security training program. Establishing such a program is consistent with our recommendations. 25. We have modified the report to reflect that the Enterprise Case Management System is the first acquisition to follow the Justice life- cycle methodology from its inception. 26. See comment 6. 27. We have modified the report to reflect that EOUSA’s acquisitions are processed through the department and must comply with all departmental policies and procedures. In addition to the individual named above, Nabajyoti Barkakati, Jamey Collins, Joanne Fiorino, Anh Q. Le, Sabine R. Paul, and William F. Wadsworth 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. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | The Executive Office for United States Attorneys (EOUSA) of the Department of Justice is responsible for managing information technology (IT) resources for the United States Attorneys' Offices. GAO was asked to determine the extent to which EOUSA has institutionalized key IT management capabilities that are critical to achieving Justice's strategic goal of improving the integrity, security, and efficiency of its IT systems. To varying degrees, EOUSA has partially defined and implemented certain IT management disciplines that are critical to successfully achieving the Justice Department's strategic goal of improving the integrity, security, and efficiency of its IT systems. However, it has yet to institutionalize any of these disciplines, meaning that it has not defined existing policies and procedures in accordance with relevant guidance, and it has yet to fully implement what it has defined. In particular, while EOUSA has developed an enterprise architecture--a blueprint for guiding operational and technological change--the architecture was not developed in accordance with certain best practices. In addition, while the office has implemented certain process controls for selecting, controlling, and evaluating its IT investments, it has not yet implemented others that are necessary in order to develop an effective foundation for investment management. Further, it has not implemented important management practices that are associated with an effective security program. In contrast, it has defined--and is implementing on a major system that we reviewed--most, but not all, of the management practices associated with effective systems acquisition. Institutionalization of these IT management disciplines has not been an agency priority and is not being guided by plans of action or sufficient resources. Until each discipline is given the priority it deserves, EOUSA will not have the IT management capabilities it needs to effectively achieve the department's strategic goal of improving the integrity, security, and efficiency of its IT systems. |
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Most of HUD’s housing assistance payments were timely—HUD disbursed by the due date 75 percent of the 3.2 million monthly payments for fiscal years 1995 through 2004. However, 25 percent of its payments were late, and 8 percent (averaging about 25,000 payments per year) were significantly late—that is, they were delayed by 2 weeks or more, a time frame in which some owners indicated the late payment could affect their ability to pay their mortgages on time. HUD made payments on an average of about 26,000 contracts per month. About one-third of these contracts experienced at least one payment per year that was late by 2 weeks or more. The timeliness of HUD’s monthly housing assistance payments varied over the 10-year period, decreasing in 1998 shortly after HUD began implementing the Multifamily Assisted Housing Reform and Affordability Act of 1997, which contained new contract renewal and processing requirements. Timeliness gradually improved after 2001, after HUD began using performance-based contract administrators to administer a majority of the contracts. In the 3-year period of fiscal years 2002 through 2004, HUD disbursed 79 percent of payments by the due date, but 7 percent of these payments were significantly late. The primary factors affecting the timeliness of HUD’s housing assistance payments were the process of renewing owners’ contracts; internal HUD processes for funding contracts and monitoring how quickly each contract uses its funding; and untimely, inaccurate, or incomplete submissions of monthly vouchers by project owners. More specifically: Monthly housing assistance payments were more likely to be late when owners’ contracts to participate in HUD’s programs were not renewed by their expiration dates. For example, our analysis of available HUD data on the reasons that payments were 2 weeks or more late from fiscal years 2002 through 2004 found that the most common reason was the payment being withheld pending contract renewal. HUD officials and contract administrators said that delays on HUD’s part—stemming from a renewal process HUD officials agreed could be cumbersome and paper intensive—could cause (or exacerbate) late payments that resulted from the lack of a renewed contract. The timeliness, quality, and completeness of owners’ renewal submissions also could cause delays in contract renewals, particularly when an owner’s initial contract expired and it had to be renewed for the first time. HUD did not know exactly how much it would pay owners each year because the amounts varied with tenant turnover, so HUD estimated how much funding it would need to obligate, or commit, to each contract and how quickly the contract would use these funds. However, HUD often underestimated how much funding a contract would need in a given year, and the agency lacked consistent processes for field office staff to monitor contracts and allocate and obligate additional funds when contracts used funds faster than anticipated. Failure to allocate and obligate additional funds to contracts promptly could cause payments to be late. According to HUD officials and contract administrators, owners’ untimely, inaccurate, or incomplete monthly voucher submissions also might cause late housing assistance payments. However, the contract administrators with whom we spoke generally indicated they were able to correct errors in owners’ submissions ahead of time to ensure timely payments. According to project owners with whom we met, delays in HUD’s housing assistance payments had negative financial effects and may have compromised owners’ ability to operate their properties, but the delays were unlikely to cause owners to opt out of HUD’s programs or stop providing affordable housing. Some owners said they incurred late fees on their mortgages and other bills or experienced interruptions in services at their properties because of delayed payments. Effects of delayed payments could vary in severity, depending on the financial condition of the property owner and the extent to which the operation of the property was dependent on HUD’s subsidy. Further, owners said that HUD did not notify them of when or for how long payments would be delayed, which prevented them from taking steps to mitigate the effects of late payments. The owners and industry group officials generally agreed that the negative effects of delayed payments alone would not cause owners to opt out of HUD’s programs, although they could be a contributing factor. We made several recommendations to HUD designed to improve the timeliness of these subsidy payments, with which the agency concurred. My statement incorporates information on the status of HUD’s actions in response to these recommendations. HUD operates a variety of project-based rental assistance programs through which it pays subsidies, or housing assistance payments, to private owners of multifamily housing that help make this housing affordable for lower-income households. HUD entered into long-term contracts, often 20 to 40 years, committing it and the property owners to providing long-term affordable housing. Under these contracts, tenants generally pay 30 percent of their adjusted income toward their rents, with the HUD subsidy equal to the difference between what the tenants pay and the contract rents that HUD and the owners negotiate in advance. In the mid- to late-1990s, Congress and HUD made several important changes to the duration of housing assistance contract terms (and the budgeting for them), the contract rents owners would receive relative to local market conditions, and the manner in which HUD administers its ongoing project-based housing assistance contracts. Specifically: Because of budgetary constraints, HUD shortened the terms of subsequent renewals, after the initial 20- to 40-year terms began expiring in the mid-1990s. HUD reduced the contract terms to 1 or 5 years, with the funding renewed annually subject to appropriations. Second, in 1997, Congress passed the Multifamily Assisted Housing Reform and Affordability Act (MAHRA), as amended, in an effort to ensure that the rents HUD subsidizes remained comparable with market rents. Over the course of the initial longer-term agreements with owners, contract rents in some cases came to substantially exceed local market rents. MAHRA required an assessment of each project when it neared the end of its original contract term to determine whether the contract rents were comparable to current market rents and whether the project had sufficient cash flow to meet its debt as well as daily and long-term operating expenses. If the expiring contract rents were below market rates, HUD could increase the contract rents to market rates upon renewal (i.e., “mark up to market”). Conversely, HUD could decrease the contract rents upon renewal if they were higher than market rents (i.e., “mark down to market”). Finally, in 1999, because of staffing constraints (primarily in HUD’s field offices) and the workload involved in renewing the increasing numbers of rental assistance contracts reaching the end of their initial terms, HUD began an initiative to contract out the oversight and administration of most of its project-based contracts. The entities that HUD hired—typically public housing authorities or state housing finance agencies—are responsible for conducting on-site management reviews of assisted properties; adjusting contract rents; reviewing, processing, and paying monthly vouchers submitted by owners; renewing contracts with property owners; and responding to health and safety issues at the properties. As of fiscal year 2004, these performance-based contract administrators (PBCA) administered the majority of contracts—more than 13,000 of approximately 23,000 contracts. HUD also has two other types of contract administrators. “Traditional” contract administrators (typically local public housing authorities) were responsible for administering approximately 5,000 contracts until they expired; at which time, these contracts would be assigned to the PBCAs. Finally, HUD itself also administered a small number of contracts under specific types of project-based programs. To receive their monthly housing assistance payments, owners must submit monthly vouchers to account for changes in occupancy and tenants’ incomes that affect the actual amount of subsidy due. However, the manner in which the owners submit these vouchers and the process by which they get paid varies depending on which of the three types of contract administrators handles their contract. For HUD-administered contracts, the owner submits a monthly voucher to HUD for verification, and HUD in turn pays the owner based on the amount in the voucher. For PBCA-administered contracts, the owner submits a monthly voucher to the PBCA, which verifies the voucher and forwards it to HUD for payment. HUD then transfers the amount verified on the voucher to the PBCA, which in turn pays the owner. In contrast, for traditionally administered contracts, HUD and the contract administrator develop a yearly budget, and HUD pays the contract administrator set monthly payments. The owner submits monthly vouchers to the contract administrator for verification, and the contract administrator pays the amount approved on the voucher. At the end of the year, HUD and the contract administrator reconcile the payments HUD made to the contract administrator with the amounts the contract administrator paid to the owner, exchanging payment as necessary to settle any difference. Overall, from fiscal years 1995 through 2004, HUD disbursed by the due date 75 percent of the 3.2 million monthly housing assistance payments on all types of contracts (see fig. 1). However, 8 percent of payments, averaging 25,000 per year, were significantly late—that is, they were delayed by 2 weeks or more and therefore could have had negative effects on owners who relied on HUD’s subsidy to pay their mortgages. During this period, 6 percent of the total payments (averaging 18,000 per year) were 4 weeks or more late, including about 10,000 payments per year that were 8 weeks or more late. HUD does not have an overall timeliness standard, by which it makes payments to owners or its contract administrators, that is based in statute, regulation, or HUD guidance. However, HUD contractually requires the PBCAs (which administer the majority of contracts) to pay owners no later than the first business day of the month. HUD officials said that they also used this standard informally to determine the timeliness of payments on HUD-administered and traditionally administered contracts. Therefore, we considered payments to be timely if they were disbursed by the first business day of the month. Based on our discussions with project owners who reported that they relied on HUD’s assistance to pay their mortgages before they incurred late fees (generally, after the 15th day of the month), we determined that a payment delay of 2 weeks or more was significant. The timeliness of housing assistance payments varied over the 10-year period (see fig. 2). The percentage of payments that were significantly late increased in 1998, which HUD and PBCA officials indicated likely had to do with HUD’s initial implementation of MAHRA and new contract renewal procedures and processing requirements for project owners. Timeliness gradually improved after 2001, shortly after HUD first began using the PBCAs to administer contracts. The percentage of contracts experiencing at least one significantly late payment over the course of the year showed a similar variation over the 10-year period, rising to 43 percent in fiscal year 1998 and decreasing to 30 percent in fiscal year 2004 (see fig. 3). As with the percentage of late payments, the percentage of contracts with late payments increased in fiscal year 1998 when HUD implemented requirements pursuant to MAHRA. Over the 10-year period, about one-third of approximately 26,000 contracts experienced at least one payment per year that was delayed by 2 weeks or more. Payments on HUD-administered contracts were more likely to be delayed than those on contracts administered by the PBCAs and traditional contract administrators, based on HUD’s fiscal year 2004 payment data (see fig. 4). Further, HUD-administered contracts were more likely to have chronically late payments. In fiscal year 2004, 9 percent of HUD- administered contracts experienced chronic late payments, while 3 percent of PBCA-administered contracts and 1 percent of the traditionally administered contracts had chronic late payments. Late monthly voucher payments were more likely to occur when a contract had not been renewed by its expiration date, according to many of the HUD officials, contract administrators, and property owners with whom we spoke. HUD’s accounting systems require that an active contract be in place with funding obligated to it before it can release payments for that contract. Therefore, an owner cannot receive a monthly voucher payment on a contract that HUD has not renewed. Our analysis of HUD data from fiscal years 2002 through 2004 showed that 60 percent of the payments that were 2 weeks or more late was associated with pending contract renewals, among late payments on PBCA-and HUD- administered contracts for which HUD recorded the reason for the delay (see fig. 5). A contract renewal might be “pending” when one or more parties involved in the process—HUD, the PBCA, or the owner—had not completed the necessary steps to finalize the renewal. Based on our interviews with HUD officials, contract administrators, and owners, pending contract renewals might result from owners’ failing to submit their renewal packages on time. Often the delay occurred when owners had to submit a study of market rents, completed by a certified appraiser, to determine the market rent levels. However, late payments associated with contract renewals also might occur because HUD had not completed its required processing. For example, according to a HUD official, at one field office we visited, contract renewals were delayed because HUD field staff were behind in updating necessary information, such as the new rent schedules associated with the renewals and the contract execution dates in HUD payment systems. HUD’s contract renewal process was largely manual and paper driven and required multiple staff in the PBCAs and HUD to complete (see fig. 6). Upon receipt of renewal packages from owners, the PBCAs then prepared and forwarded signed contracts (in hard copy) to HUD field offices, which executed the contracts; in turn, the field offices sent hard copies of contracts to a HUD accounting center, which activated contract funding. To allow sufficient time to complete the necessary processing, HUD’s policy required owners to submit a renewal package to their PBCAs 120 days before a contract expires, and gives the PBCAs 30 days to forward the renewal package to HUD for completion (leaving HUD 90 days for processing). However, some owners told us that their contract renewals had not been completed by the contract expiration dates, even though they had submitted their renewal packages on time. While initial contract renewals (upon expiration of the owner’s initial long- term contract) often exceeded the 120-day processing time, subsequent renewals were less time-consuming and resulted in fewer delays, according to HUD officials, the PBCAs, and owners. Initial renewals could be challenging for owners because they often involved HUD’s reassessment of whether the contract rents were in line with market rents. Additionally, the initial renewal represented the first time that owners had to provide HUD with the extensive documentation required for contract renewals to continue receiving housing assistance payments. Further, in preparing our 2007 report, some property owners we contacted raised concerns about the renewal process, particularly on the clarity of the HUD policies and procedures and the way the policies were applied. Specifically, these owners were concerned that the contract renewal guide that was published in 1999 had not been updated despite many changes to HUD’s policies and procedures, which has led to confusion among some owners. To improve the timeliness of housing assistance payments, we recommended in our 2005 report that HUD streamline and automate the contract renewal process to prevent processing errors and delays and eliminate paper/hard-copy requirements to the extent practicable. In its response, HUD agreed with our recommendation and commented that streamlining and automating the renewal process would be accomplished through its Business Process Reengineering (BPR) effort. As we noted in our 2005 report, HUD launched this initiative in 2004 to develop plans to improve what it characterized as “inefficient or redundant processes” and integrate data systems. However, according to HUD, the agency has not received funding sufficient to implement the BPR initiative. As a result, HUD has been pursuing other solutions aimed at streamlining and simplifying the contract renewal process. According to HUD, the agency is planning to implement a Web-based contract renewal process that would be paperless, which it expects to complete in fiscal year 2010. HUD also told us that although it does not have funding in place to fully develop this automated renewal process, it has been implementing this new process in phases, as funding becomes available. The methods HUD used to estimate the amount of funds needed for the term of each of its project-based assistance contracts and the way it monitored the funding levels on those contracts also affected the timeliness of housing assistance payments. When HUD renews a contract, and when it obligates additional funding for each year of contracts with 5- year terms, it obligates an estimate of the actual subsidy payments to which the owner will be entitled over the course of a year. However, those estimates were often too low, according to HUD headquarters and field office officials and contract administrators. For example, an underestimate of rent increases or utility costs or a change in household demographics or incomes at a property would affect the rate at which a contract exhausted its funds, potentially causing the contract to need additional funds obligated to it before the end of the year. If HUD underestimated the subsidy payments, the department needed to allocate more funds to the contract and adjust its obligation upwards to make all of the monthly payments. Throughout the year, HUD headquarters used a “burn-rate calculation” to monitor the rate at which a contract exhausted or “burned” the obligated funds and identify those contracts that may have had too little (or too much) funding. According to some HUD field office and PBCA officials, they also proactively monitored contract fund levels. Based on the rate at which a contract exhausted its funds, HUD obligated more funds if needed. However, based on our analysis of available HUD data and our discussions with HUD field office officials, owners, and contract administrators, payments on some contracts were still delayed because they needed to have additional funds allocated and obligated before a payment could be made. As shown in figure 5, our analysis of HUD’s payment data showed that, where the reasons for delayed payments on PBCA-and HUD- administered contracts were available, 11 percent of delays of 2 weeks or more were due to contracts needing additional funds obligated. That is, those payments were delayed because, at the time the owners’ vouchers were processed, HUD had not allocated and obligated enough funding to the contracts to cover the payments. One potential factor that likely contributed to payment delays related to obligating contract funding was staff at some HUD field offices—unlike their counterparts in other field offices and staff at some of the PBCAs— lacking access to data systems or not being trained to use them to monitor funding levels. At some of the field offices we visited, officials reported that they did not have access to the HUD data systems that would allow them to adequately monitor contract funding levels. HUD field offices reported, and headquarters confirmed, that some field officials had not received training to carry out some functions critical to monitoring the burn rate. A HUD headquarters official reported that changes in the agency’s workforce demographics posed challenges because not all of the field offices had staff with an optimal mix of skill and experience. We recommended in our 2005 report that HUD develop systematic means to better estimate the amounts that should be allocated and obligated to project-based housing assistance payment contracts each year, monitor the ongoing funding needs of each contract, and ensure that additional funds were promptly obligated to contracts when necessary to prevent payment delays. HUD agreed that this recommendation would improve the timeliness of payments, noting that it planned on achieving improvements through training, data quality reviews, and data systems maintenance. To determine how best to improve the current estimation/allocation system, HUD stated that it had obtained a contractor to analyze current data systems and make recommendations on improvements that would allow better identification of emerging funding requirements as well as improved allocation of available resources. As of October 2007, HUD reported that it was in the process of verifying and correcting data critical to renewing project-based rental assistance contracts in its data systems to produce a “clean universe of contracts.” Based on its preliminary results, HUD officials told us that the data appeared to be reasonably accurate for the purposes of estimating renewal funding amounts. In addition, HUD has evaluated the current methodology for estimating its budget requirements for the project-based programs and developed a “budget calculator” to estimate renewal funding amounts. HUD has been pursuing contracting services to implement this “calculator” using the recently verified contract data; however, HUD could not provide a specific date by which it expected to complete these improvements. The PBCAs with which we met estimated that 10 to 20 percent of owners submitted late vouchers each month. For example, one PBCA reported that about 20 percent of the payments it processed in 2004 were delayed due to late owner submissions. However, the PBCAs also reported that they generally could process vouchers in less than the allowable time—20 days—agreed to in their contracts with HUD and resolve any errors with owners to prevent a payment delay. According to PBCA officials, they often participated in several “back-and-forth” interactions with owners to resolve errors or inaccuracies. Typical owner submission errors included failing to account correctly for changes in the number of tenants or tenant income levels, or failing to provide required documentation. Because HUD’s data systems did not capture the back-and-forth interactions PBCA officials described to us, we could not directly measure the extent to which owners’ original voucher submissions may have been late, inaccurate, or incomplete. HUD officials and the PBCAs reported that owners had a learning curve when contracts were transferred to the PBCAs because the PBCAs reviewed monthly voucher submissions with greater scrutiny than HUD had in the past. The timeliness of payments also might be affected by a PBCA’s internal policies for addressing owner errors. For example, to prevent payment delays, some of the PBCA officials with whom we spoke told us that they often processed vouchers in advance of receiving complete information on the owners’ vouchers. In contrast, at one of the PBCAs we visited, officials told us that they would not process an owner’s voucher for payment unless it fully met all of HUD’s requirements. In preparing our 2005 report, some owners reported that they had not been able to pay their mortgages or other bills on time as a result of HUD’s payment delays. Three of the 16 owners with whom we spoke reported having to pay their mortgages or other bills late as a result of HUD’s payment delays. One owner reported that he was in danger of defaulting on one of his properties as a direct result of late housing assistance payments. Another owner was unable to provide full payments to vendors (including utilities, telephone service, plumbers, landscapers, and pest control services) during a 3-month delay in receiving housing assistance payments. According to this owner, her telephone service was interrupted during the delay and her relationship with some of her vendors suffered. This owner also expressed concern about how the late and partial payments to vendors would affect her credit rating. If owners were unable to pay their vendors or their staff, services to the property and the condition of the property could suffer. At one affordable housing property for seniors that we visited, the utility services had been interrupted because of the owner’s inability to make the payments. At the same property, the owner told us that she could not purchase cleaning supplies and had to borrow supplies from another property. One of the 16 owners with whom we spoke told us that they were getting ready to furlough staff during the time that they were not receiving payments from HUD. According to one HUD field office official, owners have complained about not being able to pay for needed repairs or garbage removal while they were waiting to receive a housing assistance payment. According to one industry group official, payment delays could result in the gradual decline of the condition of the properties in instances where owners were unable to pay for needed repairs. According to owners as well as industry group and HUD officials, owners who were heavily reliant on HUD’s subsidy to operate their properties were more severely affected by payment delays than other owners. Particularly, owners who owned only one or a few properties and whose operations were completely or heavily reliant on HUD’s subsidies had the most difficulty weathering a delay. For example: Two of the 16 owners with whom we spoke reported that they could not pay their bills and operate the properties during a payment delay. These owners were nonprofits, each operating a single property occupied by low-income seniors. In both cases, the amount of rent they were receiving from the residents was insufficient to pay the mortgage and other bills. Neither of these owners had additional sources of revenue. In contrast, owners with several properties and other sources of revenue were less severely affected by HUD’s payment delays. Three of the owners with whom we spoke reported that they were able to borrow funds from their other properties or find other funding sources to cover the mortgage payments and other bills. All three of these owners had a mix of affordable and market-rate properties. According to HUD and PBCA officials, owners who receive a mix of subsidized and market rate rents from their properties would not be as severely affected by a payment delay as owners with all subsidized units. While HUD’s payment delays had negative financial effects on project owners, the delays appeared unlikely to result in owners opting out of HUD’s programs. Project owners, industry group officials, contract administrators, and HUD officials we interviewed generally agreed that market factors, not late payments, primarily drove an owner’s decision to opt out of HUD programs. Owners generally opt out when they can receive higher market rents or when it is financially advantageous to convert their properties to condominiums. For profit-motivated owners, this decision can be influenced by the condition of the property and the income levels of the surrounding neighborhood. Owners were more likely to opt out if they could upgrade their properties at a reasonable cost to convert them to condominiums or rental units for higher-income tenants. In preparing our 2007 report, we also found that although the majority of the owners who opted out of the program did so for economic or market factors, growing owner frustration over a variety of administrative issues, including late payments, could upset the balance causing more owners to consider opting out even when economic conditions could be overcome or mitigated. However, most of the owners with whom we spoke, including some profit-motivated owners, reported that they would not opt out of HUD programs because of their commitment to providing affordable housing. Industry group officials also stated that most of their members were “mission driven,” or committed to providing affordable housing. HUD had no system for notifying owners when a payment delay would occur or when it would be resolved, which industry associations representing many owners as well as the owners with whom we met indicated impeded their ability to adequately plan to cover expenses until receiving the late payment. Most of the owners with whom we spoke reported that they received no warning from HUD that their payments would be delayed. Several of the owners told us that notification of the delay and the length of the delay would give them the ability to decide how to mitigate the effects of a late payment. For example, owners could then immediately request access to reserve accounts if the delay were long enough to prevent them from paying their mortgages or other bills on time. Industry group officials with whom we met agreed that a notification of a delayed payment would benefit their members. To mitigate the effects on owners when payments were delayed, we recommended in our 2005 report that HUD notify owners if their monthly housing assistance payments would be late and include in such notifications the date by which HUD expected to make the monthly payment to the owner. HUD agreed with the recommendation and noted it would examine the feasibility of notifying project owners if HUD anticipated that there would be a significant delay in payment due to an issue beyond the control of the owner. Based on discussions with HUD, the agency does not appear to have made significant progress in implementing this recommendation. HUD stated that it had begun notifying owners regarding the amount of funding available under their contracts, which would allow owners to judge when their contracts are likely to experience shortfalls (and thus possibly experience late payments). However, the notification would not warn owners that their payments would be delayed or advise them on the length of the delay. Without this information, it would be difficult for owners to plan for such a contingency. 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 David G. Wood at (202) 512-8678 or [email protected]. Individuals making key contributions to this testimony included Andy Finkel, Daniel Garcia-Diaz, Grace Haskins, Roberto Piñero, Linda Rego, and Rose Schuville. 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. | The Department of Housing and Urban Development (HUD) provides subsidies, known as housing assistance payments, under contracts with privately owned, multifamily projects so that they are affordable to low-income households. Project owners have expressed concern that HUD has chronically made late housing assistance payments in recent years, potentially compromising owners' ability to pay operating expenses, make mortgage payments, or set aside funds for repairs. This testimony, based primarily on a report issued in 2005, discusses the timeliness of HUD's monthly housing assistance payments, the factors that affected payment timeliness, and the effects of delayed payments on project owners. From fiscal years 1995 through 2004, HUD disbursed three-fourths of its monthly housing assistance payments on time, but thousands of payments were late each year, affecting many property owners. Over the 10-year period, 8 percent of payments were delayed by 2 weeks or more. Payments were somewhat more likely to be timely in more recent years. The process for renewing HUD's subsidy contracts with owners can affect the timeliness of housing assistance payments, according to many owners, HUD officials, and contract administrators that HUD hires to work with owners. HUD's renewal process is largely a manual, hard-copy paper process that requires multiple staff to complete. Problems with this cumbersome, paper-intensive process may delay contract renewals and cause late payments. Also, a lack of systematic internal processes for HUD staff to better estimate the amounts that HUD needed to obligate to contracts each year and monitor contract funding levels on an ongoing basis can contribute to delays in housing assistance payments. Although HUD allows owners to borrow from reserve accounts to lessen the effect of delayed housing assistance payments, 3 of 16 project owners told GAO that they had to make late payments on their mortgages or other bills--such as utilities, telephone service, or pest control--as a result of HUD's payment delays. Owners who are heavily reliant on HUD's subsidy to operate their properties are likely to be more severely affected by payment delays than other, more financially independent, owners. Owners reported receiving no warning from HUD when payments would be delayed, and several told GAO that such notification would allow them to mitigate a delay. Nonetheless, project owners, industry group officials, and HUD officials generally agreed that late housing assistance payments by themselves would be unlikely to cause an owner to leave HUD's housing assistance programs, because such a decision is generally driven primarily by local market factors. |
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cases, the files contained no evidence of OIRA changes, and we could not tell if that meant that there had been no such changes to the rules or whether the changes were just not documented. Also, the information in the dockets for some of the rules was quite voluminous, and many did not have indexes to help the public find the required documents. Therefore, we recommended that the OIRA Administrator issue guidance to the agencies on how to implement the executive order’s transparency requirements and how to organize their rulemaking dockets to best facilitate public access and disclosure. The OIRA Administrator’s comments in reaction to our recommendations appeared at odds with the requirements and intent of the executive order. Her comments may also signal a need for ongoing congressional oversight and, in some cases, greater specificity as Congress codifies agencies’ public disclosure responsibilities and OIRA’s role in the regulatory review process. For example, in response to our recommendation that OIRA issue guidance to agencies on how to improve the accessibility of rulemaking dockets, the Administrator said that “it is not the role of OMB to advise other agencies on general matters of administrative practice.” However, section 2(b) of the executive order states that “o the extent permitted by law, OMB shall provide guidance to agencies...,” and that OIRA “is the repository of expertise concerning regulatory issues, including methodologies and procedures that affect more than one agency....” We believe that OIRA has a clear responsibility under the executive order to exercise leadership and provide the agencies with guidance on such crosscutting regulatory issues, so we retained our recommendation. The OIRA Administrator also indicated in her comments that she believed the executive order did not require agencies to document changes made at OIRA’s suggestion before a rule is formally submitted to OIRA. However, the Administrator also said that OIRA can become deeply involved in important agency rules well before they are submitted to OIRA for formal review. Therefore, adherence to her interpretation of the order would result in agencies’ failing to document OIRA’s early involvement in the rulemaking process. These transparency requirements were put in place because of earlier congressional concerns regarding how rules were changed during the regulatory review process. Congress was clearly interested in making OIRA’s role in that process as transparent as possible. In response to the Administrator’s comments, we retained our original recommendation but specified that OIRA’s guidance should require agencies to document changes made at OIRA’s suggestion whenever they occur. Finally, the OIRA Administrator said that “an interested individual” could identify changes made to a draft rule by comparing drafts of the rule. This position seems to change the focus of responsibility in Executive Order 12866. The order requires agencies to identify for the public changes made to draft rules. It does not place the responsibility on the public to identify changes made to agency rules. Also, comparison of a draft rule submitted for review with the draft on which OIRA concluded review would not indicate which of the changes were made at OIRA’s suggestion, which is a specific requirement of the order. We believe that enactment of the public disclosure requirements in S. 981 would provide a statutory foundation for the public’s right to regulatory review information. In particular, the bill’s requirement that these rule changes be described in a single document would make it easier for the public to understand how rules change during the review process. We are also pleased to see that the new version of S. 981 requires agencies to document when no changes are suggested or recommended by OIRA. As I said earlier, the absence of documentation could indicate that either no changes were made to the rule or that the changes were not documented. Additional refinements to the bill may be needed in light of the OIRA Administrator’s comments responding to our report. For example, S. 981 may need to state more specifically that agencies must document the changes made to rules at the suggestion or recommendation of OIRA whenever they occur, not just the changes made during the period of OIRA’s formal review. Similarly, if Congress wants OIRA to issue guidance on how agencies can structure rulemaking dockets to facilitate public access, S. 981 may need to specifically instruct the agency to do so. During last September’s hearing on S. 981, one of the witnesses indicated that Congress should determine the effectiveness of previously enacted regulatory reforms before enacting additional reforms. We recently completed a broad review of one of the most recent such reform efforts—title II of the Unfunded Mandates Reform Act of 1995 (UMRA).Title II of UMRA is similar to S. 981 in that it requires agencies to take a number of analytical and procedural steps during the rulemaking process. Therefore, analysis of UMRA’s implementation may prove valuable in determining both the need for further reform and how agency requirements should be crafted. We concluded that UMRA’s title II requirements had little effect on agencies’ rulemaking actions because those requirements (1) did not apply to many large rulemaking actions, (2) permitted agencies not to take certain actions if the agencies determined they were duplicative or unfeasible, and (3) required agencies to take actions that they were already required to take. For example, title II of UMRA requires agencies to prepare “written statements” containing information on regulatory costs, benefits, and other matters for any rule (1) for which a proposed rule was published, (2) that includes a federal mandate, and (3) that may result in the expenditure of $100 million or more in any 1 year by state, local, or tribal governments, in the aggregate, or the private sector. We examined the 110 economically significant rules that were promulgated during the first 2 years of UMRA (March 22, 1995, until March 22, 1997) by agencies covered by the Act and concluded that UMRA’s written statement requirements did not apply to 78 of these 110 rules. Some of the rules had no associated proposed rule. Others were not technically “mandates”—i.e., “enforceable duties” unrelated to a voluntary program or federal financial assistance. Some rules were “economically significant” in that they would have a $100 million effect on the economy, but did not require “expenditures” by state, local, or tribal governments or the private sector of $100 million in any 1 year. Certain sections of UMRA permitted agencies to decide what actions to take. For example, subsection 202(a)(3) says agencies’ written statements must contain estimates of future compliance costs and any disproportionate budgetary effects “if and to the extent that the agency determines that accurate estimates are reasonably feasible.” UMRA also permitted agencies to prepare the written statement as part of any other statement or analysis. Because the agencies’ rules commonly contain the information required in the written statements (e.g., the provision of federal law under which the rule is being promulgated), the agencies only rarely prepared a separate UMRA written statement. development of regulatory proposals containing significant federal intergovernmental mandates. However, Executive Order 12875 required almost exactly the same sort of process when it was issued in 1993. Like UMRA, S. 981 contains some of the same requirements contained in Executive Orders 12866 and 12875, and in previous legislation. However, the requirements in the bill are also different from existing requirements in many respects. For example, S. 981 appears to cover all of the economically significant rules that UMRA did not cover, as well as rules by many independent regulatory agencies that were not covered by the executive orders. S. 981 would also address a number of topics that are not addressed by either UMRA or the executive orders, including risk assessments and peer review. These requirements could have the effect of improving the quality of the cost-benefit analyses that agencies are currently required to perform under Executive Order 12866. The new version of S. 981 contains one set of requirements that was not in the bill introduced last year—that agencies develop a plan for the periodic review of rules issued by the agency that have or will have a significant economic impact on a substantial number of small entities. Each agency is also required to publish in the Federal Register a list of rules that will be reviewed under the plan in the succeeding fiscal year. In one sense, these requirements are not really “new.” They are a refinement and underscoring of requirements originally put in place by section 610 of the Regulatory Flexibility Act (RFA) of 1980. Our recent work related to the RFA suggests that at least some of the RFA’s requirements are not being properly implemented. In 1997, we reported that only three agencies identified regulations that they planned to review within the next year in the November 1996 edition of the Unified Agenda of Federal Regulatory and Deregulatory Action. Of the 21 entries in that edition of the Unified Agenda that these 3 agencies listed, none met the requirements in the RFA. For example, although section 610 requires agencies to notify the public about an upcoming review of an existing rule to determine whether and, if so, what changes to make, many of the “section 610” entries in the Agenda announced regulatory actions that the agencies had taken or planned to take. Earlier this month we updated our 1997 report by reviewing agencies’ use of the October 1997 Unified Agenda. We reported that seven agencies had used the Agenda to identify regulations that they said they planned to review. However, of the 34 such entries in that edition of the Agenda, only 3 met the requirements of the statute. Although the Unified Agenda is a convenient and efficient mechanism by which agencies can satisfy the notice requirements in section 610 of the RFA, agencies can print those notices in any part of the Federal Register. We did an electronic search of the 1997 Federal Register to determine whether it contained any other references to a “section 610 review.” We found no such references. There is no way to know with certainty how many regulations in the Code of Federal Regulations have a “significant economic impact on a substantial number of small entities,” or how many of those regulations the issuing agencies have reviewed pursuant to section 610. Agencies differ in their interpretation of this phrase, and we have recommended that a governmentwide definition be developed. Nevertheless, the relatively small number of section 610 notices in the Unified Agendas, combined with the fact that nearly all of those notices did not meet the requirements of the statute, suggests that agencies may not be conducting the required section 610 rule reviews. Although many federal agencies reviewed all of their regulations as part of the administration’s “page-by-page review” effort to eliminate and revise regulations, those reviews would not meet the requirements of section 610 unless the agencies utilized the steps delineated in that section of the RFA that were designed to allow the public to be part of the review process. Therefore, we believe that the reaffirmation and refinement of the section 610 rule review process in S. 981 can serve to underscore Congress’ commitment to periodic review of agencies’ rules and the public’s involvement in that process. Another critical element of S. 981 is its emphasis on cost-benefit analysis for major rules in the rulemaking process. Mr. Chairman, at your and Senator Glenn’s request, we have been examining 20 economic analyses at 5 agencies to determine the extent to which those analyses contain the “best practices” elements recommended in OMB’s January 1996 guidance for conducting cost-benefit analyses. We are also attempting to determine the extent to which the analyses are used in the agencies’ decisionmaking processes. Although our review is continuing, we have some tentative results that are relevant to this Committee’s consideration of S. 981. The 20 economic analyses varied significantly in the extent to which they contained the elements that OMB recommended. For example, although the guidance encourages agencies to monetize the costs and benefits of a broad range of regulatory alternatives, about half of the analyses did not monetize the costs of all alternatives and about two-thirds did not monetize the benefits. Several of the analyses did not discuss any alternatives other than the proposed regulatory action. The OMB guidance also stresses the importance of explicitly presenting the assumptions, limitations, and uncertainties in economic analyses. However, the 20 analyses that we reviewed frequently did not explain why certain assumptions or values were used, such as the discount rates used to determine the present-value of costs and benefits and the values assigned to a human life. Also, about a third of the analyses did not address the uncertainties associated with the analyses. For the most part, the analyses played a somewhat limited role in the agencies’ decisionmaking process—examining the cost-effectiveness of various approaches an agency could use within a relatively narrow range of alternatives, or helping the agency define the regulations’ coverage or implementation date. The analyses did not fundamentally affect agencies’ decisions on whether or not to regulate, nor did they cause the agencies to select significantly different regulatory alternatives than the ones that had been originally considered. decisionmaking was the need to issue the regulations quickly due to emergencies, statutory deadlines, and court orders. Enactment of the analytical transparency and executive summary requirements in S. 981 would extend and underscore Congress’ previous statutory requirements that agencies identify how regulatory decisions are made. We believe that Congress and the public have a right to know what alternatives the agencies considered and what assumptions they made in deciding how to regulate. Although those assumptions may legitimately vary from one analysis to another, the agencies should explain those variations. Mr. Chairman, S. 981 contains a number of provisions designed to improve regulatory management. These provisions strive to make the regulatory process more intelligible and accessible to the public, more effective, and better managed. Passage of S. 981 would provide a statutory foundation for such principles as openness, accountability, and sound science in rulemaking. This Committee has been diligent in its oversight of the federal regulatory process. However, our reviews of current regulatory requirements suggest that, even if S. 981 is enacted into law, Congress will need to carefully oversee its implementation to ensure that the principles embodied in the bill are faithfully implemented. 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A recorded menu will provide information on how to obtain these lists. | GAO discussed its work on the Regulatory Improvement Act of 1998, focusing on federal agencies' implementation of: (1) the transparency requirements in Executive Order 12866; (2) title II of the Unfunded Mandates Reform Act (UMRA) of 1995; (3) the public notification in section 610 of the Regulatory Flexibility Act (RFA) of 1980; and (4) Office of Management and Budget's (OMB) best practices guide for economic analyses used in rulemaking. GAO noted that: (1) GAO reviewed four major rulemaking agencies' public dockets and concluded that it was usually very difficult to locate the documentation that the executive order required; (2) in many cases, the dockets contained some evidence of changes made during or because of the Office of Information and Regulatory Affairs (OIRA) review, but GAO could not be sure that all such changes had been documented; (3) in other cases, the files contained no evidence of OIRA changes, and GAO could not tell if there had been no such changes to the rule or whether the changes were just not documented; (4) UMRA's title II requirements had little effect on agencies' rulemaking actions because those requirements: (a) did not apply to many large rulemaking actions; (b) permitted agencies not to take certain actions if the agencies determined they were duplicative or unfeasible; and (c) required agencies to take actions that they were already required to take; (5) the new version of S. 981 contains one set of requirements that was not in the bill introduced last year--that agencies develop a plan for the periodic review of rules issued by the agency that have or will have a significant economic impact on a substantial number of small entities; (6) each agency is also required to publish in the Federal Register a list of rules that will be reviewed under the plan in the succeeding fiscal year; (7) although the Unified Agenda is a convenient and efficient mechanism by which agencies can satisfy the notice requirements in section 610 of the RFA, agencies can print those notices in any part of the Federal Register; (8) GAO believes that the reaffirmation and refinement of the section 610 rule review process in S. 981 can serve to underscore Congress' commitment to periodic review of agencies' rules and the public's involvement in that process; (9) another critical element of S. 981 is its emphasis on cost-benefit analysis for major rules in the rulemaking process; (10) GAO has been examining 20 economic analyses at 5 agencies to determine the extent to which those analyses contain the best practices elements recommended in OMB's January 1996 guidance for conducting cost-benefit analyses; (11) the 20 economic analyses varied significantly in the extent to which they contained the elements that OMB recommended; and (12) agency officials stated that the variations in the degree to which the economic analyses followed OMB guidance and the limited use of the economic analyses were primarily caused by the limited degree of discretion that the underlying statutes permitted. |
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In 1993, DOE, at the direction of the President and Congress, established the SSP to sustain the safety and effectiveness of the nation’s nuclear weapons stockpile without returning to the use of underground nuclear tests. NNSA administers the program through its Office of Defense Programs. This responsibility encompasses many different tasks, including the manufacture, storage, assembly, nonnuclear testing, qualifying, and dismantlement of weapons in the stockpile. To accomplish the mission of the program, the Office of Defense Programs relies on private M&O contractors to carry out various tasks at each of the nuclear security enterprise sites. (See fig. 1.) NNSA reimburses its M&O contractors under cost-reimbursement-type contracts for the costs incurred in carrying out the department’s missions. The contractors, in turn, may subcontract out major portions of their work, especially in mission-support areas such as constructing and maintaining facilities. While most day-to-day activities are managed and operated by the various contractors, NNSA is responsible for the planning, budgeting, and ensuring the execution of interconnected activities across the eight sites that comprise the enterprise. Nuclear weapons are technically complex devices with a multitude of components and over time, a weapon’s reliability could decline unless mitigating precautions are taken. Since the establishment of the SSP, NNSA has worked with its M&O contractors to provide data on weapon phenomena through science-based approaches that assess the safety and reliability of the weapons in the stockpile and that seek to extend their operational lives. As a result of these efforts, since 1996, the Secretaries of Energy and Defense have provided the President with independent reports prepared individually by the directors of the three weapons laboratories and the Commander of the U.S. Strategic Command confirming that the stockpile is safe and reliable and that there is no need to resume underground nuclear testing. During the past 15 years, Congress has made significant investments in the nation’s stockpile stewardship capabilities, and NNSA has identified a number of accomplishments it has achieved in fulfilling the SSP mission. For example, the SSP has completed a life extension program for one warhead; conducted numerous weapon alterations to address safety, reliability, or performance issues; and has dismantled more than 7,000 nuclear weapons since fiscal year 1991. Further, the SSP reestablished the capability to produce plutonium pits—a key component of nuclear warheads. In its recently released Stockpile Stewardship and Management Plan for Fiscal Year 2011, NNSA stated that the SSP’s mission is dependent upon the enterprise’s facilities and physical infrastructure and the critical skills of its workforce. Facilities and Infrastructure. NNSA’s real property portfolio dedicated to its nuclear weapons mission is vast, with thousands of facilities and associated infrastructure. A number of these facilities are unique national assets used for research and development. As such, while individual contractors operate a given facility, its capabilities may be needed to support users and activities across the enterprise. NNSA has three categories of facilities and infrastructure that indicate the extent to which they are critical to the achievement of the SSP. These categories are: (1) Mission critical. Facilities and infrastructure that are used to perform activities—such as nuclear weapons production, research and development, and storage—to meet the highest-level SSP goals, without which operations would be disrupted or placed at risk. (2) Mission dependent, not critical. Facilities and infrastructure—such as waste management, nonnuclear storage, and machine shops—that play a supporting role in meeting the SSP’s goals, without which operations would be disrupted only if they could not resume within 5 business days. (3) Not mission dependent. Facilities and infrastructure—such as cafeterias, parking structures, and excess facilities—that do not link directly to SSP goals but support secondary missions or quality-of- workplace initiatives. Many of the facilities and infrastructure of the enterprise were constructed more than 50 years ago, and NNSA has reported that they are reaching the end of their useful lives. NNSA is undertaking a number of capital improvement projects to modernize and maintain these facilities. To identify and prioritize capital improvement project needs, NNSA is to follow DOE directives and guidance for project management. Among these is DOE Order 413.3A, which establishes protocols for planning and executing a project. The protocols require DOE projects to go through a series of five critical decisions as they enter each new phase of work: Critical decision 0. Approves a mission-related need. Critical decision 1. Approves the selection of a preferred solution to meet a mission need and a preliminary estimate of project costs based on a review of a project’s conceptual design. Critical decision 2. Approves that a project’s cost and schedule estimates are accurate and complete based on a review of the project’s completed preliminary design. Critical decision 3. Reaches agreement that a project’s final design is sufficiently complete and that resources can be committed toward procurement and construction. Critical decision 4. Approves that a project has met its completion criteria or that or that the facility is ready to start operations. To oversee projects and approve these critical decisions, NNSA conducts its own reviews, often with the help of independent technical experts. Critical Human Capital Skills. NNSA reports that sustaining a large number of critical skills throughout the enterprise is central to the mission of the SSP. The importance of these critical skills has been of interest to Congress for a number of years. For example, in the National Defense Authorization Act of Fiscal Year 1997, Congress established the Commission of Maintaining United States Nuclear Weapons Expertise (referred to as the Chiles Commission). Congress tasked the commission to review ongoing efforts of DOE to attract scientific, engineering, and technical personnel and to develop a plan for the recruitment and retention within the DOE nuclear weapons complex. The Chiles Commission reviewed efforts across the enterprise and developed a number of recommendations, including the need to develop and implement a detailed and long-term site-specific and enterprisewide plan for replenishing the nuclear weapons workforce. NNSA reported in its response to Congress that it will take a number of actions, including giving greater attention to ensuring sites devote adequate resources to critical skills generation, retention, and regeneration. NNSA lacks comprehensive data needed for informed enterprisewide decision-making; however, according to a NNSA official and agency documents, NNSA is considering the use of computer models that may help to address some of these critical shortcomings. We found that NNSA lacks complete data on (1) the condition and value of its existing infrastructure, (2) cost estimates and completion dates for planned capital improvement projects, (3) shared use facilities within the enterprise, and (4) critical human capital skills in its M&O contractor workforce needed to maintain the SSP. Facilities and Infrastructure Data. NNSA does not have accurate and reliable data on the condition and replacement value of its facilities and other infrastructure. This is in part because NNSA (1) has not ensured that contractors comply with a DOE directive that requires facility inspections at least once every 5 years, and (2) does not ensure consistency among the varying approaches and methodologies contractors use when determining replacement property value. DOE requires its sites—including those within the nuclear security enterprise—to assess the condition of all real property at least once during any 5-year period. Sites are to use the results of these assessments to identify maintenance costs, which are then compared to the replacement property value for the facility. Using this information, DOE is to calculate a condition index for each of its facilities and other infrastructure. While DOE requires periodic condition assessments, in our analysis of data in DOE’s agencywide infrastructure database, the Facilities Information Management System (FIMS), we found 765 of DOE’s 2,897 weapons activities facilities, or 26 percent, have not met this requirement—having either an inspection date outside of the 5-year period or no inspection date recorded (see table 1). NNSA officials report that FIMS is the only centralized repository for infrastructure data and that the agency, in part, relies on these data to support funding decisions. Further, we found that sites used varying approaches and methodologies in determining deferred maintenance and replacement property values, but did so without validation from NNSA that the various methods were consistent with base criteria and could be aggregated for decision-making purposes. In fact, during an inspection conducted in July 2008 of one site’s approach, NNSA found that the methodology for determining deferred maintenance and replacement property values were “suspect, difficult to validate, and unreliable.” In addition, the agency stated in the inspection report that it was concerned that the site’s approach for conducting inspections was resulting in inconsistent calculation of repair and maintenance costs from year to year. NNSA conducted a follow-up assessment in April 2010 and reported that the site had made progress in addressing the concerns highlighted in the 2008 assessment but significant efforts are still needed to reach satisfactory levels. A site official at one location also told us that even though the site complied with DOE requirements to conduct an inspection of all facilities at least once every 5 years, NNSA’s data on facility and infrastructure condition for that site is not always accurate because an inspection from 3 to 5 years ago does not always reflect the rapid degradation of some facilities. In particular, the official noted that, in the last 2 years, the site experienced about $36 million of unplanned facility maintenance. NNSA officials stated that they are aware of the limitations of FIMS data and know that conditions change more rapidly than can be tracked by 5-year assessments. As a result, NNSA officials told us the agency also uses a variety of other methods to track site facility conditions, including budget requests, regularly updated planning documents, and daily dialogue with federal and contractor personnel at the sites. However, as we have reported, agencies that have a centralized database with accurate and reliable data on their facilities can better support investment decisions in planning and budgeting. Data on Capital Improvement Projects. NNSA does not have estimated total costs or completion dates for all planned capital improvement projects. While NNSA identified each of its ongoing projects as necessary to ensure future viability of the program, without more complete information on these projects NNSA cannot identify how the timing of these projects impacts other projects or how delays could increase costs and impact budgetary requirements in future year planning. NNSA identified 15 ongoing capital improvement projects to replace or improve existing infrastructure (see app. II for detailed information on each capital improvement project). The status of these projects range from preliminary design to completion, with some projects scheduled for completion in 2022. The estimated cost associated with the ongoing projects range from $35 million for the replacement of fire protection piping at the Pantex Plant in Amarillo, Texas, to up to $3.5 billion for construction of the Uranium Processing Facility (UPF) at the Y-12 Plant in Oak Ridge, Tennessee. However, NNSA does not have key information for a number of these projects, including initial estimates for cost, amount of remaining funding needed to complete the project, or completion dates. NNSA officials offered two explanations for this lack of complete information. First, they said that the lack of data is due in part to the early design phase for some of these projects. For example, NNSA’s highest infrastructure priorities—CMRR and UPF—are still in design and according to NNSA officials final cost estimates for capital improvement projects will not be available until design is 90 percent complete. NNSA’s current estimate prepared in 2007 for UPF indicates the project will cost between $1.4 and $3.5 billion to construct. As we recently reported, the 2007 figure is more than double the agency’s 2004 estimate of between $600 million and $1.1 billion. In addition, we reported that the costs for project engineering and design, which are less than halfway completed, have increased by about 42 percent—from $297 to $421 million. For CMRR, as of October 2010, NNSA did not provide us with an estimated completion cost for the project but based on information reported in the Stockpile Stewardship and Management Plan the agency is using a planning figure of approximately $8 billion for completion of both UPF and CMRR. In response to our reports, DOE and NNSA have recently initiated a number of actions that, if fully implemented, may improve its management of capital improvement projects. Second, a NNSA official told us that changes in project scope and unforeseen complications have hindered the agency’s ability to estimate costs and completion dates for some projects. For example, an NNSA official said that the project to upgrade the Radioactive Liquid Waste Treatment facility at Los Alamos National Laboratory had an initial cost estimate of $82 to $104 million, but site officials at Los Alamos reported to NNSA a need to change the building materials used in the original design estimate. As a result, the NNSA official told us this project is estimated at over $300 million. Our prior work has identified persistent problems at NNSA with cost overruns and schedule delays for capital improvement projects. For example, we found that NNSA’s National Ignition Facility—a high energy laser that NNSA reports will improve its understanding of nuclear weapons—was $1 billion over budget, and over 5 years in delays. As we have reported, without reliable information on costs and schedules, NNSA will not have a sound basis for making decisions on how to most effectively manage its portfolio of projects and other programs and will lack information that could help justify planned budget increases or target cost savings opportunities. . A LANSCE cientit review the proposand the safety nd ecrity checklind comment on the prcticl feasility, environmentsafety nd helth, nd ecrity aspect of the propoed work. Shared Enterprise Assets. NNSA lacks complete data to ensure that facilities with unique capabilities that are used by more than one site— known as shared assets—are effectively utilized. The enterprise comprises numerous state-of-the-art research facilities that NNSA describes as being unique national assets. These shared assets, which are found at the national weapons labs, plants, and test site, represent a large and continuing investment of U.S. resources and offer advanced science and technology capabilities that are desirable for solving problems throughout the enterprise. NNSA delegates responsibility for operating authority of these facilities to its M&O contractors, though NNSA broadly defines the scope of work to be performed at a facility. According to NNSA and site officials, the process to determine specific users and individual activities at the facilities are managed by each individual facility. For example, the Los Alamos Neutron Science Center (LANSCE)—a powerful proton accelerator used for, among other things, nuclear weapons research—has a management plan governing its submission and review process for shared use of the facility that only applies to LANSCE. Other shared assets operate under their own management plans. NNSA has identified a need to effectively manage these assets enterprisewide to ensure that programmatic priorities are addressed and that users enterprisewide have well supported access to these facilities. In February 2009, NNSA developed a directive stating that the Assistant Deputy Administrators within the Office of Defense Programs will (1) select and approve the research and development facilities to be designated as shared assets, and (2) review and concur on the governance plan developed for each designated facility. However, we found that NNSA does not have information on which facilities are designated as shared use assets, and a NNSA official told us the agency has not reviewed individual management plans throughout the enterprise to ensure that each facilities’ submission and review process for use of the facility provides for adequate enterprisewide access. Critical Human Capital Skills. NNSA lacks comprehensive information on the status of its M&O contractor workforce. Specifically, the agency does not have an enterprisewide workforce baseline of critical human capital skills and levels for the contractor workforce to effectively maintain the capabilities needed to achieve its mission. NNSA officials said this is primarily because NNSA relies on its contractors to track these critical skills. While contractor efforts may be effective at a specific site, these efforts do not ensure long-term survival of these skills across the enterprise, nor do they provide NNSA with the information needed to make enterprisewide decisions that have implications on human capital. NNSA reports in the Stockpile Stewardship and Management Plan that sustaining a large number of critical capabilities throughout the enterprise is central to the mission of stockpile stewardship and that maintaining the right mix of skills is a significant challenge. The agency also reported that the enterprise is losing critical capabilities, stating that the M&O contractor workforce has been reduced significantly in the past 20 years, which has decreased the availability of personnel with required critical skills. Further, NNSA stated in a 2009 internal human capital critical skills report that the site-based independent approach to sustaining key capabilities has not always been sufficient. For example, NNSA reported that increased retirements and higher than normal turnover rates have depleted the intellectual and technical knowledge and skills needed to sustain critical capabilities. Specifically, in that report, NNSA attributed problems that caused delays on an ongoing life extension program to the loss of skilled employees. Over the last several years, there have been many efforts to characterize the state of the critical human capital skills associated with the enterprise and to project its availability. In its 2009 internal human capital critical skills report, NNSA identified some preliminary actions it needs to take to maintain critical skills, which include (1) identifying enterprisewide functions and critical skills needs, (2) establishing common language and definitions across the enterprise, (3) assessing the current state of the program, and (4) identifying potential solutions to attract and retain critical skills. These actions are consistent with best practices we reported on human capital issues. Specifically, our work has shown that the ability of federal agencies to achieve their missions and carry out their responsibilities depends in large part on whether they can sustain a workforce that possesses the necessary education, knowledge, skills, and competencies. To do so, agencies need to be aware of the number of employees they need with specific skills, competencies, and levels that are critical to achieving their missions and goals, and identify any gaps between their current workforce and the workforce they will need in the future. Identifying mission-critical occupations, skills, and competencies can help agencies adjust to changes in technology, budget constraints, and other factors that alter the environment in which they operate. Nevertheless, NNSA officials told us that the agency had, until recently, made limited progress completing these actions. In October 2010, however, NNSA established the Office of Corporate Talent and Critical Skills to bring focused attention to meeting critical human capital skills and announced that the agency hired a director to develop and implement a critical skills sustainment strategy. The newly hired Director told us that NNSA has begun the process of reassessing the need for the activities identified in the 2009 report to be completed but has not yet established time frames or milestones for completing these efforts. In addition, NNSA officials stated that the agency sponsors academic outreach programs to provide a linkage between the agency and the talent that have the skills needed to complete certain SSP activities. NNSA, recognizing that its ability to make informed enterprisewide decisions is hampered by the lack of comprehensive data and analytical tools, is considering the use of computer models—quantitative tools that couple data from each site with the functions of the enterprise—to integrate and analyze data to create an interconnected view of the enterprise, which may help to address some of the critical shortcomings we identified. A NNSA official told us that if the enterprise modeling efforts are fully realized it will give decision-makers an additional tool to take a broad and accurate assessment of the enterprise and to highlight the interdependencies between various components of the enterprise so that trade-offs between costs and benefits can be analyzed. In July 2009, NNSA tasked the eight M&O contractor sites to form an enterprise modeling consortium. NNSA stated in a 2009 Enterprise Modeling Consortium Project Plan for FY 2010-2012 that the consortium is responsible for leading efforts to acquire and maintain enterprise data, enhance stakeholder confidence, integrate modeling capabilities, and fill in any gaps that are identified. Since its creation, the consortium has identified areas in which enterprise modeling projects could provide NNSA with reliable data and modeling capabilities, including infrastructure and critical skills. In addition to identifying these areas, a NNSA official told us its first steps are to build a collection of “trusted data sources” and inventory of the existing models used throughout the enterprise. Once the initial phase is complete, the official told us it will work with the sites to assess the various data collected across the enterprise, identify any data gaps, and then determine whether an existing approach can be integrated across the sites to provide NNSA with consistent and reliable enterprise data. A NNSA official told us that they are in the process of developing a plan of action for fiscal year 2011 outlining the next steps and identifying goals and milestones. As the benefits of these tools depend on the quality of the data, the official stated that a key action for fiscal year 2011 will be to determine the accuracy and reliability of data that will populate the models. NNSA faces a complex task planning, budgeting, and ensuring the execution of interconnected activities across the eight M&O contractor sites that comprise the nuclear security enterprise. Among other things, maintaining government-owned facilities that were constructed more than 50 years ago and ensuring M&O contractors are sustaining critical human capital skills that are highly technical in nature and limited in supply are difficult undertakings. Congress has long insisted that, as prerequisite to the modernization of the nuclear stockpile and supporting infrastructure, the current and past administrations develop firm nuclear weapons policy, requirements, and plans. With the completion of the congressionally- mandated Nuclear Posture Review and the Stockpile Stewardship and Management Plan, the Administration has made strides to meet congressional expectations. In doing so, it has pledged billions of dollars over the next decade to improve key stockpile stewardship capabilities, modernize and, in some cases, replace aging infrastructure, and maintain a highly skilled and specialized workforce in order to ensure the continued safety, reliability, and performance of our nuclear deterrent without returning to underground nuclear testing. For NNSA to fully meet expectations, however, it must be able to demonstrate to Congress that it can effectively manage its program so that planned budget increases are targeted to areas that will produce demonstrable returns on investments. While this task is far broader and more challenging than the scope of this report, certain data related issues are currently hindering NNSA’s enterprisewide decision-making capabilities and its ability to justify programmatic choices to Congress. These include the lack of (1) consistent, accurate, and complete data on the condition of its facilities; (2) assurance that contractors are in compliance with a DOE directive (DOE Order 430.1B) requiring facility inspections to ensure that sites’ varying approaches in determining deferred maintenance and real property values are valid and consistent; (3) information on shared use assets—although a NNSA directive (NNSA Supplemental Directive M 452.3) identifies the need for the federal and contractor officials to identify and ensure proper governance of these assets; and (4) comprehensive data on its M&O contractors’ workforce—to include identification of critical human capital skills, competencies, and staffing levels—as well as a plan with time frames and milestones for collecting this data. Continuing to make decisions without a full understanding of programmatic impact is not the most effective approach for program management or use of federal resources. We recommend the Administrator of NNSA take the following four actions. To ensure that NNSA is equipped with the information needed to effectively and efficiently manage the Stockpile Stewardship Program: Develop standardized practices for assessing the condition of its facilities and review the sites’ methodologies for determining replacement value to ensure consistency, accuracy, and completeness throughout the enterprise. Ensure contractor compliance with DOE Order 430.1B: Real Property Asset Management, which requires routine inspections of all facilities. Ensure federal and contractor compliance with NNSA Supplemental Directive NA-1 SD M 452.3: Managing the Operation of Shared NNSA Assets and Shared National Resources, which requires NNSA’s sites to identify shared assets and NNSA to review the governance plans developed for each facility. Establish a plan with time frames and milestones for the development of a comprehensive contractor workforce baseline that includes the identification of critical human capital skills, competencies, and levels needed to maintain the nation’s nuclear weapons strategy. We provided NNSA with a draft of this report for their review and comment. NNSA provided written comments, which are reproduced in appendix III. NNSA stated that it understood our recommendations and believes that it can implement them. NNSA did state, however, that it believed the report provided an incomplete picture of how the agency makes enterprisewide decisions concerning facilities and infrastructure. In response, we added additional details of NNSA’s decision making processes for facilities and infrastructure (see p. 12). Additionally, NNSA noted that its shortfall in required inspections occurs primarily in facilities that are not critical to the SSP mission. We believe that our report adequately reflects this. We also note that over 1,000 facilities identified by NNSA as not critical—such as waste management facilities and machine shops—play important supporting roles in the SSP mission and can, by NNSA’s own definition, disrupt operations if they are non-functional for more than 5 business days. Over 150 of these facilities have an inspection date outside of the required 5-year inspection period or no inspection date recorded. Finally, NNSA provided us with updated data from its FIMS database to show that additional inspections of facilities were conducted since the time of our analysis. We noted this updated data in our report, but did not independently verify the analysis NNSA conducted (see p. 11). NNSA also provided other additional technical information, which we incorporated where appropriate. NNSA’s letter also described a number of broader management initiatives that, when fully implemented, could enhance the agency’s enterprise decision making. While we are encouraged that NNSA is taking these steps, it is unclear whether the actions identified in the agency’s response would address the current shortfalls we identified in the data on infrastructure, capital improvement projects, shared use of facilities, and critical human capital skills. We continue to believe that our recommendations would provide decision makers with an increased enterprisewide knowledge that would be beneficial to understand the potential impact of programmatic decisions. If you or your staff have questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. In conducting our work, we reviewed National Nuclear Security Administration (NNSA) documents and directives, including the 2010 Nuclear Posture Review and the FY 2011 Stockpile Stewardship and Management Plan; met with Department of Energy (DOE), NNSA, and contractor officials; assessed the reliability of the data provided; and visited four of the eight enterprise sites. Specifically, to determine the condition of nuclear weapons facilities, we reviewed management and operation (M&O) contractor’s 10-year site plans for each enterprise site, and we obtained and analyzed data from DOE’s Facilities Information Management System (FIMS). DOE extracted data from FIMS in April 2010, for all facilities and other structures identified within the database as supporting NNSA’s nuclear weapon program. As a DOE directive requires inspection of facilities at least once every 5 years, we further limited our review to those facilities and other structures built prior to April 2005. Further, we limited our review to facilities and other structures identified within FIMS as being in current operational status. We worked with DOE and NNSA to ensure the data provided to us, current as of April 2010, met these criteria. Based on our analysis of this FIMS data, we determined that data needed to evaluate condition are incomplete, possibly out of date, and inconsistent across the sites. As a result, we do not believe they are sufficiently reliable for presenting current property condition. In response to our draft report, NNSA provided us with its own analysis of facility condition based on more recent FIMS data. We did not, however, independently verify the analysis, the results of which are noted on p. 11. We did not independently verify the agency’s analysis of the data. We toured a nonrandom sample of facilities at the Los Alamos and Sandia National Laboratories in New Mexico, the Pantex Plant in Texas, and the Nevada National Security Site. In selecting our site visit locations, we considered a number of factors, including the type of site (production, laboratory, or test), missions carried out at the sites, the potential for shared use facilities, and geographic location. The data we obtained from our site visits are used as examples and cannot be generalized to indicate condition throughout the nuclear security enterprise. To determine NNSA’s plans for improvements to enterprise infrastructure, NNSA identified all ongoing capital improvement projects and provided us with data for these projects. We did not independently confirm or evaluate the agency’s data. To determine the extent to which NNSA has identified shared use facilities within the enterprise and how these facilities are managed, we reviewed NNSA’s 2009 facility governance directive and met with NNSA, Los Alamos, and Sandia officials to discuss shared use facilities. We also collected and reviewed governance documents for several facilities that site officials identified to us as shared use assets. To determine NNSA’s efforts to maintain the critical human capital skills of the Stockpile Stewardship Program (SSP), we reviewed NNSA’s Development of the NNSA Critical/Capability Inventory draft report and the Report of the Commission on Maintaining United States Nuclear Weapons Expertise. In addition, we met with human capital officials at NNSA, Pantex, the Nevada National Security Site, Los Alamos, and Sandia. We also reviewed NNSA’s Fiscal Year 2010 Enterprise Modeling Consortium Project Plan to identify efforts undertaken by the agency to develop enterprisewide data and analysis tools. We conducted this performance audit from January 2010 to February 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. Replace the existing 1952 CMRR facility. Estimated to be operational by 2022. Replace the existing highly enriched uranium processing capabilities. Estimated to be operational by 2022. Replace the existing facility for non-nuclear production. Construction is estimated to begin in summer 2010. Provide a base criticality experiments capability. For example, it will provide training for criticality safety professionals and fissile materials handlers. Completion estimated in second quarter fiscal year 2011. Provide a new high explosive main charge pressing facility. Completion estimated in September 2016. Refurbish air dryers; seismic bracing of gloveboxes; replace power supply, confinement doors, criticality alarms, water tank, and exhaust stack. Support handling of newly generated TRU waste. Continue operation of existing facilities until UPF is operational. Modernize existing experimental and test capabilities. Project proceeding with a low level of activity. Provide two new fire stations. Completion is expected in fiscal year 2011. Replace existing facility and provide standalone capability for use of accelerated ions. Completion is expected in April 2012. Provide the capability to maintain existing components. Completion expected in October 2010. Replace fire protection piping and install cathodic protection to prevent corrosion. Completion expected in mid fiscal year 2011. Replace cooling towers and chiller equipment at LANL’s research and development facilities. Completed June 2010. Upgrade the facility in order to comply with current codes and standards. To be determined. An NNSA official stated that the Pantex project was delayed for about a year so that a study could be conducted to determine if this capability could be outsourced. The results of the report are still in draft, but officials told us the conclusion was that the capability could not be outsourced. As a result of the delay, Pantex revised the baseline for the costs of the project and the U.S. Army Corps of Engineers are currently planning to award a construction contract in May 2011. In addition to the individual named above, Jonathan Gill, Assistant Director; David Holt; Jonathan Kucskar; Alison O'Neill, Steven Putansu; Jeremy Sebest; Rebecca Shea; and Jay Spaan made significant contributions to this report. | The United States intends to invest about $80 billion to maintain and modernize its nuclear weapons capabilities and infrastructure over the next decade. The National Nuclear Security Administration (NNSA), a semi-autonomous agency within the Department of Energy (DOE), maintains the nation's nuclear weapons through its Stockpile Stewardship Program (SSP). NNSA uses contractors to manage and operate eight separate sites, referred to as the nuclear security enterprise, to achieve the SSP's mission. The National Defense Authorization Act for Fiscal Year 2010 directed GAO to review the SSP. This report focuses on the extent to which NNSA has the data necessary to make informed, enterprisewide decisions, particularly data on the condition of infrastructure, capital improvement projects, shared use of facilities, and critical human capital skills. GAO analyzed agency infrastructure data; reviewed agency directives and guidance; and interviewed DOE, NNSA, and contractor officials. In its FY 2011 Stockpile Stewardship and Management Plan, NNSA outlines plans for substantial investments in important nuclear weapons capabilities and physical infrastructure. However, the agency lacks important enterprisewide infrastructure and workforce data needed for informed decision-making. In response to this shortcoming, which NNSA recognizes, the agency is considering the use of computer models that integrate data from across the enterprise, which, if fully realized, may give decision-makers a tool to take a broad and accurate assessment of the situation. Specifically, (1) NNSA does not have accurate, reliable, or complete data on the condition and replacement value of its almost 3,000 weapons activities facilities. This is, in part, because NNSA has not ensured contractor compliance with a DOE directive that requires facility inspections at least once every 5 years. For example, according to data in DOE's Facilities Information Management System (FIMS), as of April 2010, 26 percent of facilities have either an inspection date outside of the 5-year period or no inspection date recorded. NNSA officials stated that they are aware of the limitations of FIMS data and told us that they use a variety of other methods to track site facility conditions, such as budget requests and daily dialogue with federal and contractor personnel at the sites. (2) NNSA has identified 15 ongoing capital improvement projects as necessary to ensure future viability of the program, but the agency does not have estimated total costs or completion dates for all projects. For example, NNSA has not estimated total costs for the largest projects it is conducting--the Chemical and Metallurgy Research Replacement Facility at Los Alamos National Laboratory in Los Alamos, New Mexico, and the Uranium Processing Facility at the Y-12 Plant in Oak Ridge, Tennessee. DOE regulations do not require a total cost estimate until the initial design phase is complete, but without reliable cost and schedule data NNSA does not have a sound basis to justify decisions and planned budget increases. (3) NNSA has identified a need to effectively manage facilities used by more than one site--known as shared use assets--and issued a directive in 2009 requiring identification of these assets and a review of the governance plan developed for each designated facility to ensure that the plans align with programmatic priorities and that users enterprisewide have well supported access to these facilities. However, NNSA has not collected data on shared use assets and has not reviewed individual management plans. (4) NNSA lacks comprehensive data on the critical skills and levels needed to maintain the SSP's capabilities. NNSA primarily relies on its contractors to maintain the workforce and, while these efforts may be effective for a specific site, NNSA lacks assurance that the overall program is maintained. Without such data, NNSA cannot forecast the impact of programmatic actions or identify consequences of those actions. NNSA officials told GAO that the agency recently established an Office of Corporate Talent and Critical Skills to bring attention to these issues. GAO recommends that NNSA take four actions to ensure that it is equipped with the information needed to effectively and efficiently manage the SSP. NNSA stated that it understood and can implement GAO's recommendations. |
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VBA provides benefits for veterans and their families through five programs: (1) compensation and pension, (2) education, (3) vocational rehabilitation and employment (VRE) services, (4) loan guaranty, and (5) life insurance. It relies on the BDN to administer benefit programs for three of VBA’s five programs: compensation and pension, education, and VRE services. Replacing the aging BDN has been a focus of systems development efforts at VBA since 1986. Originally, the administration planned to modernize the entire system, but after experiencing numerous false starts and spending approximately $300 million on the overall modernization of the BDN, VBA revised its strategy in 1996. It narrowed its focus to replacing only those functionalities that support the compensation and pension program, and began developing a replacement system, which it called VETSNET. As reported by the department in its fiscal year 2008 budget submission, the compensation and pension program is the largest of the three programs that the BDN supports: The compensation and pension program paid about $35 billion in benefits in fiscal year 2006 to about 3.6 million veterans or veterans’ family members. Of this amount, compensation programs paid benefits of about $31 billion to about 3.1 million recipients. Pension programs paid benefits of about $3.5 billion to about 535,000 recipients. The education program paid about $2.8 billion to about 498,000 veterans or their dependents in fiscal year 2006. The VRE services program paid about $574 million for VRE services in 2006 and provides rehabilitation services to approximately 65,700 disabled veteran participants per year. One of the challenges of developing the replacement system is that it must include processes to support the administration of a complex set of benefits. Different categories of veterans and their families are eligible for a number of different types of benefits and payments, some of which are based on financial need. Compensation programs, which are based on service-connected disability or death, provide direct payments to veterans and/or veterans’ dependents and survivors. These programs are not based on income. Pension benefits programs, on the other hand, are income based; these are designed to provide income support to eligible veterans and their families who experience financial hardship. Eligible veterans are those who served in wartime and are permanently and totally disabled for reasons that are not service-connected (or who are age 65 or older). Veterans are also eligible for burial benefits. Survivor benefits may be paid to eligible survivors of veterans, depending on the circumstances. Some of these benefits are based on financial need, such as death pensions for some surviving spouses and children of deceased wartime veterans, and Dependency and Indemnity Compensation to some surviving parents. Finally, certain benefits may be paid to third parties, such as individuals to whom a veteran has given power of attorney or medical service providers designated to receive payments on the veteran’s behalf. Generally, VBA administers benefit programs through 57 veterans benefits regional offices in a process that requires a number of steps, depending on the type of claim. When a veteran submits, for example, a compensation claim to any of the regional offices, a veterans service representative must obtain the relevant evidence to evaluate the claim (such as the veteran’s military service records, medical examinations, and treatment records from VA medical facilities or private medical service providers). In the case of pension claims, income information would also be collected. Once all the necessary evidence has been compiled, a rating specialist evaluates the claim and determines whether the claimant is eligible for benefits. If the veteran is determined to be eligible for disability compensation, the Rating Veterans Service Representative assigns a percentage rating based on the veteran’s degree of disability. This percentage is used in calculating the amount of payment. Benefits received by veterans are subject to change depending on changing circumstances. More than half of VBA’s workload consists of dealing with such changes. If a veteran believes that a service-connected condition has worsened, for example, the veteran may ask for additional benefits by submitting another claim. The first claim submitted by a veteran is referred to as the original claim, and a subsequent change is referred to as a reopened claim. Since its inception, VETSNET has been plagued by problems. Over the years, we have reported on the project, highlighting concerns about VBA’s software development capabilities. In 1996, our assessment of the department’s software development capability determined that it was immature. In our assessment, we specifically examined VETSNET and concluded that VBA could not reliably develop and maintain high-quality software on any major project within existing cost and schedule constraints. The department showed significant weaknesses in requirements management, software project planning, and software subcontract management, with no identifiable strengths. We also testified that VBA did not follow sound systems development practices on VETSNET, and we concluded that its modernization efforts had inherent risks. Between 1996 and 2002, we continued to identify the department’s weak software development capability as a significant factor contributing to persistent problems in developing and implementing the system. We also reported that VBA continued to work on VETSNET without an integrated project plan. As a result, the development of the system continued to suffer from problems in several areas, including project management, requirements development, and testing. Over the years, we made several recommendations aimed at improving VA’s software development capabilities. Among our recommendations was that the department take actions to achieve greater maturity in its software development processes and that it delay any major investment in software development (beyond that needed to sustain critical day-to-day operations) until it had done so. In addition, we made specific recommendations aimed at improving VETSNET development. For example, we recommended that VA appoint a project manager, thoroughly analyze its current initiative, and develop a number of plans, including a revised compensation and pension replacement strategy and an integrated project plan. VA concurred with our recommendations and took several actions to address them. For example, it appointed a full-time project manager and ensured that business needs were met by certification of user requirements for the system applications. The actions taken addressed some of our specific concerns; however, they were not sufficient to fully implement our recommendations or to establish the program on a sound footing. As a result of continuing concerns about the replacement project, in 2005 VA’s CIO and its Under Secretary for Benefits contracted for an independent assessment of the department’s options for the initiative. The chosen contractor, SEI, is a federally funded research and development center operated by Carnegie Mellon University. Its mission is to advance software engineering and related disciplines to ensure the development and operation of systems with predictable and improved cost, schedule, and quality. SEI recommended that the department reduce the pace of development while at the same time taking an aggressive approach to dealing with management and organizational weaknesses hampering VBA’s ability to complete the replacement system. According to SEI, these management and organizational concerns needed to be addressed before the replacement initiative or any similar project could deliver a full, workable solution. For example, the contractor stressed the importance of setting realistic deadlines and commented that there was no credible evidence that VETSNET would be complete by the target date, which at the time of the review had slipped to December 2006. According to the assessment, because this deadline was unrealistic, VBA needed to plan and budget for supporting the BDN so that its ability to pay veterans’ benefits would not be disrupted. SEI also noted that different organizational components had independent schedules and priorities, which caused confusion and deprived the department of a program perspective. Further, the contractor concluded that VBA needed to give priority to establishing sound program management to ensure that the project could meet targeted dates. These and other observations were consistent with our long-standing concerns regarding fundamental deficiencies in VBA’s management of the project. To help VBA implement the overall recommendation, the contractor’s assessment included numerous discussions of activities needed to address these areas of concern, which can be generally categorized as falling into two major types: Overall management concerns with regard to the initiative included governance structure, including assigning ownership for the project project planning, including the development schedule and capacity conversion of records currently on the BDN to the replacement system. Software development process improvements were needed in the program measures. As recommended by SEI, VBA is continuing to work on the replacement initiative at a reduced pace and taking action to address identified weaknesses in the project’s overall management and software development processes. For example, VBA has established a new governance structure and has developed an integrated master schedule that provides additional time and includes the full range of project activities. However, additional effort is needed to complete a number of the corrective actions, such as improving project accountability through monitoring and reporting all project costs. Further, VBA has not yet institutionalized many of the improvements that it has undertaken for the initiative. In particular, process improvements remain in draft and have not been established through documented policies and procedures. According to the VETSNET management team, it gave priority to other activities, such as establishing appropriate governance and organizational structures, and it is still gathering information to assist in prioritizing the activities that remain. Nonetheless, if VBA does not institutionalize these improvements, it increases the risk that these process improvements may not be maintained through the life of the project or be available for application to other development initiatives. SEI concluded that VBA’s management issues would need to be addressed as part of the implementation of its overall recommendation. SEI’s overall management concerns focused on the project governance, project planning, and conversion of records currently on the BDN to the replacement system. SEI guidance for software development stresses the need for organizational commitment and the involvement of senior management in overall project governance. In its assessment, SEI noted that because management of the VETSNET project had been assigned to VBA’s information technology (IT) group, certain activities critical to the veterans’ benefits program, but not traditionally managed by the IT group, had not been visible to the project’s management. The contractor pointed out that the IT group, business lines, and regional offices needed to share ownership and management of the replacement project through an established governance process and that the project management office should include business representatives. According to SEI, the project needed to establish ownership responsibility, including addressing total system and process operating costs. In response to the assessment, VBA developed a new governance structure for the initiative, which the Under Secretary for Benefits approved in March 2006. In the new structure, the VETSNET Executive Board that had been in place was expanded and reorganized to serve as a focal point and major governance mechanism for the replacement initiative. A Special Assistant (reporting directly to the Under Secretary) was appointed to coordinate and oversee the initiative as the head of the VETSNET Executive Team, which was established to provide day-to-day operational control and oversight of the replacement initiative. Implementation Teams were also established to conduct the day-to-day activities associated with implementing the initiative. This governance structure established a process for IT, business lines, and regional offices to share ownership and management, as SEI advised. The roles and membership of each of the organizational elements in the new governance structure are described in table 1. When the new governance structure was approved in March 2006, the Under Secretary ensured that those involved in the project gave it high priority, directing certain key personnel (such as members of the executive and implementation teams) to make the initiative their primary responsibility, and other personnel (technical staff that provide support to other systems) with collateral (non-VETSNET) duties to make the project their first priority. He also placed limitations on the transfer of personnel away from the project, recognizing the importance of staff continuity in successfully completing the initiative. Staff members assigned project responsibilities could be reassigned (i.e., given nonpromotion, lateral reassignments) only with approval from the Under Secretary or his deputy. By implementing the new governance and organizational structure and ensuring that the project has priority, VBA partially responded to SEI’s concerns in this area; however, VBA has not yet taken action with regard to ownership responsibility for total system and process operating costs, as SEI advised. According to administration officials, the replacement initiative is an in-house, contractor-assisted development effort, in which three different contractors provide support for program management, system development, and testing and validation of requirements. VA reported VETSNET system costs to the Congress totaling about $89 million for fiscal years 1996 through 2006, with additional estimated costs for completion of the initiative in 2009 of about $62.4 million. However, according to project management officials, these costs do not include expenditures for in-house development work. This in-house work involves many VA personnel, as well as travel to various locations for testing and other project related activities. Thus, considerable costs other than contract cost have been incurred, which have not been tracked and reported as costs for the replacement initiative. Without comprehensive tracking and reporting of costs incurred by the replacement project, the ability of VBA and the Congress to effectively monitor progress could be impaired. A second major area of overall management concern was project planning. In particular, the lack of an integrated master schedule for the VETSNET project was a major concern articulated by SEI, as well as in our prior work. An integrated project plan and schedule should incorporate all the critical areas of system development and be used as a means of determining what needs to be done and when, as well as measuring progress. Such an integrated schedule should consider all dependencies and include subtasks so that deadlines are realistic, and it should incorporate review activities to allow oversight and approval by high-level managers. Among other things, the program plan should also include capacity requirements for resources and technical facilities to support development, testing, user validation, and production. SEI was specifically concerned that releases with overlapping functionality were being developed at the same time, with insufficient time to document or test requirements; this approach constrained resources and added complexity because of the need to integrate completed applications and newly developed functionality. In addition, SEI observed that the VETSNET program suffered from lack of sufficient test facilities because it did not have enough information to plan for adequate capacity. In response to these project planning concerns, VETSNET management, with contractor support, developed an integrated master schedule to guide development and implementation of the remaining functionalities for the replacement system. The VETSNET Integrated Master Schedule, finalized in September 2006, includes an end-to-end plan and a master schedule. According to VBA, the end-to-end plan documents the end state of the project from a business perspective, which had not previously been done. The master schedule identifies the necessary activities to manage and control the replacement project through completion. The schedule also describes a new software release process that provides more time to work on requirements definition and testing, and allows for more cross- organizational communications to lessen the possibility of not meeting requirements. In addition, the new release process includes a series of management reviews to help control the software development process and ensure that top management has continuous visibility of project related activities. These reviews occur at major steps in the system development life cycle (as described in fig. 1: initiation, preliminary design, and so on). Such reviews are intended to ensure that the VETSNET Executive Team and the VETSNET Executive Board agree and accept that the major tasks of each step have been properly performed. Nonetheless, while the Integrated Master Schedule is an important accomplishment, it may not ensure that the project sufficiently addresses capacity planning, one of SEI’s areas of concern. According to its assessment, capacity requirements for the fully functional production system were unclear. Capacity planning is important because program progress depends on the availability of necessary system capacity to perform development and testing; adjustments to such capacity take time and must be planned. If systems do not have adequate capacity to accommodate workload, interruptions or slowdowns could occur. According to SEI, capacity adjustments cannot be made instantly, and program progress will suffer without sufficient attention to resource requirements. However, the VETSNET Integrated Master Schedule does not identify activities or resources devoted to capacity planning. According to officials, the capacity of the corporate environment (that is, corporate information systems, applications, and networks) is being monitored by operational teams with responsibility for maintaining this environment. According to project officials, VETSNET representatives participate in daily conference calls in which the performance of corporate applications is discussed, and changes in application performance are reported to the VETSNET developers for investigation and corrective action. Project officials reported that when a performance degradation occurred in some transactions during performance testing, it was determined that additional computing capacity was needed and would be acquired. One reason why the occurrence of degradation had not been anticipated by the VETSNET project was that capacity planning had not taken place. Unless it ensures that capacity planning and activities are included in the Integrated Master Schedule, the replacement project may face other unanticipated degradations that it must react to after the fact, thus jeopardizing the project’s cost, schedule, and performance. In its assessment, SEI questioned VBA’s approach to developing functionality while concurrently converting records from the BDN to the replacement system. It noted that VBA had chosen to complete software development according to location rather than according to the type of functionality. Specifically, in 2004, VBA began an effort to remove all claims activity (both new and existing claims) at one regional office (Lincoln, Nebraska) from the BDN to the replacement system, developing the software as necessary to accommodate processing the types of claims encountered at that site. The intention was to address each regional office in turn until all sites were converted. According to SEI, this approach had resulted in the development being stalled by obstacles arising from the variety of existing claims. The contractor advised VBA to focus first on developing functionality to process original claims and discontinue efforts to convert existing claims until all the necessary functionality had been developed, and the replacement system’s ability to handle new cases of any complexity had been proven by actual experience. In accordance with this advice, VBA stopped converting existing records from the BDN and changed its focus to developing the necessary functionality to process all new compensation claims. According to the integrated master schedule, conversion activities are now timed to follow the release of the needed functionality. That is, according to the schedule, VBA plans to begin converting each type of record from the BDN only after the necessary functionality for the replacement system has been developed and deployed to process that type of record. In addition, the project is mitigating risk by resuming conversions beginning with a test phase. Its strategy is first to convert records for terminated claims—claims that are no longer being paid. Conversion of the terminated records will be followed by additional conversions of records for claims receiving payment at Lincoln and Nashville (these two sites are being used to test system functionality during development). The VETSNET leadership will consider testing complete with the successful conversion at these two sites. However, SEI raised three additional issues with regard to the conversion of records that VBA has not fully addressed: First, SEI expressed concerns that conversion failures could lead to substantial numbers of records being returned to the BDN. Because of differences in the database technologies used for the old system and the replacement system, certain types of errors in BDN records cause conversion to fail (according to SEI, approximately 15 percent of all these records are estimated to have such errors). If records fail to convert correctly, they may need to be returned to the BDN so that benefits can continue to be paid. However, this process is not simple and may involve manually reentering the records. Second, SEI observed that VBA was also depending on manual processes for determining that records were converted successfully, including the use of statistically random samples, and that it was aiming to ensure correctness to a confidence level of 95 percent. However, in the absence of a straightforward method for automatically returning records to the BDN, SEI considered the 5 percent risk of error unacceptable for conversions of large numbers of records. Finally, SEI observed that the lack of automated methods and the complexity of the processes meant that conversions required careful planning and assurance that adequate staff would be available to validate records when the conversions took place. However, the VETSNET leadership has not developed any strategy to address the possibility that a large number of cases might need to be returned to the BDN during the testing phase. For example, it has not included this possibility as a risk in its risk management plan. The absence of a strategy to address this possibility could lead to delays in program execution. Further, VBA has not yet decided whether a possible 5 percent error rate is acceptable or developed a plan for addressing the resulting erroneous records. If VBA does not address these issues in its planning, it increases the risk that veterans may not receive accurate or timely payments. Finally, the VETSNET leadership has not yet developed detailed plans that include the scheduled conversions for each regional office and identified staff to perform the necessary validation. Having such plans would reduce the risk that the conversion process could be delayed or fail. In addition to actions addressing the overall management concerns identified by SEI, VBA has steps action to improve its software development processes in risk management, requirements management, defect/change management, and performance measures. SEI described weaknesses in all of these areas. The steps taken have generally been effective in addressing the identified weaknesses, but VBA has not yet institutionalized many of these improvements. According to the VETSNET management team, it made a conscious decision first to establish the governance, build the organization, implement processes to gain control, and gather additional information about the project to assist in prioritizing the remaining activities. The team also stated that some of the processes are no longer VBA’s responsibility but are now that of the newly realigned Office of Information and Technology. Nonetheless, if VA does not develop and establish documented policies and procedures to institutionalize these improvements, they may not be maintained through the life of the project or available to be applied to other development initiatives. Risk management is a process for identifying and assessing risks, their impact and status, the probability of their occurrence, and mitigation strategies. Effective risk management includes the development of a risk management plan and tracking and reporting progress against the plan. According to SEI, to the extent that risk management existed at all in the replacement program, it was conducted on a pro forma basis without real effect on program decisions. SEI said that risks and risk mitigation activities needed to be incorporated into all aspects of program planning, budgeting, scheduling, execution, and review. In response to these concerns, VBA has instituted risk management activities that, if properly implemented, should mitigate the risks associated with the project. Specifically, the VETSNET team, with contractor support, developed a risk management plan that was adopted in January 2007. The plan includes procedures for identifying, validating, analyzing, assessing, developing mitigation strategies for, controlling and tracking, reporting, and closing risks. It also establishes criteria for assessing the severity of the risks and their impact. The VETSNET leadership also developed a Risk Registry database, and its contractor reviewed and prioritized the open risks. Each open risk was evaluated, and a proposed disposition of the risk was submitted to VETSNET management. Of the 39 open risks, all but 3 had been addressed as of January 2007. The development documentation for each planned software release also includes sections on risk. In accordance with these plans, the VETSNET leadership is currently capturing potential risks and tracking action items and issues. At weekly status meetings, VETSNET leadership reviews Risk Registry reports of open risks. According to the contractor, the reports identify each risk and provide information on its age, ownership, and severity. However, these risk management activities have not yet been institutionalized through the definition and establishment of associated policies and procedures. If it does not institutionalize these improvements, VBA increases the possibility that the VETSNET project’s improvements in risk management may not be maintained through the life of the project. Requirements management is a process for establishing and maintaining a common understanding between the business owners and the developers of the requirements to be addressed, as well as verifying that the system meets the agreed requirements. SEI’s report commented that the VETSNET project requirements were not stable, and that the business owners (including subject-matter experts) and developers were separated by many organizational layers, resulting in confusion and delays in development of the system. SEI suggested that VA restructure project activities to focus on defining an effective requirements process. According to SEI, the project needed to ensure that subject-matter experts were included in developing requirements and that evaluation criteria were established for prioritizing requests for changes to requirements. Finally, business owners should confirm that the system is meeting organizational needs. VBA has instituted requirements management activities that, if properly implemented, should help avoid the instability and other requirements problems identified by SEI. Specifically, VBA took steps to establish a requirements management process and to stabilize the requirements. For example, the development release process in the Integrated Master Schedule includes a phase for requirements identification. In addition, the project has established and begun applying evaluation criteria to prioritize change requests for its development releases. Further, until all claims are completely migrated from the BDN to the replacement system, in July 2006, the Under Secretary directed that any additional requirements would have to have his approval. Responding to SEI’s advice regarding the involvement of subject-matter experts and business owners, VBA designed the new release process to directly involve subject-matter experts in requirements workshops. Further, the business teams participate in user-acceptance testing. However, these requirements management activities have not yet been institutionalized through the definition and establishment of policies and procedures. Until they are established, VBA runs the risk that the improved processes will not be maintained through the life of the VETSNET project or used in other software development projects. SEI raised numerous concerns regarding the defect process for the replacement system. These concerns for defect management included (1) identification of defects, (2) determination of cause, and (3) disposition of defects—either by correction or workaround. According to SEI guidance, defect management prevents known defects from hampering the progress of the program. The management process should include clearly identifying and tracking defects, analyzing defects to establish their cause, tracking their disposition, clearly identifying the rationale for not addressing any defects (as well as proposing workarounds), and making information on defects and their resolution broadly available. SEI’s report stated that VBA needed to distinguish defects from changes to requirements and develop a process for defect management. To respond to these concerns and focus program management attention on major defects, the VETSNET Executive Team, with contractor support, conducted an audit of existing defects and revised the defect management process. The audit of the defect database determined that the VETSNET database used to capture software defects also included change requests; as a result, work required to address processes that did not work properly was not distinguished from requests for added or changed functionality, which would require review and approval before being addressed. To address this issue, the team separated defects from change requests, and a new severity rating scale was developed. All open defects were recategorized to ensure the major defects would receive appropriate program management attention. Also, all defect categorizations must meet the approval of the VETSNET Business Architect and are scheduled for action as dictated by the severity level. Although these steps address many of SEI’s concerns regarding VBA’s defect management process, more remains to be done before the process is institutionalized. The Program Management Office has reported that actions to revise the defect management process are complete, but the process description is still in draft, and policies and procedures have not been fully established. Without institutionalized policies and procedures for the defect management process, it may not be maintained consistently through the life of the project. According to SEI, performance measures are the only effective mechanism that can provide credible evidence of a program’s progress. The chosen measures must link directly to the expected accomplishments and goals of the system, and they must be applied across all activities of the program. In its report, SEI stated that although VBA was reporting certain types of performance measures, it was not relating these to progress in system development. For example, VBA reported the total number of veterans paid, but did not provide estimates of how many additional veterans would be paid when the system incorporated specific functionalities that were under development. SEI suggested several measures that would provide more evidence of progress, such as increases in the percentage of original claims being paid by the replacement system, as well as user satisfaction and productivity gains resulting from use of the replacement system applications at regional offices. In response to these concerns, the replacement project has begun tracking a number of the measures suggested by SEI, including increases in the percentage of original claims being paid by the replacement system, increases in the percentage of veterans’ service representatives using the new system, decreases in the percentage of original claims being entered in the BDN rather than the replacement system. Although these measures provide indications of VA’s progress, other measures that could demonstrate the effectiveness of the replacement system have not been developed. For example, VBA has not developed results-oriented measures to capture user satisfaction or productivity gains from the system. Without measuring user satisfaction, VBA has reduced assurance that the replacement system will be accepted by the users. In addition, measures of productivity would provide VBA with another indication of progress toward meeting business needs. After more than 10 years of effort, including the recent management, organizational, and process improvements, VBA has achieved critical functionalities needed to process and pay certain original compensation claims using the replacement system, but it remains far from completing the project. For example, the replacement system is currently being used to process a portion of the original claims that veterans file for compensation. Nonetheless, the system requires further development before it can be used to process claims for the full range of compensation and pension benefits available to veterans and their dependents. In addition, VBA still faces the substantial task of moving approximately 3.5 million beneficiaries who are currently being served by the BDN to the replacement system. As designed, VETSNET consists of five major system applications that are used in processing benefits: Share—used to establish claims; it records and updates basic information about veterans and dependents both in the BDN and the replacement system. Modern Award Processing–Development (MAP-D)—used to manage the claims development process, including the collection of data to support the claims and the tracking of claims. Rating Board Automation 2000 (RBA 2000)—provides laws and regulations pertaining to disabilities, which are used by rating specialists in evaluating and rating disability claims. Award Processing (Awards)—used to prepare and calculate the benefit award based on the rating specialist’s determination of the claimant’s percentage of disability. It is also used to authorize the claim for payment. Finance and Accounting System (FAS)—used to develop the actual payment record. FAS generates various accounting reports and supports generation and audit of benefit payments. According to VBA officials, all five of the software applications that make up the new system are now being used in VA’s 57 regional offices to establish and process new compensation claims for veterans. As of March 2007, VBA leadership reported that the replacement system was providing monthly compensation payments to almost 50,000 veterans (out of about 3 million veterans who receive such payments). In addition, the replacement system has been processing a steadily increasing percentage of all new compensation claims completed: this measure was 47 percent in January 2007, increasing to 60 percent in February and 83 percent in March. Nonetheless, considerable work must be accomplished before VBA will be able to rely on the replacement system to make payments to all compensation and pension beneficiaries. Specifically, while all five software applications can now be used to process original compensation claims for veterans, two of the applications—Awards and FAS—require further development before the system will be able to process claims for the full range of benefits available to veterans and their dependents. Table 2 shows the status of development of all five applications. According to VBA officials, Awards and FAS do not yet have the capability to process original claims for payment to recipients other than veterans: that is, the applications do not have the functionality to process claims for survivor benefits and third-party/nonveteran payee claims. In addition, further development of these applications is needed to process pension benefits for qualified veterans and their survivors. Until enhancements are made to Awards and FAS, these claims must continue to be processed and paid through the BDN. Also, according to VBA, FAS does not yet have the capability to generate all the necessary accounting reports that support the development of benefits payments to claimants. As described earlier, VBA now has an Integrated Master Schedule that incorporates the activities that VBA needs to manage in order to complete the replacement project. According to the schedule, the remaining capabilities necessary to process compensation and pension claims are to be developed and deployed in three software releases, as shown in table 3. As table 3 shows, VBA does not expect to complete the development of the functionalities needed to process all new compensation and pension claims until August 2008. However, according to VBA, the estimated completion date is the planned date for completing all development and testing, but it is not necessarily the date when users will be able to begin using the new system. Before such use can begin, other activities need to occur. For example, users must receive training, and VETSNET program management must authorize the use of the system at each regional office. In addition to its remaining software development activities, VBA also faces the challenge of converting records for claims currently paid by the BDN to the replacement system. Existing compensation and pension cases on the BDN number about 3 million and about 535,000, respectively. Table 4 shows the phases in which VA is planning to perform conversions, according to its Integrated Master Schedule. As the table shows, VBA conversion efforts began in March 2007. VBA first performed conversion testing on 310,000 terminated (that is, inactive) compensation cases so that it could develop and apply lessons learned to the conversion of live records. According to VETSNET officials, VBA planned to continue testing by converting live cases at two regional offices (Lincoln and Nashville) that were used as testing sites during development. It then plans to perform the conversion of all live compensation cases. After the compensation conversion is complete, VBA plans to begin efforts to convert pension benefits cases. Based on VETSNET project documentation, activities supporting the releases have so far been performed on time, consistent with the milestones in the recently finalized Integrated Master Schedule. For example, VA completed the Project Initiation and Review Authorization for Release 1 on September 7, 2006, as scheduled (see fig. 1, shown earlier in the report, for the phases of system development and the required milestone reviews). It also completed the Preliminary Design Review and the Critical Design Review as scheduled (on November 20 and December 22, respectively). Planning for Release 2 is also on schedule: a kickoff meeting was held on January 24, 2007, which established the scope of the release, and the Project Initiation and Review Authorization was conducted on February 8. VA has responded to SEI’s assessment by making significant changes in its approach to the project and its overall management, including slowing the pace of development, establishing a new governance structure, and ensuring staff resources. However, VBA has not yet addressed all the issues raised by the SEI assessment. That is, it has not ensured ownership responsibility for total system and process operating costs, because it is not currently monitoring and reporting in-house expenditures for the project. It has not defined processes and resources for capacity planning for the project. In addition, VBA has not yet addressed issues related to the conversion of records now on the BDN to the replacement system. Specifically, it has not addressed the risk that large numbers of records may need to be returned to the BDN, decided on the degree of confidence it will require that records are converted accurately, or developed complete plans for converting and validating records. In addition, although VBA has improved key processes for managing the software development, these processes have not yet been institutionalized in defined policies and procedures, and performance measures of productivity and user satisfaction have not been developed. VETSNET management has stated that it gave priority to other activities, such as establishing appropriate governance and organizational structures, and that it is still gathering information to assist in prioritizing the activities that remain. Much work remains to be done to complete the VETSNET initiative. Although VBA has substantially increased the number of claims being paid by the replacement system, it must not only finish the development and deployment of the software, it must also convert the over 3.5 million records now on the BDN to the replacement system. Addressing the remaining issues identified by SEI would improve VBA’s chances of successfully completing the replacement system and ending reliance on the aged BDN to pay compensation and pension benefits. To enhance the likelihood that the replacement system will be successfully completed and implemented, we are recommending that the Secretary of Veterans Affairs take the following five actions: Direct the CIO to institute measures to track in-house expenditures for the project. Direct the VETSNET project to include activities for capacity planning in the VETSNET Integrated Master Schedule and ensure that resources are available for these activities. Direct VBA to (1) develop a strategy to address the risk that large numbers of records may need to be returned to the BDN; (2) determine whether a greater confidence level for accuracy should be required in the conversion process; and (3) develop a detailed validation plan that includes the scheduled conversions for each regional office and the validation team members needed for that specific conversion. Direct the CIO to document and incorporate the improved processes for managing risks, requirements, and defects into specific policy and guidance for the replacement initiative and for future use throughout VBA. Direct the replacement project to develop effective results-oriented performance measures that show changes in efficiency, economy, or improvements in mission performance, as well as measures of user satisfaction, and to monitor and report on the progress of the initiative according to these measures. In providing written comments on a draft of this report, the Secretary of Veterans Affairs agreed with our conclusions and concurred with the report’s recommendations. (The department’s comments are reproduced in app. II.) The comments described actions planned that respond to our recommendations, such as incorporating processes developed for the VETSNET project in standard project management policies, processes, and procedures that would be used for all IT projects in the department. In addition, the comments provided further information on actions already taken, such as details of the records conversion process. If the planned actions are properly implemented, they could help strengthen the department’s management of the replacement system project and improve the chances that the system will be successfully completed. We are sending copies of this report to the Chairman and Ranking Minority Member of Committee on Veterans’ Affairs. We are also sending copies to the Secretary of Veterans Affairs and appropriate congressional committees. We will make copies available to other interested parties upon request. Copies of this report will also be made available at no charge on GAO’s Web site at http://www.gao.gov. Should you or your staff have any questions about this report, please contact me at (202) 512-6304 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. Our objectives were to determine (1) to what extent the Department of Veterans Affairs (VA) has followed the course of action recommended by the Carnegie Mellon Software Engineering Institute (SEI) and addressed the concerns that it raised and (2) the current status of the replacement project, the Veterans Service Network (VETSNET). To determine the actions taken to implement SEI’s recommended approach and address the concerns it raised, we determined the recommended actions by analyzing the report; compared the concerns identified in the assessment to actions planned, actions undertaken but not completed, and actions implemented by VA officials or contractors; interviewed contractor, VA, and VETSNET program office officials to gain an understanding about processes developed and procedures implemented; and obtained and reviewed relevant VA and contractor documents that disclosed or validated VA responses to SEI’s concerns. To determine the status of system development efforts and the extent that tasks planned for the initiative were completed, we analyzed VA and contractor documentation regarding system operations and development, time frames, and activities planned. We analyzed VA documents that disclosed costs to date and costs planned for completion of the initiative. We did not assess the accuracy of the cost data provided to us. We supplemented our analyses with interviews of VA and contractor personnel involved in the replacement initiative. We visited the Nashville and St. Petersburg regional offices to observe the replacement system in operation and the processes and procedures used to test and validate the replacement system as it was being developed and implemented. We analyzed VA documentation and relevant evidence from contractors involved in the replacement effort to establish the work remaining to complete the project. Finally, we interviewed cognizant VA and contractor officials, responsible for developing, testing, and implementing the replacement system. We performed our work at VA offices in Washington, D.C., and at VA regional offices in Nashville, Tennessee, and St. Petersburg, Florida, from April 2006 to April 2007 in accordance with generally accepted government auditing standards. In addition to the individual named above, key contributions were made to this report by Barbara Oliver, Assistant Director; Nabajyoti Barkakati; Barbara Collier; Neil Doherty; Matt Grote; Robert Williams; and Charles Youman. | Since 1996, the Veterans Benefit Administration (VBA) has been working on an initiative to replace its aging system for paying compensation and pension benefits. In 2005, concerned about the slow pace of development, VBA contracted with the Software Engineering Institute (SEI) for an independent evaluation of the project, known as the Veterans Service Network (VETSNET). SEI advised VBA to continue working on the project at a reduced pace while addressing management and organization weaknesses that it determined had hampered the project's progress. GAO was requested to determine to what extent the VETSNET project has followed the course of action recommended by SEI and describe the project's current status. To perform its review, GAO analyzed project documentation, conducted site visits, and interviewed key program officials. VBA is generally following the course of action recommended by SEI by continuing to work on the replacement initiative at a reduced pace, while taking action to address identified weaknesses in overall management and software development processes. For example, VBA established a new governance structure for the initiative that included senior management and involved all stakeholders, and it incorporated all critical areas of system development in an integrated master schedule. However, not all of SEI's management concerns have been addressed. For example, SEI advised VBA to ensure that stakeholders take ownership responsibility for the project, including the total system and process operating costs; however, although VBA is tracking costs incurred by contractors, it is not yet tracking and reporting in-house costs incurred by the project. Further, although the project has improved its management processes, such as establishing a process to manage and stabilize system requirements, it has not yet developed processes for capacity planning and management. This will be important for ensuring that further VETSNET development does not lead to delays and slowdowns in processing of benefits. In addition, although the project has established certain performance measures, it has not yet established results-oriented measures for productivity and user satisfaction, both of which will be important for measuring progress. Finally, the process improvements that VBA has incorporated in the replacement initiative remain in draft and have not been established through documented policies and procedures. If VBA does not institutionalize these improvements, it increases the risk that they may not be maintained through the life of the project or be available for application to other development initiatives. After more than 10 years of effort, including the recent management, organizational, and process improvements, VBA has developed critical functionalities needed to process and pay certain original compensation claims using the replacement system, but it remains far from completing the project. According to VBA officials, all five of the major software applications that make up the new system are now being used to establish and process new compensation claims for veterans. In total, the replacement system is currently providing monthly compensation payments to almost 50,000 veterans (out of about 3 million veterans who receive such payments); the system was used to process about 83 percent of all new compensation claims completed in March 2007. Nonetheless, the system requires further development before it can be used to process claims for the full range of compensation and pension benefits available to veterans and their dependents. |
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This section describes TVA’s (1) legislation and governance, (2) operations and planning, (3) debt ceiling, and (4) retirement system. TVA is an independent federal corporation established by the TVA Act. The act established TVA to improve the quality of life in the Tennessee River Valley by improving navigation, promoting regional agricultural and economic development, and controlling the floodwaters of the Tennessee River. To those ends, TVA built dams and hydropower facilities on the Tennessee River and its tributaries. From its inception in 1933 through fiscal year 1959, TVA received annual appropriations to finance its cash and capital requirements. In 1959, however, Congress amended the TVA Act and provided TVA with the authority to finance its power program through revenue from electricity sales and borrowing and required it to repay a substantial portion of the annual appropriations it had received to pay for its power facilities. Under the TVA Act, TVA must design its rates to cover all costs but also keep rates as low as feasible. TVA must charge rates for power that will produce gross revenues sufficient to provide funds for its costs including operating, administrative and maintenance costs. TVA can borrow by issuing bonds and notes, an authority set by Congress that cannot exceed $30 billion outstanding at any given time. Legislation also limits competition between TVA and other utilities. When the TVA Act was amended in 1959, it prohibited TVA, with some exceptions, from entering into contracts to sell power outside the area where it or its distributors were the primary source of power supply on July 1, 1957. This is commonly referred to as the “fence,” because it limits TVA’s ability to expand substantially outside its service area. In addition, the Federal Power Act includes a provision that helps protect TVA’s ability to sell power within its service area. This provision, called the “anti- cherrypicking” provision, exempts TVA from being required to allow other utilities to use its transmission lines to deliver power to customers within its service area. The anti-cherrypicking provision reduces TVA’s exposure to loss of customers and competition from other utilities. A nine-member Board of Directors nominated by the President and confirmed by the U.S. Senate administers TVA. The board sets TVA’s goals and policies, appoints the CEO, develops long-range plans, seeks to ensure those plans are carried out, and approves TVA’s budget. The board also approves rate changes and has the sole authority to set wholesale electric power rates and approve the retail rates charged by TVA’s distributors. TVA’s board approves the agency’s strategic plan which outlines TVA’s broad goals, priorities, and performance measures. TVA’s most recent strategic plan covers fiscal years 2014 through 2018 and outlines its “strategic imperatives”—namely, to “maintain low rates, live within our means, manage our assets to meet reliability expectations and provide a balanced portfolio, and be responsible stewards of the region’s natural resources.” In August 2013, TVA’s board approved the goal to reduce TVA’s debt to about $22 billion by fiscal year 2023. TVA developed this goal during its fiscal year 2014 long-term financial planning process, but TVA updates its long range financial plan each year. The TVA board approves the budget each fiscal year, and the board is updated at least semi-annually on the long-range financial plan. TVA uses a 10-year long-range financial plan to determine the amount of funds that will be available for capital investment. Operating priorities are detailed in business unit plans, such as the power supply plan, the transmission assessment plan, and the coal and gas operations asset plan. In addition, TVA files publicly available quarterly and annual financial reports with the Securities and Exchange Commission. TVA also submits a budget proposal and management agenda (performance report) to Congress and a performance budget (performance plan) to OMB. To meet demand for electricity, utilities can construct new plants, upgrade existing plants, purchase power from others, and provide incentives to customers to reduce and shift their demand for electricity through energy efficiency or demand-response programs. Since its establishment, to meet the subsequent need for more electric power, TVA has expanded beyond hydropower to other types of power generation such as natural gas, coal, and nuclear plants. In fiscal year 2016, TVA provided nearly 159 billion kilowatt-hours to customers from its power generating facilities and purchased power, as shown in figure 1. To guide TVA decisions about the resources needed to meet future demand for electricity and determine the most cost-effective ways to prepare for the future power needs of its customers, TVA periodically develops an integrated resource plan (IRP). TVA’s 2015 IRP found no immediate needs for new baseload plants—plants that generally have been the most costly to build but have had the lowest hourly operating costs—beyond the completion of the Watts Bar Unit 2 nuclear plant in Tennessee and the expansion of capacity at the Browns Ferry nuclear plant in Alabama. In October 2016, TVA completed Watts Bar Unit 2— the first nuclear unit to enter commercial operation in 20 years. Beyond those projects, the 2015 IRP found that TVA could rely on additional natural gas generation, greater levels of cost-effective energy efficiency, and increased contributions from competitively priced renewable power. TVA develops forecasts of demand for electricity that help it make resource planning decisions, such as how much and what kind of capacity to build, how much power to buy from other sources, or how much to invest in energy efficiency. To forecast the demand for electricity in its service area for the next 20 or more years, TVA employs a set of models but forecasting beyond a few years into the future involves great uncertainty. Utilities deal with uncertainty partly by producing a range of forecasts based on demographic and economic factors, and by maintaining excess generating capacity, known as reserves. Models help utilities choose the least-cost combination of generating resources to meet demand. If demand forecasts are unreasonably high or low, a utility could end up with more or less generating capacity than it needs to serve its customers reliably, or it could end up with a mix of generating capacity that is not cost effective. These outcomes can affect electricity rates as well as the utility’s financial situation. TVA experienced less than anticipated electricity demand growth over the past 20 years and now forecasts little, if any, growth in demand for electricity in the upcoming years. Congress increased TVA’s debt ceiling four times from 1966 to 1979, from $750 million to $30 billion. In the years following these increases, TVA’s financial condition worsened, largely as the result of construction delays, cost overruns, and operational shutdowns in its nuclear program. In the late 1960s and 1970s, TVA started construction on 17 nuclear units but completed only 7 because of lower-than-anticipated demand for electricity, resulting in billions of dollars of debt. In February 2001, we reported that TVA had about $6.3 billion in unrecovered capital costs associated with uncompleted and nonproducing nuclear units. In fiscal year 2016, TVA had about $1.1 billion in unrecovered costs associated with uncompleted nuclear units. While the debt ceiling has not been changed since 1979, TVA’s business and operations have grown along with the power needs of the Tennessee Valley. TVA has continued to add generating capacity to the system, as its customer base has increased, and environmental spending requirements have increased. TVA generally uses debt financing for capital investments in new generation capacity and environmental controls and uses revenues for operation and maintenance of the power system. TVA can borrow funds at competitive interest rates as a result of its triple-A credit rating which is based, in part, on its ownership by the federal government. Appendix I includes historical data on TVA’s debt and other selected financial data. TVA’s board established TVARS in 1939. TVARS is a separate legal entity from TVA and is administered by a seven-member Board of Directors. The TVARS board manages the retirement system, including decision-making on investment portfolios, the interest rate or rates used in actuarial and other calculations, and benefits. The Rules and Regulations of the TVA Retirement System (TVARS Rules) establish how the retirement system is administered and what benefits are payable to participants. The TVARS Rules establish the minimum amount TVA must contribute to the system each year. The TVARS board can amend the TVARS Rules, but TVA has veto power and amendments proposed by the TVARS board become effective only if TVA does not exercise its veto within 30 days. As a governmental plan, TVA’s plan is not subject to the Employee Retirement Income Security Act of 1974 (ERISA), which sets minimum standards for pension plans in the private sector. As of September 30, 2016, the defined benefit pension plan (which we refer to as the pension plan in this report) had about 34,000 participants, of whom about 24,000 were retirees; it is a “mature” plan, in that there are more than twice as many retirees and beneficiaries as employees participating in the plan. To meet its goal to reduce its debt from about $26 billion in fiscal year 2016 to about $22 billion by fiscal year 2023, TVA plans to increase revenue through rate increases, limit the growth of operating expenses, and reduce capital expenditures. TVA’s plans assume the completion of capital projects will occur on time and within budget. TVA’s plans also include costs for investigating the development of new nuclear technology but do not include capital costs for construction. According to TVA officials, TVA aims to increase its overall financial flexibility over the long term to ensure sufficient room under the debt ceiling so it can access capital for future investments to meet its mission. TVA plans to gradually decrease debt through 2023 (see fig. 2). To meet its goal to reduce its debt to about $22 billion by fiscal year 2023, TVA’s plans include the following. Rate increases. TVA’s plans include annual rate increases not to exceed 1.5 percent of the retail rate as needed to maintain its debt reduction trajectory. According to TVA officials and documents, TVA’s plans included rate increases of 1.5 percent for about $200 million in annual revenue. TVA can use increased revenue to refinance existing debt or to fund certain expenditures rather than taking on new debt, but TVA’s board must approve rate increases. TVA increased rates each fiscal year from 2014 through 2017. According to TVA officials, annual rate increases through 2023 could result in the reduction of debt to about $19.8 billion by fiscal year 2023, which would exceed the agency’s debt reduction goal. Limits in the growth of operating expenses. TVA plans to continue evaluating its operations and to limit the growth of its operating expenses. Having fewer operating expenses frees up revenue from rates that TVA can use to repay outstanding debt or fund certain expenditures without taking on new debt. In fiscal year 2016, TVA’s O&M expenses totaled about $2.8 billion—a reduction of about 18 percent from $3.4 billion in fiscal year 2013. As part of its cost-reduction initiatives, TVA eliminated 2,200 positions through attrition and elimination of vacant positions. TVA plans to pursue additional workforce reductions to offset increases in retirement benefit and labor costs. According to TVA documents, reductions in expenses associated with coal plant closures will offset some of the increase in labor-related costs but other reductions will be required. TVA officials said that additional reductions could involve contract labor in its nuclear group. In July 2016, TVA offered a voluntary reduction-in-force program to all 3,500 employees in its nuclear group, providing an opportunity to retire or depart; as of January 2017, TVA officials had not provided information on the number of employees participating in this program. In fiscal year 2016, TVA’s workforce included 10,691 employees and 12,729 contractors. According to TVA documentation, as a major component of its O&M costs, TVA continuously evaluates its staffing levels, both employees and contractors. TVA plans are being finalized, over the next several years, to decrease the overall workforce through various mechanisms as TVA aligns its workforce with changes to its generating assets; these mechanisms may include reductions-in-force, attrition, and elimination of vacant positions. However, early retirements and severance associated with workforce reductions could also pose additional expenses. Reductions in capital expenditures. TVA plans to reduce its capital expenditures through fiscal year 2023. Over the past decade, TVA’s capital expenditures increased by over 180 percent—from about $1.2 billion in fiscal year 2006 to about $3.4 billion in fiscal year 2015. TVA aims to decrease capital expenditures to about $1.8 billion by fiscal year 2023 (see fig. 3). Based on its electricity demand forecast, TVA does not anticipate the need for additional baseload capacity until the 2030s beyond completion of Watts Bar Unit 2—which cost about $4.7 billion—and capacity expansion at three nuclear units. TVA’s capital expenditure plan from fiscal years 2016 through 2023 includes a total of about $17.4 billion; about $8.3 billion for base capital projects to maintain the current operational state, about $5.2 billion for capacity expansion projects, and about $3.9 billion for environmental and other projects. Under TVA’s financial guiding principles, TVA may issue debt for new assets, including capacity expansion and installation of environmental controls, but, according to TVA officials, TVA plans to primarily fund capital expenditures with revenue, as opposed to issuing new debt, to reach its debt goal. TVA increased construction expenditures from fiscal years 2006 through 2016 from about $1.4 billion ($1.6 billion in 2016 dollars) to about $2.7 billion while reducing the amount of new debt issued (see fig. 4). According to TVA officials, TVA’s plans assume that the completion of capital projects will occur on time and within budget. TVA’s plans included the assumption that it would complete construction of a new nuclear unit—Watts Bar Unit 2—in 2016. Watts Bar Unit 2 began commercial operation in October 2016. By completing construction of this unit in 2016, a key assumption underlying TVA’s debt reduction plans was met. However, TVA’s plans include other key capital projects such as the construction of two natural gas plants, modification of a coal plant to install clean air controls, and two smaller nuclear projects. Information about these two nuclear projects follow. Browns Ferry extended power uprate (EPU). TVA’s capital plans include a project that aims to increase generation capacity at the Browns Ferry nuclear plant’s three existing units. TVA began the project in 2001 and anticipated completion within 2 to 4 years but the project remains incomplete. As of September 30, 2016, TVA reported that it anticipates completion of the project by 2024 at a total estimated cost of about $475 million—an increase of 25 percent from an estimated $380 million in fiscal year 2014. According to TVA documentation, the agency spent about $191 million on the project through fiscal year 2016. The project involves engineering analyses and modification and replacement of certain existing plant components to enable the units to produce additional power. To allow operation at the higher power level, the license for each unit requires modification that would occur in parallel with the NRC license amendment review process. TVA originally submitted the licensing amendment requests to NRC in June 2004. However, TVA withdrew these requests in September 2014 and submitted a new request in September 2015. According to NRC, it is planning to complete its review by fall 2017. Watts Bar Unit 2 steam generator replacement. TVA’s capital plans include about $438 million to replace steam generators at the newly operational unit. The existing generators prematurely developed leaks and other problems occurred at nuclear plants, including Watts Bar Unit 1 which required replacement of the generators 9 years into operation. According to TVA officials, TVA has completed steam generator replacements at other nuclear units without significant cost overruns or schedule delays. Given historical trends in nuclear construction, TVA’s estimated capital costs may be optimistic and could increase. Any cost overruns or delays on its nuclear or other capital projects could require adjustments to its future financial plans. TVA’s history of cost overruns and schedule delays includes the construction of Watts Bar Unit 2 which began commercial operation in October 2016 after decades of construction (see table 1). TVA did not complete another nuclear project. TVA auctioned off the 1,400 acre site of the Bellefonte nuclear plant in Alabama, including two unfinished nuclear units, in November 2016 for $111 million—a fraction of the approximately $5 billion TVA had spent on the plant. TVA began building the plant in 1974, but several stops and starts in construction occurred primarily as a result of lower-than-anticipated growth in electricity demand. According to TVA officials, TVA decided again to complete unit 1 in 2011 but stopped work in 2013 because of reduced electricity demand, Watts Bar Unit 2 concerns, and anticipated increases in construction costs. In 2013, TVA estimated that the cost to complete the unit had grown from its prior approved cost of $4.9 billion to at least $7.5 billion or more. TVA stated that it wanted to complete Watts Bar Unit 2 and await the results of its IRP process. Based on the 2015 IRP, TVA decided not to complete construction of Bellefonte. According to TVA documentation, TVA spent about $10 million to $12 million annually maintaining the Bellefonte site. TVA’s plans do not anticipate any such events occurring with its current projects that would interfere with timely completion within budget. TVA’s plans include costs for investigating the development of new nuclear technology but do not include capital costs for construction of the technology. Specifically, TVA is assessing the potential of its Clinch River site in Tennessee for the construction of small modular reactors (SMR). According to TVA documentation, these efforts include research and development activities that support its technology innovation mission. In 2016, TVA submitted an early site permit application to NRC to assess the suitability of the site for construction and operation of SMRs at its 1,200-acre Clinch River site. An early site permit is valid for up to 20 years and would address site safety, environmental protection, and emergency preparedness associated with any of the light-water reactor SMR designs under development in the United States. According to TVA documentation, TVA has not selected a technology and has not entered into any contracts for design work. If TVA decides to construct SMRs, its costs are uncertain but could total about $3 billion after cost sharing through public-private partnerships but expenditures prior to a construction decision would be a very small portion of this cost, according to TVA documentation. The total estimated costs for TVA to develop, submit, and support the NRC application and review include about $72 million, according to an interagency agreement with DOE, and TVA is responsible for half of these costs. According to TVA documentation, the agency spent about $23 million on SMR activities through fiscal year 2015 and estimates spending about $5 million in fiscal year 2016. According to TVA, it spends about $10 million to $15 million on research and development activities each year as part of its technology innovation organization (not including spending on SMRs). TVA officials said that the agency will not decide whether or not to construct SMRs for at least 5 years. However, TVA is investigating SMRs even though its 2015 IRP found that TVA does not need additional baseload power plants beyond the projects currently under way and that SMRs are cost-prohibitive. TVA’s debt reduction plans and performance information are not reported in a manner consistent with GPRAMA requirements. GPRAMA requires agencies, including TVA, to report major management challenges that they face, and for each major management challenge that agencies develop and report performance information—including performance goals, measures, milestones, and planned actions to resolve the challenge. TVA identifies managing debt and its unfunded pension liabilities as major management challenges but TVA has not reported required performance information in its annual performance plan or report on these challenges. For managing debt, TVA’s CEO stated a goal for debt reduction by 2023 during a congressional hearing in April 2015 and the goal is reported in internal documents and Board presentation slides available on TVA’s website. In addition, according to TVA’s 2016 performance report, its strategic objectives include “effectively manage debt to ensure long-term financial health.” TVA’s 2016 performance report includes a goal related to total financing obligations for fiscal years 2016 and 2017, but the goal shows these obligations increasing, and the report does not include information on planned actions to resolve the challenge. Although TVA established a goal to reduce its debt, it has not documented in its annual performance plan or report strategies for how it will meet its goal, as required by GPRAMA, thereby reducing transparency and raising questions about how the agency will meet its goal. For TVA’s unfunded pension liabilities, TVA officials have stated a goal to eliminate the pension funding shortfall (about $6 billion at the end of fiscal year 2016) by 2036, but TVA has not identified such a goal or milestones in its performance plan or report. As of September 30, 2016, TVA’s pension plan was about 54 percent funded with a funding shortfall of about $6 billion (plan assets totaled $7.1 billion and liabilities $13.1 billion). While TVA’s debt has remained relatively flat, its unfunded pension liabilities have steadily increased over the past 10 years (see fig. 5). Unfunded pension liabilities are similar to other kinds of debt because they constitute a promise to make a future payment or provide a benefit. According to a joint American Academy of Actuaries and Society of Actuaries task force, a pension plan needs to be evaluated as part of a plan sponsor’s overall enterprise; an analysis that looks at the pension plan as a self-standing entity is incomplete and too narrow. However, TVA officials told us that because TVA uses revenue from the rates it charges customers to fund the pension, and not debt in the form of bonds, unfunded pension liabilities would not affect TVA’s debt reduction plan. In addition, TVA defers pension costs as “regulatory assets”— incurred costs deferred for recovery through rates in the future—in accordance with accounting standards and with TVA board approval. However, because TVA will need to recover these costs through rates in the future, this affects its financial health and operations. If TVA uses revenue from rate increases to close the pension shortfall, this could decrease its ability to fund other activities such as capital projects with revenue from rates. This could, in turn, require TVA to rely on debt to fund certain capital projects and interfere with efforts to meet overall debt reduction goals. Alternatively, further rate increases could interfere with TVA’s objective of keeping rates as low as feasible. Without the Board of Directors ensuring that TVA better document and communicate information about its goals to reduce debt and unfunded pension liabilities in its performance plan and report, including strategies for achieving its goals, congressional and other stakeholders will not have a complete picture of TVA’s progress toward managing its debt or its overall financial health. Several factors could affect TVA’s ability to meet its debt reduction goal, including regulatory pressures, changes in demand for electricity, technological innovations, or unforeseen events. In addition, TVA aims to eliminate its $6 billion in unfunded pension liabilities within 20 years, according to TVA officials, but no mechanism is in place to ensure TVA fully funds the liabilities if, for example, plan assets do not achieve expected returns. Several factors could affect TVA’s ability to meet its debt reduction goals, including regulatory pressures that could require additional capital investment, changes in demand for electricity, technological innovations, or unforeseen events that could affect revenues or require additional investments. TVA’s fossil fuel and nuclear power plants are, or potentially will be, affected by existing and proposed environmental and other regulations, and the implementation of these regulations may require TVA to make additional capital investments. For example, TVA estimates it will spend about $2 billion on environmental expenditures and compliance with regulations from 2017 through 2023 but, according to a TVA document, this estimate could change as additional information becomes available and regulations change. TVA spent about $977 million to eliminate the wet storage of coal combustion residual, commonly called coal ash, to assist in meeting EPA and Tennessee Department of Environment and Conservation environmental requirements. As part of these efforts, TVA prepared a June 2016 environmental impact statement on the approach it planned to take for closing coal ash impoundments at its coal plants, which involved converting all its wet storage to dry storage. According to a TVA document, the agency anticipates spending about an additional $1.2 billion in related coal ash costs through 2022. While the status of the Clean Power Plan that EPA issued in 2015 is unclear, TVA continues to assess the plan and its status. According to TVA documentation, TVA is well positioned to meet carbon emission guidelines for existing fossil fuel plants under the plan. Specifically, in April 2011, TVA agreed to retire 18 of its 59 fossil fuel units by the end of 2017 for several reasons, including the cost of adding emission control equipment and other environmental improvements to the units. As of September 2016, TVA had retired 14 of the 18 units and reported that it would continue to evaluate the appropriate asset mix, given the costs of continuing to operate its coal plants, including adhering to environmental regulations. With regard to TVA’s nuclear power plants, TVA also faces potential costs related to proposed regulations. For example, in May 2014, NRC notified certain nuclear power plant licensees of the results of seismic hazard screening evaluations performed following the Fukushima nuclear accident. Based on the screening results, TVA must conduct additional seismic risk evaluations of all three of its nuclear plants—Browns Ferry, Sequoyah, and Watts Bar—by 2019. According to TVA, NRC is developing a rule anticipated in mid-2017 for nuclear plants to mitigate the effects of events, such as seismic events, that exceed plant design standards that could require TVA to modify one or more of its nuclear plants. According to TVA documents, plant modification costs will be unknown until the rule is finalized, but they could be substantial. Reductions in demand for electricity could affect TVA’s revenues; alternatively, increases in demand could generate additional revenue but require investment in additional capacity or purchased power. The expanded use of distributed generation and increased energy efficiency and conservation could reduce demand for electricity in TVA’s service area and affect its revenues. As the amount of distributed generation grows and renewable generation and energy efficiency technologies improve and become more cost-effective, TVA projects sales of electricity will see little, if any, growth in upcoming years. According to several representatives from industry and stakeholder groups, distributed generation could increase competition from end-use customers— consumers who typically buy power from the local power companies that obtain power from TVA—if they adopt on-site power generation. According to EIA’s Annual Energy Outlook 2016, annual electricity demand for the average household will decline by 11 percent from 2015 to 2040. EIA reported that factors contributing to a decline in household demand include efficient lighting technologies and increased distributed generation, particularly rooftop solar. According to TVA documents, the agency cannot predict the financial impact from future growth of distributed generation but TVA has taken steps to anticipate the changes in the electricity market that distributed generation could bring. For example, in 2016, TVA announced a new business unit focused on distributed energy resources and the energy delivery marketplace, and according to a TVA official, it also formed information exchanges to provide forums to discuss implementation issues related to distributed generation and energy efficiency. Other technological developments in the electric utility industry could change TVA’s operating costs or requirements. For example, several representatives we interviewed from industry and stakeholder groups said that energy storage technology could become more cost-effective and change the way utilities operate. While the added capacity provided by energy storage could delay or alleviate the need for TVA to build additional power plants, TVA officials said that there are still several unknowns about the technology though they do not believe integration of battery storage into the system would be problematic. Finally, unforeseen events could also affect TVA’s ability to meet debt reduction goals. For example, the 2008 Kingston coal ash spill cost about $1.2 billion to remediate—costs TVA is still recovering. TVA plans to make annual contributions of $300 million to the pension plan, or more if required by the TVARS Rules, for up to 20 years. According to TVA’s analysis, there is a 50 percent chance that annual contributions of $300 million could eliminate the $6 billion funding shortfall at the end of 20 years and a 50 percent chance that a funding shortfall would remain. TVA’s analysis assumes an annual return of 7 percent on pension plan assets, but depending on market conditions, assets could yield higher or lower than expected returns. According to TVA officials, the pension plan asset performance is critical to TVA’s ability to close the pension funding shortfall. TVA officials have stated a goal to fully fund the pension plan within 20 years. However, if market conditions over the next 20 years are not favorable enough to fully fund the pension liabilities, which TVA’s analysis assigns a 50 percent chance, TVA would need to contribute more than $300 million per year to make up the difference if it aims to eliminate the funding shortfall. Other factors that could affect TVA’s pension liabilities include greater than expected increases in retiree lifespans and declining bond yields. In a 2010 report, the TVA OIG found that a combination of factors— including market conditions and TVA actions—resulted in a significant shortfall between pension plan assets and projected liabilities. These factors included: (1) TVA not making contributions to TVARS for 6 years, (2) the addition of significant retirement benefits to the plan when the funded status was better, (3) the establishment of TVARS Rules that had the effect of enticing employees to retire, and (4) the economic downturn in 2008 and 2009. The TVARS pension plan’s funded status decreased from about 92 percent in 2007 to about 55 percent in 2016 (see fig. 6). In December 2015, TVA proposed changes to the TVARS Rules to reduce the obligations of the pension plan and commit to making consistent contributions. The TVARS board approved amendments that reduced TVA’s pension liabilities by about $960 million, reduced future benefit accruals, and added a minimum contribution requirement of $300 million to the existing requirement for a period of 20 years. However, the amended TVARS Rules do not adjust TVA’s annual contribution requirement to ensure TVA will fully fund its pension liabilities. The TVARS Rules require that for a period of 20 years, or until the plan is deemed fully funded, TVA’s annual contribution equal the greater of (1) a formula-based contribution or (2) $300 million. To the extent that a $300 million contribution proves inadequate because of plan experience, the formula-based contribution would determine the amount TVA must contribute each year. The formula uses a 30-year “open amortization method,” meaning that the amortization period is reset to 30 years each fiscal year, so the end of the amortization period (i.e., paying off the unfunded liability) may never be achieved. A Blue Ribbon Panel commissioned by the Society of Actuaries believes that plans’ risk management practices and their ability to respond to changing economic and market conditions would be enhanced through the use of amortization periods shorter than the 30-year period commonly used today. The panel recommended amortization periods of no more than 15 to 20 years for gains and losses. According to the panel’s 2014 report, the panel believes that fully funding pension benefits of public employees over their average future service reasonably aligns the cost of today’s public services with the taxpayers who benefit from those services. In addition, according to the American Academy of Actuaries, funding rules should include targets based on accumulating the present value of benefits for employees by the time they retire, and a plan to make up for any variations in actual assets from the funding target within a defined and reasonable time period. In the private sector, ERISA generally requires a 7-year amortization of shortfalls for private sector single- employer pension plans. Unlike an open amortization period, a closed, or fixed, amortization period is generally maintained until the original unfunded liability amount is fully repaid. Thus, a closed amortization period would be a better practice if the goal is to fully fund pension liabilities. Table 2 compares the amortization of $6 billion in unfunded liabilities using open and closed amortization methods, assuming assets return 7 percent, as TVA expects. The closed amortization method would extinguish the unfunded liability in 30 years, whereas more than $4 billion in unfunded liability would remain under the open amortization method (see table 2). As we mentioned earlier, TVA assumes an annual return of 7 percent on pension plan assets, but depending on market conditions, assets could yield higher or lower than expected returns. If the return on investment was lower than expected, the unfunded liabilities would be greater, and TVA would need to contribute more than $300 million per year to make up the difference. The open amortization period utilized by the TVARS formula-based contribution requirement does not ensure TVA’s contributions will adequately adjust for plan experience and does not ensure full funding of the pension liabilities. Without a mechanism that ensures TVA’s contributions will adequately adjust for actual plan experience, unfunded liabilities could remain, and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. TVA officials told us that the agency does not plan to contribute more than the TVARS Rules require and that it plans to continue to treat its unfunded pension liabilities as regulatory assets, deferring pension costs for recovery through rates in the future. However, the TVARS Rules do not provide for fully funding pension benefits over the service of TVA employees covered by the plan, which would align the cost of services provided by covered employees with the rates paid by customers who benefit from the services of covered employees. The deferral of contributions necessary to close the funding shortfall reduces future financial flexibility and may result in the need for rate increases during a period of declining demand for electricity. If TVA needs to use revenue originally targeted for debt reduction to pay for greater than estimated pension expenses, this could interfere with TVA’s debt reduction goal and additional rate increases may be required which could interfere with TVA’s ability to keep rates low. Alternatively, less flexibility could lead to pressure to reduce the pay or benefits of future TVA employees. Since fiscal year 2013, TVA reduced its O&M costs by about 18 percent while completing construction of the first nuclear unit to enter commercial operation in 20 years. However, since the late 1970s, TVA’s financial condition worsened largely as a result of delays, cost overruns, and operational shutdowns in its nuclear program, and the agency continues to invest in nuclear projects while deferring full recognition and funding of pension liabilities. TVA generally aims to reduce its debt to increase its financial flexibility over the long term to ensure sufficient room under its debt ceiling so it can access capital for future investments to meet its mission. However, retirement benefit and labor costs and cost overruns or delays on nuclear capital projects could put pressure on TVA’s plan, along with other factors including future demand for electricity or unforeseen events. GPRAMA requires agencies to report major management challenges that they face and report performance information—including performance goals, measures, milestones, and planned actions needed to resolve them. However, TVA is not fully meeting this requirement, thereby reducing transparency and raising questions about how it will meet its goals of managing debt and reducing its unfunded pension liabilities. TVA’s unfunded pension liabilities affect TVA’s financial health and operations especially if TVA will need to fund them through rate increases in the future. Without better documentation and communication of TVA’s goals to reduce debt and unfunded pension liabilities in its performance plan and report, including the strategies for achieving these goals, congressional and other stakeholders will not have a complete picture of TVA’s progress toward managing its debt or its overall financial health. TVA aims to eliminate $6 billion in unfunded pension liabilities within 20 years, according to TVA officials, but factors such as market conditions could affect TVA’s progress and no mechanism is in place to ensure the pension plan is fully funded. The TVARS Rules do not adjust TVA’s required contributions to ensure pension liabilities will be fully funded and TVA plans to contribute no more than the rules require and to defer the remaining pension liability. Without a mechanism that ensures TVA’s contributions will adequately adjust for actual plan experience, unfunded liabilities could remain, and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. We recommend that the Board of Directors ensure that TVA take the following two actions: better document and communicate its goals to reduce its debt and unfunded pension liabilities in its performance plans and reports, including detailed strategies for achieving these goals. propose, and work with the TVARS board to adopt, funding rules designed to ensure the plan’s full funding. We provided a draft of this product to TVA for comment. In its comments, reproduced in appendix II, TVA agreed with our first recommendation and stated that it will incorporate additional details in the next iteration of its performance plan and report to enhance transparency. TVA neither agreed nor disagreed with our second recommendation. However, TVA said that it is committed to working with the TVARS Board to ensure a fully funded system. It did not specifically state whether it would consider proposing, and working with the TVARS Board to adopt, funding rules designed to ensure the pension plan’s full funding. As TVA states in its comments, it worked with the TVARS Board to implement plan amendments that were effective October 1, 2016. TVA states that those amendments have placed the retirement system on a path toward achieving full funding in 20 years. We continue to believe that the action we recommended is needed and, as discussed in the report, that the open amortization period used in the TVARS Rules to determine TVA’s minimum contribution requirement does not ensure TVA’s contributions will adequately adjust for plan experience and, therefore, does not ensure full funding of the pension liabilities. In addition, we received technical comments, which we have incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, TVA’s board of directors, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix III. The Tennessee Valley Authority (TVA) reports on debt using a measure of total financing obligations that includes bonds and notes, which TVA considers “statutory debt,” and other financing obligations which include lease-leaseback obligations, energy prepayment obligations, debt related to variable interest entities, and membership interests issued in connection with a lease financing transaction. As table 3 shows, in fiscal year 2016, TVA’s $26 billion in debt included about $24 billion in bonds and notes and $2 billion in other financing obligations. Table 4 shows selected data from TVA’s financial statements including revenues, expenses, and other data. Table 5 shows TVA’s pension liabilities, assets and funded status. Table 6 shows TVA’s regulatory assets—incurred costs deferred for recovery through rates in the future—by major category. Frank Rusco, (202) 512-3841 or [email protected]. In addition to the contact named above, Michael Hix (Assistant Director), Janice Ceperich, Philip Farah, Kirk Menard, and Joseph Silvestri made key contributions to this report. Also contributing to this report were Antoinette Capaccio, Cindy Gilbert, Steve Lowrey, Alison O’Neill, Karissa Robie, Dan C. Royer, Barbara Timmerman, and Jacqueline Wade. | TVA, the nation's largest public power provider, is a federal electric utility with revenues of about $10.6 billion in fiscal year 2016. TVA's mission is to provide affordable electricity, manage river systems, and promote economic development. TVA provides electricity to more than 9 million customers in the southeastern United States. TVA must finance its assets with debt and operating revenues. TVA primarily finances large capital investments by issuing bonds but is subject to a statutorily imposed $30 billion debt limit. In fiscal year 2014, TVA established a debt reduction goal. GAO was asked to review TVA's plans for debt reduction. This report examines (1) TVA's debt reduction goal, plans for meeting its goal, and key assumptions; (2) the extent to which TVA reports required performance information; and (3) factors that have been reported that could affect TVA's ability to meet its goal. GAO analyzed TVA financial data and documents and interviewed TVA and federal officials and representatives of stakeholder and industry groups. To meet its goal to reduce debt by about $4 billion—from about $26 billion in fiscal year 2016 to about $22 billion by fiscal year 2023—the Tennessee Valley Authority (TVA) plans to increase rates, limit the growth of operating expenses, and reduce capital expenditures. For example, TVA increased rates each fiscal year from 2014 through 2017 and was able to reduce operating and maintenance costs by about 18 percent from fiscal year 2013 to 2016. TVA's plans depend on assumptions that future capital projects will be completed on time and within budget, but TVA's estimated capital costs may be optimistic and could increase. TVA's debt reduction plans and performance information are not reported in a manner consistent with the GPRA Modernization Act of 2010. Specifically, TVA identifies managing its debt and its unfunded pension liabilities as major management challenges but has not reported required performance information in its performance plans or reports on these challenges, thereby reducing transparency and raising questions about how it will meet its goal. As of September 30, 2016, TVA‘s pension plan was about 54 percent funded (plan assets totaled about $7.1 billion and liabilities $13.1 billion). While TVA's debt has remained relatively flat, its unfunded pension liabilities have steadily increased over the past 10 years, as shown below. Tennessee Valley Authority's Debt and Unfunded Pension Liabilities, Fiscal Years 2006 through 2016 Several factors could affect TVA's ability to meet its debt reduction goal, including regulatory pressures, changes in demand for electricity, technological innovations, or unforeseen events. Also, TVA aims to eliminate its unfunded pension liabilities within 20 years, according to TVA officials. However, factors such as market conditions could affect TVA's progress, and no mechanism is in place to ensure it fully funds the pension liabilities if, for example, plan assets do not achieve expected returns. The TVA retirement system rules that determine TVA's required annual pension contributions do not adjust TVA's contributions to ensure full funding and TVA does not plan to contribute more than the rules require. Without a mechanism that ensures TVA's contributions will adequately adjust for actual plan experience, unfunded liabilities could remain and future ratepayers may have to fund the pension plan even further to pay for services provided to prior generations of ratepayers. GAO recommends that TVA (1) better communicate its plans and goals for debt reduction and reducing unfunded pension liabilities in its annual performance plan and report and (2) take steps to have its retirement system adopt funding rules designed to ensure the pension plan's full funding. TVA agreed with the first recommendation and neither agreed nor disagreed with the second. GAO believes that action is needed as discussed in the report. |
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Under TRICARE, DOD contracts with private sector health care companies to supplement the care provided by military hospitals and clinics. These contracts, which are referred to as managed care support contracts, are generally performance-based contracts. For such contracts, most, but not all, of the requirements include an expected outcome, but the manner in which that outcome is to be achieved is left to the contractor. Contractors are given discretion in determining how best to meet the government’s performance objectives. For example, the managed care support contract states that the contractor must maintain an adequate network of providers, and the contractor is responsible for determining how it will accomplish that objective, including how many providers will be in its network. TMA expected to award the third generation of managed care support contracts in each of the three regions in 2009, but bid protests and other actions resulted in delays. In the North region, the final contract was awarded in May 2010 to the incumbent contractor, Health Net Federal Services, after its bid protest against TMA’s initial decision to award the contract to Aetna Government Health Plan was sustained. In the South region, the final contract was awarded in February 2011 to the incumbent contractor, Humana Military Healthcare Services, after its bid protest against TMA’s initial decision to award the contract to UnitedHealth was sustained. As we reported in March 2014, there were two bid protests in the West region.UnitedHealth in July 2009 challenging the award to TriWest. This protest was sustained and included a recommendation that TMA reevaluate proposals and make a new source selection decision. In implementing this recommendation, TMA allowed offerors to submit revised proposals. TMA then reviewed the revised proposals and, based on this review, awarded the contract to UnitedHealth. After TMA announced the new award, a second West region protest was filed by TriWest in March 2012. The first protest was an agency-level protest filed by GAO denied the second protest and upheld UnitedHealth as the contractor for the West region. (See fig. 1.) The process for implementing the third generation of managed care support contracts involves transitioning health care delivery from the outgoing contractor to the incoming contractor. The transition involves planning, managing, and monitoring to ensure continuity of services for TRICARE beneficiaries and providers. The transition period officially begins when the managed care support contract has been signed by DOD and the contractor, and it ends on the health care delivery start date. For the West region, UnitedHealth’s transition period was slightly less than 9 months; it began on July 3, 2012, and was completed on March 31, 2013, with the health care delivery start date of April 1, 2013. TMA has guidance for the management and oversight of managed care support contract transitions, as well as for the incoming and outgoing contractors. TMA’s management of all of the third-generation contract transitions, including the managed care support contract transitions, is governed by TMA’s Concept of Operations for TRICARE T-3 Transitions Work Group (Concept of Operations). contractor’s performance, TMA uses the TRICARE Acquisitions Directive (Acquisitions Directive), which establishes roles and responsibilities for both TMA and TRO officials and a chain of command to address contractor nonconformance. According to this directive, the Contracting Officer is ultimately responsible for the oversight of the contractor’s performance. The Contracting Officer’s Representative assists the Contracting Officer with this effort by working with other TRO officials to monitor the contractor’s performance. The TRO is responsible for the day-to-day monitoring of the contractor’s performance during both contract transition and health care delivery. See TMA, Concept of Operations for TRICARE T-3 Transitions Work Group (2008). key focus areas during the transition period because of their importance in delivering health care; they are provider network, referral management, enrollment, medical management, claims processing, customer service, and management. (See table 1.) The contract is also supplemented by four TRICARE manuals, including the TRICARE Operations Manual, which includes guidance for both the outgoing and the incoming contractors, among other requirements. TMA provided some guidance to both TRO-West and UnitedHealth for the West region’s managed care support contract transition, but the guidance was inadequate because it lacked sufficient specificity on how to both oversee the transition and meet certain transition requirements. Although TRO-West was responsible for the day-to-day management of UnitedHealth’s transition, it lacked specific guidance from TMA on how to provide oversight, particularly when the contractor had difficulty meeting transition requirements. According to TMA-Aurora officials, the Concept of Operations is the official guidance for managing the transition of all third- generation TRICARE contracts, including the managed care support contracts. We found that this seven-page document outlines a basic approach for the transitions, including a general management structure. However, it does not provide information on the specific roles and responsibilities for managing the day-to-day transition process. It also does not contain guidance for addressing any problems that may occur, including a process for holding the contractor accountable when transition activities are delayed and interim milestones are not met. Separately, the Acquisitions Directive provides a basic approach for overseeing a contractor’s performance, including performance during a transition period. However, we found that this high-level five-page document also lacks specificity on how and when to hold a contractor accountable for not meeting requirements. For example, it notes that the Contracting Officer has the authority to issue a corrective action request in response to the contractor’s nonconformance, but does not provide sufficient detail on what level of nonconformance would require such response, nor how long the Contracting Officer should wait before sending it. In July 2012, TMA-Aurora officials developed the TMA Transition User Guide to supplement the Concept of Operations, which provided more- specific information on how to implement its approach for managing contract transitions.a more-detailed structure for the transition process, including key management roles and responsibilities for TMA-Aurora and TRO-West officials, as well as timelines for important meetings and lessons learned from previous contract transitions. However, similar to the Concept of Operations and the Acquisitions Directive, it does not address how TRO- West officials should provide oversight of the contractor’s activities, including what to do when the contractor is not on track to meet requirements. We found that TMA’s transition guidance to UnitedHealth as an incoming contractor was also inadequate primarily because UnitedHealth’s transition requirements were more specific than those of the outgoing contractor, and TMA did not adequately address these differences. The managed care support contracts include transition guidance for both the incoming and the outgoing contractors that is outlined in the TRICARE manuals, most notably the TRICARE Operations Manual.UnitedHealth’s contract included the 2008 version of the manual, while the contract for the outgoing contractor included the 2002 version. Despite our attempts to obtain an explanation, TMA-Aurora and TRO- West officials could not clearly explain to us why the two contractors were not required to follow the same transition guidance. The different versions of the manual contributed to information gaps for UnitedHealth, which UnitedHealth officials said was an important factor that delayed development of their civilian provider network. Specifically, UnitedHealth had intended to duplicate at least 95 percent of TriWest’s provider network to create a more seamless transition for beneficiaries, but to accomplish this, it needed specific information from TriWest that it expected to receive as part of the transition. UnitedHealth’s transition guidance stated that the outgoing contractor was required to provide the incoming contractor with copies of a provider certification file no later than 30 days after contract award to be updated on a monthly basis until the start of health care delivery. However, TriWest’s transition guidance only contained a reference to a provider certification file, but did not define its contents, link it to other provider files specifically mentioned, or stipulate a time frame for producing it. Instead, TriWest’s guidance stated more generally that the outgoing contractor was required to provide full cooperation and support to the incoming contractor and was silent on when the provider certification file had to be delivered. TriWest did not provide this file within 30 days, but UnitedHealth and TriWest officials were able to reach a compromise about the provision of the needed information. As a result, TriWest provided UnitedHealth with a provider certification file in late August 2012. However, this was almost a month later than UnitedHealth expected to receive the information based on its transition guidance. Furthermore, UnitedHealth officials told us that because there was no guidance on the transfer of the provider certification file between incoming and outgoing contractors, they received a file with nearly 700,000 provider records without any data definitions. As a result, UnitedHealth officials told us that they had to spend several months working with the data to make them usable for their purposes. In this instance, the lack of consistent transition guidance for the outgoing and incoming contractors affected the incoming contractor’s ability to meet transition requirements. Federal standards for internal control note that an agency is responsible for the establishment and monitoring of performance measures—which would include ensuring consistent transition guidance. TMA’s transition guidance to UnitedHealth also lacked sufficient specificity for some of the seven key focus areas it had identified in the contract as being important for health care delivery, such as referral management. TRICARE has a unique referral process that provides MTFs with the right of first refusal when TRICARE Prime beneficiaries are referred for specialty care—a practice that helps maximize the use of the military’s direct care system. As a result, contractors would need to have a referral management system that could electronically interface with the referral management systems used by the region’s MTFs to facilitate this process. However, the TRICARE manuals do not contain guidance for the contractors on how to establish this interface. In contrast, DOD provides detailed guidance for establishing interfaces with other, more centralized DOD systems, such as the guidance for interfacing with the Defense Enrollment Eligibility Reporting System. A TRO-West official explained that the lack of specific guidance for a referral management interface is likely due to the fact that the military services use different referral management systems, and there is no central DOD system for this process. At the time, the military services used one of two referral management systems. UnitedHealth officials told us that they did not learn about the MTFs’ different systems until a month into the transition period, which affected their timeliness in developing an automated referral management system to interface with the systems used by the region’s MTFs. Additionally, during that time, there were also discussions within DOD to adopt one of these referral management systems for use across all of the military services by March 2013. As a result, UnitedHealth officials told us that they developed a referral management system that could receive faxed referrals from the MTFs with the expectation that they would develop an automated interface once more information was available about which single referral management system DOD would adopt. In addition, unlike some other key focus areas, including customer service (call centers) and claims processing, TMA did not test UnitedHealth’s referral process prior to health care delivery. According to both TRO-West and UnitedHealth officials, this testing was not conducted because it was not required by transition guidance. Both TRO-West and UnitedHealth officials agreed that such testing would have been beneficial for determining whether their interface would work at the start of health care delivery. Providing sufficient specificity for, and testing, this system and other systems identified as critical for health care delivery would better align with federal standards for internal control, which recommend that once an agency has identified areas of risk, such as referral management, it should analyze those areas, formulating an approach to manage and mitigate them. TMA-Aurora and TRO-West officials provided insufficient oversight of the West region’s contractor transition because they took limited action in response to the concerns they identified and did not resolve their concerns promptly. Specifically, the Contracting Officer and TRO-West officials provided oversight by following the structured process outlined in the TMA Transition User Guide. For example, they held specific types of meetings defined in the guide, such as a “kick-off meeting” with UnitedHealth officials shortly after the transition period began to discuss high-level transition strategies; meetings were also held to discuss interfacing DOD and UnitedHealth computer systems. Additionally, TRO- West officials reviewed UnitedHealth’s weekly transition reports and participated in weekly meetings with UnitedHealth officials to discuss their progress in meeting transition requirements. TRO-West officials did not maintain formal agency records of these weekly meetings, and they could only provide us with examples of handwritten notes of the discussions that transpired. Although the notes provide a general outline of topics discussed, they lack the degree of specificity that would allow us to determine, without making assumptions, the nature of any concerns raised by TRO-West officials or how UnitedHealth responded. We therefore determined that these notes provided insufficient evidence of the agency’s oversight actions during the transition period. Due to delays in the awarding of the contract, the Contracting Officer told us that there were discussions with TRO-West and UnitedHealth officials as early as July 2012 about whether the transition period should be extended. According to the Contracting Officer, a decision was ultimately made in September 2012 to continue with the expected plan, after UnitedHealth officials assured TMA that they would be able to meet the transition requirements by the start of health care delivery—an assurance that UnitedHealth officials confirmed. The Contracting Officer told us that none of these discussions were documented because the decision not to extend the transition period did not represent a change from what was already required. Although TRO-West officials told us that there were no indications at the time that the health care delivery start date should be delayed, these officials later told us that they had limited data on which to base their determination, in part because it was so early in the transition period. According to federal standards for internal control, sufficient information should be identified and captured in a time frame that permits program managers (such as the Contracting Officer or TRO-West officials) to make effective decisions. Without such pertinent information, the Contracting Officer and TRO-West officials cannot ensure that they made an informed determination about whether to extend the transition period. Despite not delaying the health care delivery start date, TMA-Aurora and TRO-West officials told us that they had concerns with UnitedHealth’s determination of how it would meet, and its progress toward meeting, several of the transition requirements. TRO-West officials told us that because the contract is performance-based, they had difficulty holding the contractor accountable until an actual requirement was missed, and were only able to express their concerns regarding the progress to UnitedHealth’s officials. However, TRO-West officials could not provide sufficient documentation of these conversations with UnitedHealth. In addition, while we recognize that under a performance-based contract an agency does not provide detailed instructions to the contractor on how to meet its requirements, we do not believe that a performance-based contract diminishes TMA’s responsibility to provide an oversight structure for managing the contractor’s performance during the transition period. As we have previously reported, important attributes of a performance-based contract include measurable performance standards and a quality The assurance plan for evaluating the contractor’s performance.contract with UnitedHealth contains these features. Taken together, these contract provisions created an obligation on the part of the department to provide sufficient oversight to ensure that the contractor was performing as required. Although TRO-West monitored UnitedHealth’s progress and had concerns about its performance, it did little to resolve them, and could not always provide documentation of the communication of these concerns to UnitedHealth. In one instance, TRO-West officials told us that they were concerned about UnitedHealth’s ability to meet call center requirements because they were concerned about the staffing numbers that UnitedHealth had proposed. Specifically, UnitedHealth was required to hire a sufficient number of staff to answer customer service calls from beneficiaries and providers within prescribed time frames. However, the determination of how many staff to hire was ultimately UnitedHealth’s decision. UnitedHealth officials told us that in order to determine how many call center staff were needed, they estimated the efficiency of their call center staff and applied that to an estimated volume of customer service calls, which was based on TriWest’s daily average plus an additional 50 percent to factor in a heavier call volume for the start of health care delivery. UnitedHealth officials told us that they were unable to obtain staffing numbers from TriWest because the numbers were proprietary. However, TRO-West officials told us that based on their comparisons of UnitedHealth’s call center staffing numbers to those of TriWest’s, they expressed concerns to UnitedHealth about the adequacy of its call center staffing estimate. TRO-West officials said that UnitedHealth officials replied that their staffing numbers should be sufficient, but if needed, they would be able to transfer staff from other departments to provide coverage. However, UnitedHealth officials did not recall these discussions in our interviews, and TRO-West officials could not provide documentation that they took place. TRO-West’s approach was inconsistent with federal standards for internal control, which state that management should have a strategy for documenting significant events, which would include TMA’s communication of concerns about the contractor’s performance in meeting requirements. When UnitedHealth missed deadlines for transition requirements, TMA either did not take, or was slow to take, formal action, and it did not sufficiently document all of its informal actions. For example, TRO-West officials told us that on several occasions, starting in November 2012, they expressed concerns to UnitedHealth that it was not progressing sufficiently with meeting two of the requirements related to the development of its provider network. Specifically, UnitedHealth was required to have both its network of civilian providers (including primary care managers and other provider specialties) signed to contracts and the providers’ relevant information entered into its databases 60 days prior to health care delivery.weekly transition reports on its progress in meeting these requirements, including assurances to TRO-West officials that they would be met, it did not ultimately meet the requirements on time. TRO-West officials told us that after the requirements were not met, they held informal discussions with UnitedHealth officials during weekly transition meetings to determine how UnitedHealth would come into compliance. Although TRO-West officials could not provide sufficient documentation of these discussions, they were able to provide examples of emails sent to UnitedHealth about these concerns. According to the Contracting Officer, he did not take formal action at that time in order to allow TMA-Aurora and TRO-West officials to exercise other informal mechanisms for resolving the issue. UnitedHealth did not complete this requirement until June 2013—more than 4 months late. Although UnitedHealth provided updates in its Although UnitedHealth was not always timely in meeting transition requirements, it did not face any financial penalties as a result. According to its contract, UnitedHealth was eligible for a transition-in payment of $10 million to be paid in two increments, with the last payment following completion of all transition requirements. The Contracting Officer told us that because the contract did not specify that the transition-in payment was subject to timely completion of the transition requirements, TMA’s interpretation was that it had to award the payment without regard to whether the contractor met the transition’s timeliness requirements. However, our previous work has found that performance-based contracts should include incentives—either positive or negative, or a combination of both—to encourage better quality performance. In this instance, TMA determined in December 2013 that UnitedHealth completed all of its transition requirements—about 8 months after health care delivery began. TMA subsequently awarded UnitedHealth the remainder of its transition- in payment in February 2014. TMA’s inadequate guidance and insufficient oversight of UnitedHealth’s transition contributed to problems at the start of health care delivery, which in turn led to the disruption in the continuity of care for some beneficiaries and potentially cost the department millions of dollars, according to Army officials. Specifically, inadequate guidance and insufficient oversight contributed to UnitedHealth’s health care delivery problems, including those related to its provider database, referral processing, and call center responsiveness. As a result of these difficulties, TMA-Aurora and TRO-West officials increased their oversight of UnitedHealth, took steps to hold the contractor accountable for the problems that had transpired, and updated the guidance (TMA Transition User Guide). Provider database: The different versions of transition guidance and insufficient oversight contributed to information gaps for UnitedHealth, which UnitedHealth officials said was an important factor that led to its difficulties in creating its provider database. UnitedHealth did not have information for all its civilian network providers entered into its provider database until June 2013—more than 4 months after the contract deadline of January 30, 2013. Referrals and claims related to these providers had to be put on hold until UnitedHealth officials could complete the data entry process. Additionally, at the start of health care delivery, UnitedHealth officials told us that they had not entered information on primary care managers for 113,000 TRICARE Prime beneficiaries, and some of these beneficiaries had to be temporarily reassigned to a new primary care manager.information about its primary care managers 3 weeks after the start of health care delivery, the beneficiaries who had been reassigned were moved back to their original primary care manager if they requested it. When UnitedHealth had completed entering Referral processing: The absence of transition guidance on developing a referral management interface contributed, in part, to UnitedHealth’s difficulties in establishing an automated referral management system, which inconvenienced beneficiaries and was potentially costly for the government. Because DOD had not decided which referral management system would be used in the region, UnitedHealth officials told us that they could only receive faxed referrals from MTFs during the first few months of health care delivery. This situation contributed to inordinate processing delays along with a higher-than-expected number of referrals and staff who were not as efficient as anticipated. Specifically, UnitedHealth expected its staff to process about 7,000 referrals a day. Instead, during the first few days of health care delivery, they processed about 2,500 per day. On May 2, 2013, the director of TMA issued a temporary waiver of the requirement for TRICARE Prime beneficiaries to obtain referral authorizations for specialty care. This waiver was initially effective for the first 6 weeks of health care delivery starting on April 1, 2013, and was subsequently extended through July 2, 2013. Officials from the Army estimated that these waivers could cost the department over a million dollars in lost resources because they impeded the right of first refusal for the MTFs, which potentially resulted in more beneficiaries’ obtaining specialty care from civilian providers, costing the government additional money. During this time, UnitedHealth hired more staff and increased its efficiency at processing referrals, and in July 2013—about 4 months after the start of health care delivery—it was able to meet and exceed the contract requirement of processing 90 percent of referrals within 2 workdays. While UnitedHealth has not yet met its requirement to process 100 percent of all referrals within 3 workdays, it is currently processing 99 percent of referrals within this time frame. In addition, UnitedHealth officials told us that they currently use both automated and fax referral systems, depending on the MTF. Call centers: TMA’s oversight of UnitedHealth’s plans for staffing its call centers was insufficient, which contributed to a delayed resolution of UnitedHealth’s performance problems, which lasted until the third month of health care delivery. Specifically, UnitedHealth experienced difficulties in answering telephone calls within the required time frame on the first day of health care delivery. This was based, in part, on insufficient numbers of call center staff and staff who were not as efficient as UnitedHealth had anticipated, along with a higher-than-predicted call volume. For the month of April 2013, UnitedHealth officials expected about 23,500 calls each day, and they hired the number of staff they thought they would need to answer 90 percent of these calls (21,150) within 30 seconds, as required by the contract. However, during the first month of health care delivery, the daily number of calls received was about 24,000, and the number of calls answered within the required time frame ranged from a low of about 2,200 calls (9 percent) to a high of almost 16,000 calls (67 percent). To meet telephone response time requirements, UnitedHealth told us that they used staff from its other departments, subcontracted for additional staff, and hired more staff to alleviate the call center problems. more call center staff, the staff from other departments and its subcontractor were returned to their previous responsibilities. UnitedHealth began meeting its telephone response time requirements in June 2013. UnitedHealth subcontracted with several entities to meet the requirements of its contract. One of those entities, Health Net—the managed care support contractor in the North region—assisted with the hiring of about 100 staff to help alleviate call center problems. requests—a written request for action describing missed contractual requirements—to UnitedHealth on April 5, 2013, for the referral delays and other issues. This corrective action request cited problems with referral processing and the entry of information about primary care managers into UnitedHealth’s provider database. Further, the request asked that UnitedHealth submit a corrective action plan—a plan demonstrating how the requirements would be met—as soon as possible. While the effect of these issues on the call centers was mentioned, the call center response times were not addressed in this request. However, the Contracting Officer determined that UnitedHealth’s initial response was vague and inadequate. As a result, he repeated the corrective action request process two more times in April 2013. Finally, on May 1, 2013, UnitedHealth submitted a corrective action plan that was deemed adequate by the Contracting Officer. Additionally, based on UnitedHealth’s performance during the first 6 months of health care delivery, TMA-Aurora and TRO-West officials determined that UnitedHealth would be financially penalized through performance guarantees and award fees in accordance with contract requirements. Performance guarantees: The West region managed care support contract includes performance guarantees, which are financial penalties based on the contractor’s performance in meeting certain requirements. Specifically, if a contractor does not meet requirements in six areas related to customer service and claims processing, such as answering 90 percent of phone calls from beneficiaries within 30 seconds and processing 100 percent of claims within 90 days, they are financially penalized. However, these six areas do not include all of the contract requirements that TMA identified for the seven key focus areas, such as referrals and provider network adequacy. Therefore, these guarantees do not reflect the contractor’s performance in those areas. TMA calculates whether the contractor meets these guarantees on a quarterly basis. If the contractor does not meet the requirement, TMA-Aurora uses a contractually defined formula to determine how much money it will be penalized. For the first and second quarter, TMA-Aurora officials determined that UnitedHealth would be penalized about $134,000. A majority of this penalty resulted from its failure to answer 90 percent of all customer service calls within the required 30 seconds. Award fee: The West region managed care support contract also includes financial incentives through an award fee, which is calculated twice a year and is based on the contractor’s provision of exceptional service that is above and beyond contractual requirements. The determination of the award fee is based on a combination of the results of satisfaction surveys conducted of MTFs, beneficiaries, and providers on the contractor’s performance (50 percent of the award fee) and an evaluation of the performance (the other 50 percent of the award fee). The survey portion of the award fee requires that a contractor must receive a composite score of 4.5 or higher on a scale of 6 to receive any portion of the payment. UnitedHealth received a composite score of 4 for the first 6 months of health care delivery. For the portion of the award fee based on an evaluation of UnitedHealth’s performance, a panel of TMA officials, including both TMA-Aurora and TRO-West officials, determined that there were no occurrences where UnitedHealth’s performance exceeded contractual requirements. Consequently, the panel recommended in December 2013 that UnitedHealth should not receive any portion of the over $7 million potential award fee for the first 6 months of health care delivery. The evaluation of the contractor’s performance is conducted by several TMA officials, including the Contracting Officer, and these officials subjectively evaluate whether UnitedHealth exceeded contract requirements related to several areas, including maintaining an efficient referral management. limited because it is not sufficiently specific, and some of these changes would likely need to be formally incorporated into the managed care support contracts. The transition of managed care support contractors in the West region did not go smoothly. Many problems arose that negatively affected TRICARE beneficiaries and potentially resulted in additional costs for DOD. UnitedHealth was the first new managed care support contractor since the TRICARE program began, and its transition highlighted numerous deficiencies in TMA’s guidance and oversight. In particular, insufficient guidance on transition oversight contributed to a complacent approach by TRO-West officials, who did little to hold the contractor accountable during the transition, aside from holding informal conversations that were not always sufficiently documented. While TRO-West officials also cited the performance-based contract as a basis for their approach, this type of contract does not diminish their responsibility to provide an oversight structure to manage the contractor’s performance in meeting requirements. Furthermore, TMA failed to ensure that the incoming and outgoing contractors used the same version of transition guidance, resulting in information gaps that were left largely to the contractors to resolve, contributing to UnitedHealth’s delay in meeting transition requirements related to its provider network. And, while TMA did consider the possibility of extending the transition period, TRO-West officials cited a lack of sufficient information to make an informed decision at the time the decision was being considered. Moreover, the transition guidance for UnitedHealth also lacked sufficient detail for some requirements, including the development of a critical interface for managing specialty care referrals, which was not pretested to ensure that it was fully operational prior to health care delivery, unlike pretesting that was done for other system interfaces. The confluence of these factors led to a particularly problematic start for health care delivery in TRICARE’s West region, as evidenced by events such as call center failures and inordinate delays in processing specialty care referral authorizations. The latter problem necessitated that TMA waive its authorization requirements for 3 months—a costly workaround for DOD. Despite these difficulties, approximately 10 months after the start of health care delivery, TMA paid UnitedHealth the remainder of its $10 million transition-in payment after UnitedHealth completed its transition requirements. Eventually, TMA did begin taking steps to hold the contractor accountable for the problems that surfaced, including the use of corrective action requests and financial penalties. In an effort to prevent similar problems in future transitions, TMA also modified the guidance provided in the TMA Transition User Guide. However, the effectiveness of this modification is unclear because this guidance is not sufficiently specific and would likely require contractual changes. Without adequate guidance, DHA—which assumed oversight responsibility for TMA in 2013—cannot provide reasonable assurance that its efforts to oversee future managed care support contract transitions will be effective in ensuring that contractors are prepared for health care delivery, including meeting all contract requirements and appropriately serving their TRICARE beneficiaries. To ensure that DHA provides appropriate levels of oversight and accountability to future managed care support contractor transitions, we recommend that the Secretary of Defense require the Director of DHA to review existing transition guidance, and revise as needed, to include sufficient specificity about 1. A requirement that all significant oversight communication between the TRO and the contractor be sufficiently documented, particularly communication regarding concerns about the contractor’s ability to meet transition requirements and deadlines; 2. A requirement that the TROs and Contracting Officers have sufficient data and information from the contractor at a defined point in time to make an informed determination about whether to extend the transition period; 3. A process for identifying and monitoring all key focus areas, including the pretesting of key functions and interfaces prior to the start of health care delivery; and 4. A course of action for holding the contractor accountable for problems that transpire in meeting transition requirements or deadlines. In addition, to ensure that future managed care support contractors have the information they need to successfully complete transition requirements and are fully prepared for health care delivery, we recommend that the Secretary of Defense require the Director of DHA to 5. Ensure that both the incoming and the outgoing contractors are using consistent versions of transition guidance; 6. Revise the contractors’ transition guidance to contain clear definitions and an appropriate level of specificity, particularly for key focus areas identified by DHA, such as referral management; and 7. Conduct a review of whether the transition-in payment should be designed to incentivize timely completion of transition requirements and deadlines. We provided a copy of this report to DOD for review and comment. DOD stated that we made two specific assertions that it wanted to clarify: (1) that TMA guidance and oversight during the transition period contributed to issues with health care delivery; and (2) that this is the first transition to a nonincumbent contractor since the start of the TRICARE program. In addition, with regard to the recommendations, DOD either concurred or partially concurred with all of our recommendations. DOD’s written comments are reprinted in appendix II. We disagree with DOD’s statement that our report mischaracterized these two issues. With regard to our statement that TMA guidance and oversight during the transition period contributed to issues with health care delivery, DOD states that the report misinterprets two distinctly separate transition requirements: establishing an adequate provider network and transferring provider certification files for claims processing. While we understand that the establishment of an adequate network is the responsibility of the incoming contractor, our report notes that UnitedHealth expected to use the provider certification files from the outgoing contractor to help establish its own provider network. However, differences in specificity between the two versions of transition guidance for the incoming and outgoing contractors contributed to the delay of the transfer of these files. Furthermore, UnitedHealth spent several months working with the provider certification data they eventually received in order to make the data usable for its purposes—all of which contributed to UnitedHealth’s delay in establishing an adequate provider network within required time frames. Ultimately, UnitedHealth did not meet its requirement to complete network development and load all of the provider files 60 days prior to health care delivery. TMA was slow to take action— waiting more than 2 months to send a corrective action request related to this missed requirement. Because UnitedHealth did not have information for all its civilian network providers entered into its provider database at the start of health care delivery, referrals and claims related to these providers had to be put on hold until UnitedHealth officials could complete the data entry process, potentially impacting beneficiaries’ access to health care. Additionally, at the start of health care delivery, UnitedHealth officials told us that they had not entered information on primary care managers for 113,000 TRICARE Prime beneficiaries and that some of these beneficiaries had to be temporarily reassigned to a new primary care manager until the data entry process was complete. Based on this evidence, we disagree with DOD’s statement that issues arising from the transfer of the provider certification files would not impact access to health care delivery. We also disagree with DOD’s statement that our finding to the contrary is an assertion rather than an objective assessment of the facts. DOD also wanted to clarify our statement that the transition to the West region’s contractor was the first transition to a nonincumbent contractor since the start of the TRICARE program. DOD noted that TMA has successfully transitioned a nonincumbent contractor for the delivery of health care services on numerous occasions. We believe that DOD misinterpreted our statement, because for the purposes of our report, we use the term “contractor” to refer to a managed care support contractor. Aside from citing MetLife Federal Dental Plan as an example, DOD listed three other contractors that previously participated in the first generation of TRICARE managed care support contracts. However, none of them participated in a TRICARE managed care support contract transition as a nonincumbent. Therefore, we believe that our statement that UnitedHealth’s transition in the West region represented the first transition to a nonincumbent managed care support contractor since the TRICARE program began is accurate. In addition, DOD made the point that our report did not recognize numerous occasions when TMA representatives conducted onsite readiness reviews and pretesting activities and that it was important to note the government exacted numerous financial and other sanctions on UnitedHealth because of its inability to meet contract requirements. Our report acknowledges that TMA conducted readiness reviews and some pretesting activities. However, as stated in our report, TMA did not pretest UnitedHealth’s referral process, which TRO-West officials told us would have been beneficial for determining whether the referral process would work prior to health care delivery. Furthermore, we believe it is important to stress that TMA did not exact any financial or other sanctions during transition. Specifically, as our report discusses, UnitedHealth was not always timely in meeting the transition requirements, yet it was not financially penalized. TMA did not issue any corrective action or financially related sanctions until after health care delivery. To date, TMA has provided evidence of two financially related sanctions—performance guarantees and award fees—which were discussed in our report. However, these financially related sanctions were for missed requirements that took place after health care delivery began, and were not imposed as a result of the missed transition requirements. DOD concurred or partially concurred with each of our recommendations. However, DOD disagreed with some of the related findings upon which these recommendations were based. Additionally, despite its concurrence, DOD did not always provide details on how it plans to implement our recommendations. DOD’s specific responses to each of our recommendations are as follows: DOD partially concurred with our first recommendation to require that all significant oversight communication between the TRO and the contractor be sufficiently documented. While DOD agreed with the substance of this recommendation, it disagreed with our finding that it could not provide us with sufficient documentation of the communication of its concerns to UnitedHealth about its ability to meet transition and performance requirements and deadlines. DOD noted that it provided thousands of pages of comprehensive documentation of both formal and informal correspondence with UnitedHealth—essentially stating that it is already meeting this recommendation and implying that no additional action is necessary. While we agree that DOD was able to provide documentation of its oversight, not all of it reflected its communication of specific concerns with UnitedHealth. For example, DOD could not provide documentation regarding its concerns about the call center staffing that UnitedHealth had proposed—discussions that UnitedHealth officials did not recall during our interviews. Further, the documentation of DOD’s communications with UnitedHealth was largely dependent upon handwritten notes, which were difficult to understand without extensive explanation by DOD officials. We therefore continue to believe that our recommendation remains valid. DOD concurred with our second recommendation to require that the TRO and Contracting Officers have sufficient data and information to make an informed determination about whether to extend the transition period. DOD's comments indicate that it has already undertaken steps to implement this action, but did not provide any time frames for when this activity would be complete. DOD concurred with our third recommendation to require a process for the identification and monitoring of all key focus areas, including the pretesting of key functions. DOD noted in its comments that prior to our review, DHA began redefining contract requirements for transition and oversight. DOD added that this effort would include revised transition requirements for pretesting. In addition, DOD stated that an independent contractor will be used to assess key systems, interfaces, and performance. DOD partially concurred with our fourth recommendation to review existing transition guidance and revise as needed to include sufficient specificity and accountability for meeting transition requirements or deadlines. DOD noted that during its review of existing transition guidance, it will consider whether specific guidance for the Contracting Officer is needed. Although DOD stated that contract administration matters require a certain degree of discretion and business judgment, we found that the Contracting Officer was inconsistent in using his authority to take formal action against UnitedHealth when it missed transition requirements. We therefore believe that implementing this recommendation is critical to ensure that future transitions—particularly those of nonincumbent contractors—proceed without incident. DOD concurred with our fifth recommendation to ensure that both the incoming and the outgoing contractors are using consistent versions of transition guidance. However, DOD also noted in its comments that the progression from the 2002 manuals to the 2008 manuals did not create a wholesale change between the two versions and that the use of the two versions was not a contributory factor in the difficulties that transpired during the transition. While we agree that the changes in the manuals were not necessarily wholesale, there was a difference in the level of specificity, which UnitedHealth said contributed to problems with its transition. Specifically, the 2008 version noted that the outgoing contractor was required to provide the incoming contractor with copies of a provider certification file no later than 30 days after contract award, to be updated on a monthly basis until the start of health care delivery. However, the 2002 version contained only a reference to the provider certification file, and did not define its contents, link it to other provider files specifically mentioned, or stipulate a time frame for producing it. Further, the 2002 version stated more generally that the outgoing contractor was required to provide full cooperation and support to the incoming contractor. Therefore, we continue to believe that the differences in the two versions of the manuals created an information gap, which UnitedHealth officials identified as an important factor that delayed development of its civilian provider network, and that action to respond to our recommendation is needed. DOD concurred with our sixth recommendation that the contractors’ transition guidance should be revised to contain clear definitions and an appropriate level of specificity, particularly for key focus areas identified. DOD stated that the key focus areas with the associated risk for each area should be clearly identified with the appropriate level of specificity by DHA, while still ensuring that the contract language is not overly prescriptive to allow contractors to use best business practices. While we understand DOD’s concern about not being overly prescriptive, we believe our findings illustrate why having clear definitions and sufficient specificity is vital to ensuring that future transitions are successful, and why action is needed. DOD also concurred with our seventh recommendation to conduct a review of whether the transition-in payment should be designed to incentivize timely completion of transition requirements and deadlines. In addition, DOD stated that the transition requirements should have both positive and negative incentives for the contractor to achieve satisfactory progress. We are sending copies of this report to the Secretary of Defense and appropriate congressional committees. The report is also available at no charge on GAO’s website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix III. UnitedHealth began its transition to become the West region’s managed care support contractor on July 3, 2012, with health care delivery starting on April 1, 2013. As part of its contract, UnitedHealth is required to conduct outreach and hold briefings for beneficiaries at various military sites throughout its region and develop a provider education program that is designed to enhance providers’ awareness of TRICARE. In addition, all materials used to educate beneficiaries and providers on TRICARE must be approved by the Department of Defense. In February 2013, UnitedHealth began providing briefings to beneficiaries about various aspects of TRICARE, including health coverage information related to retirement, dependents, and deployment. (See table 2 for briefings conducted through the first 6 months of health care delivery.) In addition, UnitedHealth distributed welcome packages to all beneficiary households in the region, which included a welcome letter and a brochure produced by the TRICARE Management Activity. The type of education that UnitedHealth offered to providers depended on whether the provider was new to UnitedHealth. Providers new to UnitedHealth received a general orientation about both TRICARE and UnitedHealth. Existing UnitedHealth providers received an orientation that included similar materials, but was premised on the providers’ familiarity with UnitedHealth and its network programs and tools. In addition, UnitedHealth officials began conducting briefings to educate providers about TRICARE in February 2013. (See table 3 for briefings conducted through the first 6 months of health care delivery.) In addition to the contact named above, Bonnie Anderson, Assistant Director; Danielle Bernstein; Jacquelyn Hamilton; Jeffrey Mayhew; Laurie Pachter; and Bill Woods made key contributions to this report. | DOD provides health care through TRICARE, its regionally structured health care program. In each of its regions (North, South, West), DOD uses contractors to manage health care delivery through civilian providers, among other tasks. UnitedHealth—an organization new to TRICARE—was awarded the contract in the West region. After health care delivery began, UnitedHealth experienced problems fulfilling some requirements and delivering care to TRICARE beneficiaries. GAO was asked to review the West region's transition to UnitedHealth. This report provides information on (1) the extent to which TMA provided guidance and oversight of the new contractor's transition period in preparation for health care delivery; and (2) how, if at all, TMA's guidance and oversight during the transition period contributed to issues with health care delivery. GAO reviewed and analyzed TMA guidance, contract requirements, and other relevant documentation, and interviewed TMA and UnitedHealth officials. The recent transition of TRICARE's managed care support contractors (contractors) in the West region did not go smoothly and highlighted numerous deficiencies in guidance and oversight by the TRICARE Management Activity (TMA)—the Department of Defense's (DOD) office responsible for awarding and managing these contracts at the time of GAO's review. For example, TMA did not ensure that its outgoing and incoming contractors used the same version of transition guidance, resulting in problems that were left largely to the contractors to resolve. Additionally, TMA's guidance lacked sufficient specificity for some requirements, such as the development of a referral management system that could interface with the referral systems used by the regions' military treatment facilities—a system that was also not tested prior to health care delivery, unlike other critical system interfaces. In addition, TMA lacked a process for holding the contractor accountable when transition requirements were delayed or not met. TMA officials explained that the regional contracts are performance-based, meaning that most—but not all—of the contract requirements include an expected outcome, but the manner in which that outcome is to be achieved is left to the contractor. As a result, TMA officials stated that, regardless of their concerns, it was difficult to hold UnitedHealthcare Military & Veterans Services (UnitedHealth) accountable until the requirement was actually missed. However, as GAO has previously reported, important attributes of a performance-based contract include features that allow for the evaluation of a contractor's performance. UnitedHealth's contract contained these features, and as a result, GAO believes that this performance-based contract structure did not diminish TMA's responsibility for providing sufficient oversight to ensure that the contractor was performing as required. TMA's inadequate guidance and insufficient oversight contributed to problems with health care delivery. UnitedHealth experienced difficulty in meeting some of its requirements early on, disrupting continuity of care for some beneficiaries and potentially resulting in unnecessary costs. For example, the lack of guidance on developing a referral management interface contributed to problems with the processing of specialty care referrals. Consequently, the requirement for beneficiaries to obtain a referral authorization for specialty care was temporarily waived—a move that the Army estimated could cost DOD over a million dollars as beneficiaries may have obtained more specialty care from civilian providers than from military treatment facilities. Further, insufficient oversight related to UnitedHealth's determination of the number of staff needed to man its call center contributed to a delayed resolution in meeting telephone response time requirements. As a result, it was not until the third month of health care delivery that UnitedHealth was able to meet its requirement to answer 90 percent of calls within 30 seconds. These and other problems ultimately resulted in TMA holding the contractor accountable through the use of corrective action requests and financial penalties. GAO recommends that DOD review and revise as necessary, its transition guidance to strengthen its oversight and ensure that future managed care support contractors have sufficient information to successfully complete transition requirements. DOD concurred or partially concurred with GAO's recommendations, but disagreed with some of GAO's findings. GAO maintains that the information presented is accurate, and recommendations valid as discussed in the report. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
The National Guard has two elements—the Army National Guard and the Air National Guard—that mostly consist of part-time forces responsible for both federal and state missions. The Army Reserve and Air Force Reserve (Reserves) also largely consist of part-time forces and are responsible for only federal missions. In addition to these part-time forces, both the National Guard and the Reserves use full-time personnel for duties that can include pay processing, personnel actions, preparing and monitoring training schedules, and other tasks that cannot be effectively executed through the use of part-time personnel. These full-time positions—which DOD calls full-time support—in general are more expensive than part-time personnel because they are paid as full-time employees and receive greater compensation and benefits such as retirement, health-care, and education. As table 1 shows, the Army National Guard is authorized approximately 358,000 soldiers, and the Army Reserve approximately 205,000 soldiers, which collectively constitute about 50 percent of the Army’s total authorized end strength. Likewise, the Air National Guard has approximately 105,000 military personnel, and the Air Force Reserve has approximately 71,000 military personnel, which collectively are about 35 percent of the Air Force’s authorized end strength. Each state’s National Guard forces have a dual role as both a state and federal force, while the Reserves are strictly a federal force. Although the National Guard has a dual role, the federal government provides funding for National Guard personnel when they are conducting training and other federal missions. In fiscal year 2013, federal funding for National Guard personnel totaled about $11.1 billion. In addition, the federal government provides about 90 percent of the funding for National Guard installation base-operation and maintenance costs. The National Guard’s dual state and federal role means that state Governors have command and control over National Guard units when they are not performing federal missions or other federal service. The National Guard and Reserves maintain a number of nondeployable headquarters that are responsible for managing and overseeing subordinate units. Of the 75 headquarters we identified, 57 reside within the National Guard. The National Guard’s headquarters include the National Guard Bureau, Army National Guard Directorate, Air National Guard Readiness Center, and the National Guard’s 54 Joint Force headquarters—which DOD refers to as Joint Force Headquarters-State— located in each state, the District of Columbia, Puerto Rico, the Virgin Islands, and Guam. In addition, appendixes III and IV provide detailed information on the locations, missions and responsibilities of these headquarters. Figure 1 shows the organizational structure of the National Guard. The National Guard Bureau is managed by the Chief of the National Guard Bureau—a 4-star General who was placed on the Joint Chiefs of Staff in 2011. Reporting to the Chief are two Lieutenant Generals who manage the Army National Guard Directorate and the Air National Guard Readiness Center, respectively. When not activated for federal missions, each state’s National Guard’s forces are commanded by the Adjutants General who also command the states’ Joint Force headquarters. The state Joint Force headquarters each consist of a Joint staff element, Army staff element, and Air staff element. Each of these elements is subject to different processes for reassessing and validating personnel requirements. These headquarters are responsible for coordinating the planning, training, and execution of National Guard homeland defense, civil support, and other domestic emergency missions within the United States. They also manage the National Guard’s readiness and prepare National Guard units for federal mobilization. The Army National Guard provides a balance of maneuver (combat), maneuver support, and maneuver sustainment capabilities. The Air National Guard provides a broad range of ready combat and combat-support capabilities such as tactical airlift and special operations. The Army Reserve and Air Force Reserve maintain 18 nondeployable headquarters that manage or oversee subordinate units. The Army Reserve provides maneuver support and maneuver sustainment capabilities as well as individual soldiers through the Individual Ready Reserve and Individual Mobilization Augmentation programs. We identified 13 nondeployable Army Reserve headquarters that include the Office of the Chief of the Army Reserve, U.S. Army Reserve Command, 4 regional support commands, and 7 functional commands. See appendixes V through VII for detailed information on the locations, missions, and responsibilities of these headquarters. The Office of the Chief of the Army Reserve and the U.S. Army Reserve Command are commanded by the same Lieutenant General who, by law, also sits on the Army Staff. Reporting to the Chief are 11 General officers who command support and functional commands, ensure the readiness of personnel, and maintain reserve installations within the United States, as shown in figure 2. The Air Force Reserve provides a broad range of combat and combat- support capabilities. We identified five nondeployable headquarters that include Headquarters, Air Force Reserve; Air Force Reserve Command; and the 4th, 10th, and 22nd Air Forces. See appendixes VIII and IX for detailed information on the locations, missions and responsibilities of these headquarters. Headquarters, Air Force Reserve, and Air Force Reserve Command are commanded by the same Lieutenant General who, by law, also sits on the Air Staff. Reporting to the Chief are three General officers who help to ensure the readiness of Air Force Reserve forces, as shown in figure 3. The Joint Chiefs of Staff, the Army, and the Air Force have processes to size and structure headquarters organizations. In general, these processes seek to provide the minimum number of personnel needed to accomplish missions and performance objectives. Additionally, Congress requires DOD to report personnel data for its Major DOD Headquarters Activities to support congressional oversight of these headquarters. These headquarters are listed in a DOD instruction. Prior to 2008, Congress placed a cap on the number of personnel that could be assigned to such headquarters; however, Congress removed this cap in 2008. Our analysis found that the overall number of funded military and civilian positions at the Army’s and Air Force’s reserve-component headquarters has steadily increased since fiscal year 2009, primarily due to DOD’s reassignment of workload from contractors to full-time federal civilians and increased mission requirements. These increases have come amid broader DOD efforts since 2010 to constrain or reduce headquarters. Between fiscal year 2009 and 2013, the total number of positions funded for the 75 reserve-component headquarters we identified grew from about 30,200 to about 31,900—an increase of nearly 6 percent, as shown in figure 4. Overall, the National Guard increased by about 1,350 funded positions (5 percent) and the Reserves by about 330 funded positions (7 percent). The National Guard’s growth was driven by increases in the Army National Guard Directorate, which grew by about 750 funded positions over the period (about 44 percent). The National Guard Bureau, Air National Guard Readiness Center, and 54 state Joint Force headquarters increased about 17 percent, 21 percent, and 1 percent, respectively. The number of funded positions also increased at the Army Reserve’s headquarters, which grew by about 15 percent, but decreased at the Air Force Reserve’s headquarters by about 4 percent over the same period. Of the nearly 1,700 positions DOD added to these headquarters, approximately 37 percent (more than 620 positions) were for full-time support positions. The percentage of funded positions that were allocated for full-time personnel varied by headquarters. For example, nearly 100 percent of the positions funded for the National Guard Bureau, Air National Guard Readiness Center, Army National Guard Directorate, U.S. Army Reserve Command, and Headquarters, Air Force Reserve, were for full-time support in fiscal year 2013. In contrast, approximately 45 percent of funded positions at the state Joint Force headquarters and 33 percent of funded positions at the Army Reserve’s functional commands were for full-time positions in fiscal year 2013. Appendixes III through IX provide more-detailed analysis of positions funded at the headquarters we identified. Our analysis shows that the National Guard has consistently allocated a greater percentage of its funded military and civilian positions to its headquarters than the other reserve components. Specifically, funded positions at the Army National Guard headquarters we identified equaled 6 percent of its estimated military and civilian funded positions in fiscal year 2013 (about 22,800 of its 389,350 estimated civilian and military funded positions). This contrasts with the other reserve components we examined, which have 2 to 3 percent of their military and civilian funded positions in nondeployable headquarters. National Guard officials said that the Army National Guard has allocated more funded positions to its headquarters for several reasons, including the National Guard’s need to prepare for and execute homeland defense and civil support missions, recruit its own personnel, and maintain a U.S. Property and Fiscal office in each state. National Guard and Reserve officials told us that there are two main drivers of growth since 2009 in funded positions at reserve-component headquarters—DOD’s 2010 effort to reduce its reliance on contractors by reassigning their workload to federal civilian positions, referred to as “in- sourcing,” and expanded mission requirements. In April 2009, the Secretary of Defense announced his intention to reduce DOD’s reliance on contractors and increase the number of civilian positions. Reserve component officials said that DOD’s in-sourcing effort was a significant driver of growth in civilian positions. For example, Army National Guard officials said that DOD’s in-sourcing effort contributed to an increase in over 700 civilian positions at the Army National Guard Directorate. Likewise, Air National Guard officials said that DOD’s in-sourcing effort caused the Air National Guard Readiness Center to add 180 funded positions. The other driver of growth in funded positions identified by reserve- component officials was expanded mission requirements. Army Reserve officials noted that the 7th Civil Support Command’s increase of 71 funded positions from fiscal year 2009 to fiscal year 2011 was the result of the Army closing a second Army activity and adding missions at the command. In a second instance, Army Reserve officials attributed growth at the Office of the Chief of the Army Reserve to the addition of new functions such as the Employer Partnership Office. National Guard officials attributed the increase of over 250 funded positions at the state Joint Force headquarters to mission growth resulting from the establishment of civil-support capabilities such as implementation of the Homeland Response Forces beginning in fiscal year 2011. National Guard officials also said that the National Guard Bureau may grow in the future as a result of the Chief of the National Guard Bureau’s placement on the Joint Chiefs of Staff in 2011. Although DOD has processes in place that generally seek to provide the minimum number of personnel needed to accomplish missions and performance objectives, these processes have not been consistently applied at 68 of the 75 headquarters we identified. For instance, the National Guard Bureau has been determining its own personnel requirements with no external review and validation since 2010 and has been growing steadily since 2009. In addition, DOD has not included data on the National Guard Bureau in its required Defense Manpower Requirements Report to Congress. In fiscal year 2013, the National Guard had about 21,900 funded positions at its 54 state Joint Force headquarters, but the processes for determining personnel requirements for these headquarters are fragmented among the National Guard Bureau’s Joint staff, the Army National Guard, and the Air National Guard. Finally, the Army and Air Force have not determined personnel requirements or fully reassessed within required time frames the personnel requirements at 13 of the 20 headquarters. Consequently, DOD lacks assurance that the Army’s and Air Force’s reserve-component headquarters are being staffed with the minimum personnel needed to perform their assigned missions. Department of Defense Directive 1100.4, Guidance for Manpower Management (Feb. 12, 2005). Chairman of the Joint Chiefs of Staff, Instruction 1001.01a (Oct. 1, 2010). Department of the Army, Manpower Management, Regulation 570-4 (Feb. 8, 2006). GAO, Human Capital: A Model of Strategic Human Capital, GAO-02-373SP (Washington, D.C.: Mar. 15, 2002). applicable to reserve-component headquarters organizations are discussed in table 2. Under an informal agreement with the Joint Staff, the National Guard Bureau has been determining its own personnel requirements without validation by a higher-level command or external organization. Since 2010, the number of funded positions at the bureau increased by 17 percent and could grow further, according to National Guard Bureau officials. The DOD directive governing the National Guard Bureau provides that the National Guard Bureau’s personnel requirements should be managed in the same manner as other joint activities to the greatest extent possible. Joint activities are generally subject to the Joint Staff’s Joint Manpower and Personnel Program. According to officials, this program includes review, approval, and documentation of a headquarters’ personnel requirements by an external organization. According to Joint Staff and National Guard officials, in 2010, the Joint Staff and the National Guard Bureau reached an informal agreement that the bureau would maintain control for determining and validating its own personnel requirements. However, this agreement is inconsistent with the Joint Staff’s regular personnel requirements reassessment process and differs from the military-service practices. National Guard Bureau and Joint Staff officials gave three reasons for this agreement. First, Joint Staff officials said that this agreement was reached because the bureau wanted to maintain control over its personnel requirements. Second, the National Guard Bureau is too dissimilar from other joint activities—such as the combatant commands—for which the Joint Staff is responsible. Third, the Joint Staff lacks the resources to assume responsibility for validating the bureau’s personnel requirements. Recognizing that recent developments warrant a re-evaluation of the National Guard Bureau’s personnel requirements, the National Guard Bureau started two efforts intended to enable it to define its personnel requirements. The National Guard Bureau has started an initiative called “Project Muster” to realign its headquarters processes to support the new roles and responsibilities of the Chief and Vice Chief of the National Guard Bureau and determine the personnel requirements needed to execute these responsibilities following the Chief’s placement on the Joint Chiefs of Staff. Officials responsible for the study said that it may show that the bureau will need to grow beyond its current size. In part because one of Project Muster’s baseline assumptions is that the bureau’s current manpower will be retained to meet preexisting requirements. In July 2013, while our review was underway, the Vice Chief for the National Guard Bureau asked that the U.S. Army Manpower Analysis Agency—with assistance from the Air Force Personnel Center—conduct an advisory analysis of positions at the National Guard Bureau to include its joint staff and the Office of the Chief of the National Guard Bureau. According to the U.S. Army Manpower Analysis Agency official responsible for the analysis, an advisory analysis entails a strategic look at a headquarters’ organizational structure. It is different from a personnel requirements study, which would assess individual workload, validate missions, and map processes. The Vice Chief’s request for an analysis was accepted by the U.S. Army Manpower Analysis Agency in August 2013 and is currently scheduled for calendar year 2014. Although both of these efforts are significant attempts to determine the bureau’s personnel requirements, neither of them will establish a process to periodically validate and reassess those requirements. Additionally, National Guard Bureau officials said that the Chief of the National Guard Bureau will continue to be the final authority on what requirements are approved for the bureau. By creating a system whereby an external organization is not independently assessing the National Guard Bureau’s personnel requirements the bureau has removed an independent check that could help ensure that the bureau is staffed with the appropriate number of personnel needed to execute its assigned missions and workload. . Our analysis of DOD’s reserve-component headquarters found that DOD’s list of its Major DOD Headquarters Activities did not include the National Guard Bureau, even though the bureau meets the headquarters criteria specified in DOD’s instruction and is now commanded by a 4-star General who sits on the Joint Chiefs of Staff. DOD uses an instruction issued by the Office of the Secretary of Defense’s Director for Administration and Management that establishes the definitions and criteria that should be used to identify DOD’s Major DOD Headquarters Activities. This instruction also contains an enclosure that lists DOD’s Major DOD Headquarters Activities and this list is the basis for reporting required personnel data to Congress. In this instruction, DOD defines major DOD headquarters activities as those headquarters (and the direct support integral to their operation) whose primary mission is to manage or command the programs and operations of DOD, the DOD components, and their major military units, organizations, or agencies. In practice, DOD includes those headquarters that are commanded by a General or Admiral, or Lieutenant General or Vice Admiral or their equivalents. The National Guard Bureau meets both these criteria. In 2012, we reported that some other organizations that fit the definition of Major DOD Headquarters Activities were not included in DOD’s instruction. We recommended at that time that DOD revise its instruction to include all of its Major DOD Headquarters Activities. Our review found that DOD has not updated its list to include the National Guard Bureau or the headquarters we identified in our 2012 report. DOD officials said that the National Guard Bureau was not included in its list of major DOD headquarters activities in the past because the National Guard Bureau had previously been a subactivity of the Army and Air Force; the National Guard Bureau has a National Guard mission that relates to the states, which is unusual for DOD’s headquarters; and officials did not focus on the National Guard Bureau being a headquarters that drives the department’s active-duty or Reserve missions. Officials from the Office of the Director of Administration and Management and the Assistant Secretary of Defense for Reserve Affairs agreed that the National Guard Bureau (including both the Office of the Chief and the Joint staff element) should be considered a major DOD headquarters activity and listed in DOD’s instruction; however, at the time of our review these officials did not have a schedule for further updating the instruction or the list of major DOD headquarters activities. Having complete information about such headquarters activities is important for oversight because Congress has established reporting requirements that it can use to oversee the size of specific kinds of DOD’s headquarters, such as the National Guard Bureau. DOD is required to provide Congress with an annual Defense Manpower Requirements Report on a variety of personnel issues, including the number of military and civilian personnel assigned to major DOD headquarters activities in the previous year, and estimates of such numbers for the current and subsequent year. Prior to 2008, DOD was subject to a statutory cap on the total number of personnel that could be assigned to Major DOD Headquarters Activities. The National Defense Authorization Act for Fiscal Year 2008 repealed this cap, but required DOD to continue to report certain information about the size and composition of the staff assigned to Major DOD Headquarters Activities. When fulfilling its reporting requirement, DOD uses the definitions and criteria in its instruction to identify DOD’s Major DOD Headquarters Activities and lists these headquarters in an enclosure. This list is the basis for reporting required personnel data to Congress, and because the bureau was not included in DOD’s list, its personnel data were not reported to Congress. Unless DOD revises its instruction to include the National Guard Bureau in its list of major DOD headquarters activities and reports the bureau’s personnel requirements data, Congress will continue to have limited information available to support oversight of this expanding headquarters activity. The National Guard has not fully reassessed the personnel requirements of the 54 state Joint Force headquarters or their predecessor organizations—which collectively contain nearly 21,900 funded positions—since the 1980s despite changes in their organization and assigned missions. Our prior work has shown that cost savings may be achieved by consolidating and centralizing overlapping functions and eliminating unnecessary overlap and duplication. The state Joint Force headquarters consist of a Joint staff element, Army staff element, and Air staff element each of which is subject to different processes for reassessing and validating personnel requirements. Additionally, these headquarters have personnel that are assigned as the personal staff and special staff of the Adjutant General. The National Guard Bureau, Army National Guard Directorate, and Air National Guard Readiness Center share responsibility for overseeing personnel requirements at the state Joint Force headquarters and there is not a process in place that enables the holistic assessment of personnel requirements at these headquarters. In the absence of a process that provides a holistic assessment of the state Joint Force Headquarters, National Guard officials noted that they have begun two efforts that are intended to assess personnel requirements at the state Joint Force headquarters: (1) a National Guard Bureau study evaluating personnel requirements for the Joint staff element at these headquarters and (2) an Army National Guard Directorate evaluation of functions—some of which include both Army National Guard and Air National Guard personnel—within these headquarters. We found that these efforts are limited and do not constitute a process that holistically assesses these headquarters’ personnel requirements. Without implementing a process to holistically assess personnel requirements for all three staff elements at these headquarters’, DOD lacks assurance that they are sized and structured to be efficient. National Guard officials said that they have not reassessed the personnel requirements for the National Guard’s 54 state Joint Force headquarters since the 1980s, even though there have been changes in the organization of these headquarters, including the missions assigned to them. The Army and the Air Force determined the personnel requirements for the Army and Air staff elements at the state Joint Force headquarters’ predecessor headquarters in 1982 on the basis of the number of personnel authorized for the state or territory as well as its population. The Army staff and Air staff elements are filled with Army National Guard and Air National Guard personnel respectively. The Joint staff element and the Adjutant General’s staff can be comprised of personnel from the Army National Guard, the Air National Guard, or both. Responsibility for overseeing personnel requirements of these staff elements is shared by the National Guard Bureau, Army National Guard Directorate, and Air National Guard Readiness Center, which have separate processes for determining, validating, and reassessing requirements for their respective staff elements, as shown in table 3. We have previously found that government can reduce costs and improve operations through the elimination of unnecessary fragmentation, overlap, and duplication. Additionally, our 2012 report examining DOD’s headquarters and support organizations found that there may be additional opportunities for DOD to achieve cost savings by consolidating and centralizing overlapping functions and services. In our 2012 report, we recommended that DOD continue to examine opportunities to centralize administrative and command support services, functions, or programs. National Guard officials noted that they have two ongoing efforts that are intended to assess personnel requirements at the state Joint Force headquarters; however, we found that these efforts were limited and were not based on a process that holistically assessed personnel requirements for all three staff elements at these headquarters. First, as previously discussed, the National Guard Bureau has begun a two-phased study reassessing the personnel requirements for these headquarters’ Joint staff element; however, National Guard Bureau officials stated that the study would not examine the Army staff element or Air staff element portion of the state Joint Force headquarters. National Guard Bureau officials determined that on average each Joint staff element would need 30 personnel to perform core functions during the first phase of the study, which was completed January 2012. However, National Guard officials noted that the ultimate size and structure of the joint staff element will vary by state and should correlate with the state’s assigned missions and personnel. The second phase of the study is intended to develop a joint manpower document that would document the state headquarters’ ultimate size and structure. National Guard Bureau officials expect to complete this phase by fiscal year 2015. Second, in addition to the National Guard Bureau’s study, Army National Guard Directorate officials said that the absence of a holistic assessment of the state Joint Force headquarters contributed to their completing assessments of 17 functions, some of which are performed at these headquarters and are staffed with both Army National Guard and Air National Guard personnel. Army National Guard officials identified five offices within the Adjutant General’s personal staff that typically have both Army National Guard and Air National Guard personnel: the Chaplain’s Office, the Human Resources Office, the Office of the Judge Advocate General, the Public Affairs Office, and the Office of the Inspector General. Army National Guard officials said they are not required to collaborate with the Air National Guard when determining personnel requirements for these functions—although individual analysts may choose to do so at their discretion—and assessments only examine Army personnel requirements. Army National Guard officials also said that a recently completed study of the Chaplain’s office and an ongoing study of the Human Resources office had minimal collaboration with the Air National Guard. Further, Army National Guard officials noted that even if the Air National Guard were to be more heavily involved in the Army National Guard’s studies, there is not a process in place to estimate the workload for functions that have both Air National Guard and Army National Guard personnel. Three different organizations are responsible for assessing personnel requirements at the state Joint Force headquarters, and there is no process in place that provides a holistic assessment. As a result, the state Joint Force headquarters may be missing opportunities to consolidate or centralize overlapping functions and services and may be allowing personnel gaps or overlaps to develop or persist. For example, our review of the personnel requirements documents for the 54 state Joint Force headquarters shows that a number of similar positions are approved for both the Army staff element and the Air staff element within the same state. In one state’s Joint Force headquarters, the Army staff element allocated positions for five Judge Advocate Generals, two Public Affairs officials, and one Chaplain, while the Air Staff element allocated positions for two Judge Advocate Generals, one Public Affairs official, and two Chaplains. In a second state Joint Force headquarters, we found that the Army staff element allocated positions for three Judge Advocate Generals, three Public Affairs officials, and two Chaplains, while the Air staff element allocated positions for one Judge Advocate General, two Public Affairs officials, and one Chaplain. However, it is not clear whether these positions are all justified because the National Guard Bureau has not completed a holistic assessment of all the staff elements at these headquarters. While the National Guard Bureau’s and the Army National Guard’s efforts are important steps in determining personnel requirements at the state Joint Force headquarters, they are limited because the National Guard has not established a process for holistically assessing all three elements at these headquarters. Further, the Army National Guard and Air National Guard are not required to collaborate when determining personnel requirements, do not use a formal process to estimate workload for joint functions in their entirety, and do not have a means for ensuring these functions are staffed to be efficient. As a result, these studies are unlikely to ensure that the state Joint Force headquarters avoid gaps or overlaps in positions and have the minimum personnel required to perform their assigned missions. The Army and Air Force have not consistently implemented processes for ensuring their reserve-component headquarters have the minimum number of personnel, thereby hindering their ability to determine whether these headquarters have been sized to be efficient. Our analysis shows that 13 of the 20 Army and Air Force reserve-component headquarters have not been fully reassessed. Our analysis shows that 5 of the 7 organizations that have been reassessed shrank from fiscal year 2009 through fiscal year 2013. In contrast, several of the headquarters that showed significant growth were among those that have not been reassessed including the Office of the Chief of the Army Reserve and Air National Guard Readiness Center. As we previously noted, our work in the area of strategic human-capital management has shown that reassessing resource requirements—including personnel—enables organizations to achieve their missions and match resources to their needs. Table 4 shows the status of personnel requirement assessments at the Army and Air Force reserve-component headquarters we identified. According to Army Manpower Analysis Agency officials, most Army reserve-component headquarters have not had their personnel requirements fully reassessed because the U.S. Army Manpower Analysis Agency has a backlog of reassessments needing review and approval. The U.S. Army Manpower Analysis Agency validates the headquarters’ reassessment of their requirements. The Army’s manpower-management regulation requires that Army headquarters be reassessed not less than every 5 years and optimally every 3 years. Army officials said that a reassessment should generally include a review of the entire headquarters; however, there are some instances where commanders conduct a partial assessment—for example of a single function or type of position. Army officials said that the manpower analysis agency has prioritized its review and approval of personnel requirements reassessments and worked with the Army Reserve to establish a schedule through fiscal year 2016 for reassessing some headquarters; however, we found that several of the headquarters included in our review that had not recently been reassessed were not included in this schedule. Once the U.S. Army Manpower Analysis Agency validates an assessment, it is submitted to the Office of the Army Operations and Plans for approval. If an Army headquarters does not have a validated personnel requirements document, its personnel requirements could be removed from its personnel requirements document during periodic force-structure reviews and excluded from the Army’s annual budget request. Air Force officials told us that one Air Force reserve-component headquarters we identified did not have its personnel-requirements assessed because such a periodic reassessment is not currently required in the Air Force’s guidance. Specifically, the guidance only requires headquarters embedded in its operational wings be reassessed at least every 2 years. In contrast, reassessments for the Air Force’s reserve- component headquarters are done on an ad hoc basis. In 2011 and 2012, the Air Force Reserve reassessed five of its headquarters as part of its efforts to streamline its operations, not due to any requirement in guidance. Following this reassessment, the Air Force Reserve shrank the three numbered Air Force headquarters by more than one-third, and Headquarters, Air Force Reserve, by more than 10 percent. Another headquarters that was reassessed, the Air Force Reserve Command, grew in size by about 7 percent. According to Air Force officials, changes in headquarters personnel requirements are typically driven by changes in force structure, made in response to efficiency initiatives, or initiated by the headquarters’ commanding officer. Air Force officials said that it would be beneficial to apply a reassessment standard to all of the Air Force’s reserve-component headquarters, but the Air Force has not taken steps to initiate such reviews or revise the guidance to require them in the future. Unless the Army and Air Force periodically reassess their reserve- component headquarters, they will lack assurance that these headquarters are sized with the minimal staff required and structured appropriately. Amid DOD’s recent efforts to trim budgets by finding efficiencies and reducing overhead, some reserve-component headquarters have grown. While some of this growth is due to reducing reliance on contractors and expanding missions, DOD does not know whether its reserve-component headquarters are sized with the appropriate personnel needed to accomplish their missions today and in the future. Human-capital practices suggest that the size and structure of organizations need to be reassessed periodically. In total, 68 of 75 the reserve-component headquarters we reviewed have not been recently reassessed. Until these organizations are assessed, the Army and Air Force will lack assurance that they are sized and structured appropriately. Additionally, until DOD externally validates the National Guard Bureau’s personnel requirements, holistically assesses personnel requirements for its 54 state Joint Force headquarters, and schedules reassessments for reserve component headquarters it will lack assurance that these headquarters are appropriately sized to accomplish their assigned mission. The National Guard Bureau—whose Chief was recently placed on the Joint Chiefs of Staff—has grown about 17 percent since 2010 and is anticipating further growth related to its elevated role. However, the oversight process currently in place allows the National Guard Bureau to determine its personnel requirements without validation by a higher-level command or external organization. Furthermore, reports used to support congressional oversight have not included information on the bureau. Unless the bureau’s personnel requirements are validated by an external organization and related information is included in DOD’s report to Congress, both DOD and Congress will lack assurance that the bureau’s size and structure is appropriate for its mission. For the 54 state Joint Force headquarters, fragmented review processes across the National Guard Bureau, Army National Guard, and Air National Guard have created an environment where similar and possibly overlapping positions have been approved for the three interconnected staff elements in each state. Their requirements have not been reassessed since the 1980s, and ongoing studies by the National Guard are too limited in scope to provide a comprehensive reassessment. As a result, no organization has examined the multiple staff elements at these headquarters for potential personnel gaps or overlaps that could hinder their ability to perform their missions or could waste resources. Finally, for those headquarters overseen by the Army and Air Force— specifically 13 Army Reserve headquarters, 5 Air Force Reserve headquarters, the Army National Guard Directorate, and the Air National Guard Readiness Center—DOD has processes in place that if consistently implemented could help ensure that these headquarters are sized and structured appropriately. The Army and Air Force have not reassessed 13 of these 20 headquarters, and of the seven headquarters that were recently reassessed five shrank, some markedly. Until the Army and the Air Force reassess the remaining headquarters that they oversee DOD will lack assurance that these headquarters are sized and structured appropriately. To facilitate oversight of the size of DOD’s reserve-component headquarters and ensure that they have the minimum personnel needed to complete their assigned missions, we are making the following six recommendations. To independently validate the personnel requirements for the National Guard Bureau, we recommend that the Secretary of Defense direct the Chief of the National Guard Bureau to implement the Joint Chief of Staff’s Joint Manpower and Personnel Process and have its personnel requirements periodically validated by a DOD organization external to the National Guard Bureau. To provide Congress the data it requires to oversee DOD’s Major DOD Headquarters Activities, we recommend that the Secretary of Defense include the National Guard Bureau among its list of Major DOD Headquarters Activities and report personnel associated with the National Guard Bureau in the Defense Manpower Requirements Report. To minimize the potential for gaps or overlaps at the National Guard’s state Joint Force headquarters, we recommend that the Secretary of Defense direct the Chief of the National Guard Bureau to: develop a process for the Army National Guard and Air National Guard to collaborate when determining personnel requirements for joint functions at these headquarters and assess and validate all personnel requirements at the state Joint Force headquarters to include the Army staff element and Air staff element. To ensure that Army Reserve headquarters and the Army National Guard Directorate are properly sized to meet their assigned missions, we recommend that the Secretary of Defense direct the Secretary of the Army to ensure that these headquarters are reassessed and have their personnel requirements validated within required time frames by including them in the U.S. Army Manpower Analysis Agency’s schedule for reassessment and validation. To ensure that Air Force Reserve headquarters and the Air National Guard Readiness Center are properly sized to meet their assigned missions, we recommend that the Secretary of Defense direct the Secretary of the Air Force to modify the Air Force’s guidance to require that these headquarters have their personnel requirements reassessed on a recurring basis, and establish and implement a schedule for reassessing personnel requirements for its reserve-component headquarters. We provided a draft of this report to the Department of Defense for review and comment. In response, we received written comments which are reprinted in appendix XI. DOD concurred with three of our recommendations and partially concurred with the remaining three recommendations. DOD also provided technical comments which we incorporated into the report as appropriate. DOD partially concurred with our first recommendation that the Secretary of Defense require the Chief of the National Guard Bureau have its personnel requirements periodically validated by a DOD organization external to the National Guard Bureau. DOD stated that while the department agrees that external validation is appropriate, it is DOD’s view that the appropriate means for obtaining this external validation is by establishing a vetting process that includes representatives from the Army, Air Force, and the National Guard Bureau. DOD therefore suggested that we modify our recommendation to reflect this. We believe DOD retains the flexibility to develop a vetting process that includes representatives from the organizations identified above so long as this process follows the guidelines described in DOD guidance and requirements are periodically validated by an organization external to the bureau. As a result we did not modify our recommendation as DOD suggested. DOD concurred with our recommendation that the Secretary of Defense include the National Guard Bureau among its list of Major DOD Headquarters Activities and report personnel associated with the National Guard Bureau in its Defense Manpower Requirements Report. In its response to our recommendations DOD provided several technical comments that we addressed in the body of our report. The department also partially concurred with our recommendations that the Chief, National Guard Bureau modify the scope of its ongoing manpower study to reassess personnel requirements at the state Joint Force headquarters and validate these requirements including those for the Army and Air staff elements. In DOD’s response, the department detailed ongoing efforts to validate personnel requirements and stated that revising the scope of the National Guard Bureau’s study would eliminate the ability of the Army National Guard and Air National Guard to identify their own personnel requirements. The department further stated that when shared functions are being studied, coordination should be increased between the staff elements to ensure that the correct workload is captured, requirements are not duplicated, and process efficiencies are maximized. However, we found minimal coordination on studies examining the five functions that the National Guard identified as being staffed with both Army National Guard and Air National Guard personnel. For example, Army National Guard officials told us that a study of the Chaplain’s office was completed with minimal Air National Guard participation and only captures the Army National Guard’s personnel requirements. Similarly, Army National Guard officials said that the Air National Guard has been minimally involved in an ongoing evaluation of the Human Resources Office. We agree that closer coordination is warranted and have revised our recommendation to emphasize this while retaining the recommendation that the National Guard Bureau review and validate all personnel requirements at the state Joint Force headquarters including the Army staff element and Air staff element. DOD also concurred with our recommendation that the Secretary of Defense direct the Secretary of the Army to ensure that Army Reserve’s headquarters and the Army National Guard Directorate have their personnel requirements validated within required time frames by including them in the U.S. Army Manpower Analysis Agency’s schedule for reassessment and validation. In its response to our recommendations, DOD noted it has several ongoing efforts that are intended to assess Army Reserve full-time support requirements, and institutional and operational headquarters. DOD also noted that the draft report was not specific as to whether this recommendation is intended to be applicable to the Army National Guard. We clarified our recommendation in response to DOD’s comments to specify that the Army Reserve’s headquarters and Army National Guard Directorate be included in the U.S. Army Manpower Analysis Agency’s schedule for reassessment and validation. DOD agreed with our last recommendation that the Secretary of Defense direct the Secretary of the Air Force to modify the Air Force’s guidance to require that these headquarters have their personnel requirements reassessed on a recurring basis, and establish and implement a schedule for reassessing personnel requirements for its reserve-component headquarters. In its response to our recommendations, DOD noted that the Air Force agreed to modify its guidance to require that reserve component headquarters have their personnel requirements reassessed on a recurring basis. Additionally, the Air Force intends to establish and implement a schedule for reassessing personnel requirements at these headquarters. If implemented, these steps would satisfy the intent of our recommendation. 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 Defense; the Secretary of the Army; the Secretary of the Air Force; the Joint Chiefs of Staff; the Chief, National Guard Bureau; the Chief, Army Reserve; and the Chief, Air Force Reserve. This report is also available at no charge on the GAO website at http://www.gao.gov. Should you or your staffs have any questions about this report, please contact John Pendleton 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 contributions to this report are listed in appendix XII. To conduct this work and address our objectives, we reviewed data on funded positions at the Army’s and Air Force’s reserve-component headquarters from fiscal year 2009 through fiscal year 2013. We selected these years because senior officials stated that the current reserve- component headquarters structure has remained relatively constant over this period of time. We did not review contractor positions as part of this review because officials told us that they were unable to determine the number of contractor positions at the reserve-component headquarters we identified. On the basis of a review of Department of Defense (DOD) and service guidance, organization charts, and discussions with officials, we focused our review on 75 headquarters within the Army National Guard, Air National Guard, Army Reserve, and Air Force Reserve. We limited our review to nondeployable headquarters that perform many of the functions DOD identified as being characteristics of management headquarters. For the Army, these headquarters had their personnel requirements documented on tables of distribution and allowance, and we collaborated with Army National Guard and Army Reserve officials when developing our list. For the Air Force, we interviewed Air National Guard and Air Force Reserve officials to identify headquarters units that met our criteria. We then provided DOD, Joint Staff, National Guard, and Reserve officials with an opportunity to comment on our final list of 75 headquarters and these officials agreed the headquarters we identified met these criteria, but noted that they were not all Major DOD Headquarters Activities. For all of the headquarters we identified, we limited our assessment of personnel requirements to positions that: were assigned to the headquarters, included military personnel or civilians, were funded by the federal government, and did not complete work in support of more than one component (for example, recruiting positions were excluded because the Army Reserve and the active-duty Army share recruiting resources). To ensure the reliability of the personnel data, we interviewed knowledgeable officials about the data and internal controls on the systems that contain them. We also analyzed the data in order to identify outliers or invalid data and removed these data from our dataset where appropriate. Finally, we shared our analysis with knowledgeable agency officials and asked them to verify its accuracy. On the basis of these steps we determined that the data were sufficiently reliable for the purposes of this audit. To evaluate the extent to which DOD established and implemented processes to efficiently size its reserve-component headquarters and provide information for congressional oversight we took the following steps: 1. We evaluated the Joint Staff’s implementation of its process for assessing personnel requirements at the National Guard Bureau by reviewing relevant guidance and documentation and interviewing officials from the Joint Staff and the National Guard Bureau. Where available, we analyzed manpower assessments and manpower documents for the National Guard Bureau from fiscal year 2009 through fiscal year 2013 and evaluated whether they met standards. We also compared the steps taken to assess the National Guard Bureau’s personnel requirements with Army and Air Force guidance and practices. 2. We assessed DOD’s efforts to identify Army and Air Force reserve component major DOD headquarters activities and report personnel data for these headquarters by reviewing DOD guidance on major DOD headquarters activities; reviewing documentation and interviewing officials to identify reserve-component headquarters with those characteristics; and comparing identified headquarters’ functions to characteristics of Major DOD Headquarters Activities identified in DOD’s guidance. We assessed section 194 of Title 10 of the United States Code to determine whether the statutory cap identified in that section applies to the headquarters we identified. We also reviewed the Defense Manpower Requirements Report for fiscal year 2012 and fiscal year 2013 to determine which headquarters were included in reports to Congress. Where we identified discrepancies, we spoke with DOD and service officials to identify the cause of these discrepancies. Finally, we assessed the National Guard Bureau’s ongoing study (Project Muster) seeking to establish baseline requirements for the National Guard Bureau by collecting relevant documentation and interviewing knowledgeable staff from the National Guard Bureau. 3. We evaluated the National Guard Bureau’s implementation of its process for assessing personnel requirements at the 54 state Joint Force headquarters by reviewing relevant guidance and documentation and interviewing officials from the Joint Staff and the National Guard Bureau. We analyzed manpower assessments and manpower documents from fiscal year 2009 through fiscal year 2013 for the state Joint Force headquarters and evaluated whether they met standards established in guidance. We also conducted site visits to the state Joint Force headquarters for Delaware, Georgia, New Jersey, and Texas to determine whether manpower documents and assessments accurately documented these headquarters’ requirements given assigned personnel, missions, and workload. We selected these headquarters to obtain perspectives from state officials from states of varying size and with different numbers of National Guard, Army Reserve, and Air Force Reserve personnel. Finally, we assessed the National Guard Bureau’s ongoing state Joint Force headquarters requirements study seeking to establish baseline personnel requirements for these headquarters’ Joint staff element by collecting relevant documentation and interviewing knowledgeable staff from the National Guard Bureau. We evaluated the Army’s and Air Force’s implementation of their processes for assessing personnel requirements at service-specific headquarters by reviewing relevant guidance and documentation and interviewing officials from numerous Army and Air Force offices including the U.S. Army Manpower Analysis Agency, the Air Force Personnel Center, and Air Force Reserve Command. We then analyzed manpower assessments for each of the 20 service-specific headquarters we identified for fiscal year 2009 through fiscal year 2013 to determine (1) when the headquarters was most recently reassessed, (2) the scope of the assessment, and (3) whether they met requirements established in guidance for recurring reassessment and validation of headquarters’ personnel requirements. One analyst analyzed the assessments and a second analyst reviewed the analyst’s work. Any disagreements in the determination were resolved through discussion. We also visited the headquarters listed in table 5 to determine whether manpower documents and assessments accurately documented these headquarters’ personnel requirements given assigned personnel, missions, and workload. To discuss whether DOD has studied merging the Army’s and Air Force’s reserve components to improve efficiency, we conducted a literature search, analyzed past studies, reviewed our prior work, and reviewed white papers by DOD and subject-matter experts examining mergers and the factors organizations use when evaluating the merits of a merger. We reviewed statutes as well as DOD and military-service guidance describing the organization and function of the Army's and Air Force’s reserve-component headquarters to understand their missions and how they are organized. To obtain perspectives on the implications of a merger, we interviewed officials from numerous offices including the Office of the Secretary of Defense; the National Guard Bureau; the Department of the Army; the Office of the Chief, Army Reserve; the Department of the Air Force; and the Office of the Chief, Air Force Reserve. We also reviewed documentation and met with officials from four state Joint Force headquarters and select headquarters in the Army Reserve and Air Force Reserve. We interviewed officials and, where appropriate, obtained documentation at the organizations listed in table 6. We conducted this performance audit from July 2012 to November 2013, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Department of Defense (DOD), special commissions, and some nondefense organizations have studied the concept of merging the Air Force’s and the Army’s reserve components. DOD considered merging some reserve components after World War II, during the Vietnam era, and during the wars in Afghanistan and Iraq. In addition, the Congressional Budget Office examined the costs and benefits of merging multiple components. Additionally, the 2005 Base Closure and Realignment Commission recommended that National Guard and Reserve units share facilities. Finally, DOD has taken steps, short of merging its reserve components, to address concerns about access to the federal reserves to assist the National Guard in domestic duties such as responding to floods or hurricanes. Department of Defense, Committee on Civilian Components, Reserve Forces for National Security (June 1948). its report, which criticized the Secretary’s plan for its negative effect on morale, and because it did not address issues related to reserve- component recruiting, retention, and equipment. The report also noted opposition from Army and reserve-component advisory boards. The Secretary of Defense did not implement the proposed approach. The Secretary’s second plan proposed merging all of the Army’s Guard and Reserve units under the management of the National Guard at the federal level. Under this plan, the Army Reserve’s units would have been eliminated and Army Reservists would be organized, trained, and equipped as individuals and not as units. Like the Secretary’s first plan, this proposal was not implemented due to congressional opposition. Commission on the National Guard and Reserves. While large numbers of reservists were being deployed to Afghanistan, Iraq, and elsewhere, the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 created a 13-member, independent Commission on the National Guard and Reserves. Congress chartered the commission to assess a variety of issues related to the reserve components of the U.S. military and to make recommendations on those issues. The commission’s stated mission was to ensure that the National Guard and reserves are organized, trained, equipped, compensated, and supported to best meet the needs of U.S. national security. The commission issued three reports between 2006 and 2008 studying, among other things, the roles and missions of the National Guard and other reserve components. The commission’s third report focused on the organizational and structural changes required to support an operational reserve force. A former staff member for the commission stated that the commission studied the feasibility and advisability of merging the National Guard with the Army Reserve and the Air Force Reserve, but it ultimately concluded that doing so would not better enable the reserve component to execute its missions, and the process would be extremely difficult— both politically and logistically—as well as costly to implement. The commission ultimately focused its report on (1) changes that could be made to remove cultural barriers that hamper the effective use of the reserve components, (2) changes to the categories used to manage the reserve components, (3) changes to the Office of the Secretary of Defense, and (4) changes within the reserve components and their headquarters. The commission made several recommendations across these areas; however, it did not recommend significant changes to the structure. GAO, Federal Land Management: Observations on a Possible Move of the Forest Service into the Department of the Interior, GAO-09-223 (Washington, D.C.: Feb. 11, 2009). dual state and federal status of the current Army National Guard. In its report, the Congressional Budget Office noted that laws and court rulings had removed many impediments to the President’s power to call up National Guard units, potentially making the federal reserves redundant. In addition, according to the Congressional Budget Office, many capabilities currently in the Army Reserve—such as helicopter transport units and medical units—might be useful to Governors during domestic crises. At the time, the Congressional Budget Office estimated that by eliminating duplicative administrative organizations and eliminating approximately 43,000 personnel from the Reserve, the Army could save over $500 million annually. It is unclear, however, whether similar cost savings could still be realized. 2005 Base Closure and Realignment Commission. For the 2005 Base Realignment and Closure round, the Base Closure and Realignment Commission approved 44 recommendations that pertain to the reserve components which primarily directed the Army National Guard and the Army Reserve to create 125 Armed Forces Reserve Centers capable of accommodating both National Guard and Reserve units. According to DOD, these Armed Forces Reserve Centers should significantly reduce operating costs; however, we reported in 2013 that DOD officials estimated the total cost to implement the 44 recommendations was about $3 billion, and it is unclear whether the consolidations will result in cost savings over the long term. In June 1993, following Hurricane Andrew, we noted that a large percentage of the type of DOD capabilities that are needed in disasters— such as engineers, military police, supply and transportation personnel, and chaplains—reside in DOD’s reserve components, particularly in the Army Reserve. At that time, and again in May 2006, in our report on the military’s response to Hurricane Katrina, we reported that the Reservists who responded to the disaster—all of whom were volunteers—constituted a relatively small portion of the response when compared to National Guard and active component forces because, while states were able to mobilize National Guard forces, no similar provisions existed to specifically mobilize Reserve forces for disaster response. Since Hurricane Katrina, two key steps have been taken to address DOD’s response to domestic incidents: (1) implementation of a command construct whereby a single military officer exercises authority over both federal military forces and state National Guard forces; and (2) implementation of new mobilization authorities. Dual-Status Commanders. The National Defense Authorization Act for Fiscal Year 2012 provided that a dual-status commander—military officers with authority over both federal military forces and state National Guard forces—should be the usual and customary command and control arrangement in situations when the armed forces and National Guard are employed simultaneously in support of civil authorities, including missions involving major disasters and emergencies. When an officer is appointed as a dual-status commander, he or she serves on federal active duty, sometimes referred to as Title 10 status, as well as on duty in or with the National Guard of a state, sometimes referred to as Title 32 status. Dual- status commanders exercise command on behalf of both the federal and the state chains of command and serve as the link between these two chains of command. According to DOD officials, dual-status commanders are intended to provide unity of effort, ensuring coordination of National Guard and federal military resources in response to domestic emergencies, natural disasters, or designated planned events. According to DOD officials, dual-status commanders have been used for select planned events since 2004 and helped coordinate response to Hurricane Sandy in 2012, wildfires in Colorado, and the bombing at the Boston Marathon in 2013. Mobilization Authorities. DOD officials said that following Hurricane Katrina it was clear to them that the military needed to be empowered to respond more quickly to disasters. Ultimately, Congress approved new authorities in the National Defense Authorization Act for Fiscal Year 2012, one of which provided DOD with greater access to the federal reserve during domestic incidents. Section 12304a of Title 10 of the United States Code states that when a Governor requests federal assistance in responding to a major disaster or emergency the Secretary of Defense may mobilize any individual or unit of the federal reserves involuntarily for up to 120 days to respond to the Governor’s request. The military services were using interim implementation guidance for these authorities at the time of our review and were waiting for DOD to finalize its guidance in September 2013. Additionally, DOD officials told us that Hurricane Sandy is the only domestic disaster thus far to use the new mobilization authorities under section 12304a. Since DOD is still developing its process for implementing these new authorities and has had limited experience using them it is too early to know whether they will better enable the states to access federal capabilities when responding to domestic disasters. Appendix III: Profile for the National Guard Bureau, Army National Guard Directorate, and Air National Guard Readiness Center In addition to having full-time civilian and Active Guard and Reserve personnel, the Army National Guard Directorate has a group of personnel that are categorized as “Active Duty for Operational Support”. Active Duty for Operational Support is an authorized voluntary tour of active duty that is performed at the request of an organizational or operational commander, or as a result of reimbursable funding, among other things. The purpose of this category is to provide the necessary skilled manpower assets to support existing or emerging requirements. We included subordinate headquarters in the National Guard Bureau’s list of capabilities because these headquarters are under the management of the Chief of the National Guard Bureau. Appendix IV: Profile for the National Guard State Joint Force Headquarters These data reflect funded civilian and military positions. Some DOD personnel, referred to as “dual- status technicians,” are required, as a condition of employment, to be a drilling member of the National Guard or Reserves and thereby fill both a full-time civilian position and a part-time military position. Additionally, some DOD personnel, referred to as “Active Guard and Reserve,” occupy both a full-time military position as well as a part-time military position. Consequently, in our calculations, we included them in both the Active Guard and Reserve and the part-time Guardsmen categories. DOD Directive 5105.83, National Guard Joint Force Headquarters-State (NG-JFHQs-State) (Jan. 5, 2011). Appendix V: Profile for the Office of the Chief of the Army Reserve and U.S. Army Reserve Command These data reflect funded civilian and military positions. Some DOD personnel, referred to as “dual- status technicians,” are required, as a condition of employment, to be a drilling member of the National Guard or Reserves and thereby fill both a full-time civilian position and a part-time military position. Additionally, some DOD personnel, referred to as “Active Guard and Reserve,” occupy both a full-time military position as well as a part-time military position. Consequently, in our calculations, we included them in both the Active Guard and Reserve and the part-time reservist categories. Appendix VI: Profile for the Army Reserve Regional Support Commands These data reflect funded civilian and military positions. Some DOD personnel, referred to as “dual- status technicians,” are required, as a condition of employment, to be a drilling member of the National Guard or Reserves and thereby fill both a full-time civilian position and a part-time military position. Additionally, some DOD personnel, referred to as “Active Guard and Reserve,” occupy both a full-time military position as well as a part-time military position. Consequently, in our calculations, we included them in both the Active Guard and Reserve and the part-time Reservist categories. Appendix VII: Profile for the U.S. Army Reserve Functional Commands These data reflect funded civilian and military positions. Some DOD personnel, referred to as “dual- status technicians,” are required, as a condition of employment, to be a drilling member of the National Guard or Reserves and thereby fill both a full-time civilian position and a part-time military position. Additionally, some DOD personnel, referred to as “Active Guard and Reserve,” occupy both a full-time military position as well as a part-time military position. Consequently, in our calculations, we included them in both the Active Guard and Reserve and the part-time reservist categories. Appendix VIII: Profile for Air Force Reserve Command and Headquarters, Air Force Reserve These data reflect funded civilian and military positions. Some DOD personnel, referred to as “dual- status technicians,” are required, as a condition of employment, to be a drilling member of the National Guard or Reserves and thereby fill both a full-time civilian position and a part-time military position. Additionally, some DOD personnel, referred to as “Active Guard and Reserve,” occupy both a full-time military position as well as a part-time military position. Consequently, in our calculations, we included them in both the Active Guard and Reserve and the part-time reservist categories. Appendix IX: Profile for the Air Force Reserve Numbered Air Forces These data reflect funded civilian and military positions. Some DOD personnel, referred to as “dual- status technicians,” are required, as a condition of employment, to be a drilling member of the National Guard or Reserves and thereby fill both a full-time civilian position and a part-time military position. Additionally, some DOD personnel, referred to as “Active Guard and Reserve,” occupy both a full-time military position as well as a part-time military position. Consequently, in our calculations, we included them in both the Active Guard and Reserve and the part-time reservist categories. Headquarters type National Guard Bureau A joint activity of the Department of Defense (DOD). Participate with the Army and the Air Force staffs in the formulation, development, and coordination of all programs, policies, concepts, and plans pertaining to the National Guard; Administer programs. Assist in the organization, maintenance, and operation of National Guard units. Focal point at the strategic level for National Guard matters that are not under the authority of the military service. Air National Guard Air National Guard Readiness Center Office of the Chief of the Army Reserve Channel of communications between DOD and the states. Located in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, and Guam. Comprised of a Joint staff, Army staff, and Air staff. The Adjutant General’s federal responsibilities include the following: Establishing temporary joint task force command elements ready to provide command and control for domestic operations. Accepting mutually agreed-upon federal liaison elements. Designating officers eligible to serve in dual-status and ensure that these officers facilitate unity of effort between state and federal military forces. Ensures homeland defense– and civil support–unique equipment is available for use should the unit owning the equipment deploy. Advises the Governors and collaborates with DOD leadership. Assists the Chief, National Guard Bureau, in carrying out the functions of the National Guard Bureau as they relate to the Army National Guard. The Director, Army National Guard, under the supervision and control of the Chief, National Guard Bureau, performs those administrative and operational functions of the Chief pertaining to the Army National Guard and the Army National Guard of the United States. Assists the Chief, National Guard Bureau, in carrying out the functions of the National Guard Bureau as they relate to the Air National Guard. The Director, Air National Guard, under the supervision and control of the Chief, National Guard Bureau, performs those administrative and operational functions of the Chief pertaining to the Air National Guard and the Air National Guard of the United States. Serves as the Headquarters Army principal staff organization to organize and equip Army Reserve Forces. Provides direct support to the Chief of Staff of the Army in the execution of his function and Title X responsibilities, and commands the U.S. Army Reserve Command. Responsible, subject to certain exceptions, for justification and execution of certain Army Reserve budgets, and is the director and functional manager of those appropriations; directing and managing the Army Reserve’s appropriations; managing the Army Reserve’s full-time support program; and submitting annual reports to the Secretary of Defense. Provides command, control, and support to Army Reserve forces assigned. Organizes, trains, and prepares Army Reserve units for mobilization and commitment to wartime theater of operations. Ensures wartime readiness of Army Reserve forces. Provides administrative and logistical support to all Army Reserve units and commands within their geographic area of responsibility. Manages all Operation and Maintenance, Personnel, Military Construction, and other appropriations for which requirements are justified as allocated by the U.S. Army Reserve Command and the Office of Chief, Army Reserve. Supervises all area maintenance support activities and equipment- concentration sites within its area of responsibility. Provides facility support to all Army Reserve units within its area of responsibility. The Command Group of these commands is responsible for the following: Providing direction, guidance, and regional base-operations support to supported units within the region. The base-operations support is provided in functional areas of personnel, logistics, force integration, programming and budgeting, finance and accounting, information management, emergency services, public works, historian, inspector general, religious, medical, legal, safety, public affairs, internal review, and management controls. Managing and executing appropriations as authorized by U.S. Army Reserve Command and the Assistant Chief of Staff for Installation Management for base-operations support. Implementing policies and intent of the U.S. Army Reserve Command commanding general. Representing the Army Reserve before military and civilian organizations and agencies at various levels of command and government to include speaking engagements. Assisting with local community relations and representing the U.S. Army Reserve Command to foreign dignitaries on various occasions. Functional Commands Maintain and provide training and, in certain cases, generate specific Headquarters, Air Force Reserve capabilities. Deploy subordinate units in support of federal missions. Provides direct support to the Chief of Staff of the Air Force in the execution of his or her function and Title X responsibilities, and commands the U.S. Air Force Reserve Command. Subject to certain exceptions, justify and execute the budgets for Air Force Reserve. Manages the full-time support program. Provides an annual report to the Secretary of Defense on the state of the Air Force Reserve and its ability to meet its missions. Provides citizen airmen to defend the United States and to protect its interests through air and space power. Organizes, trains, and equips combat-ready forces. Directs operation of the three numbered Air Forces and provides all required major command–level support for all Air Force Reserve units and personnel. Maintains overall supervision of Air Force Reserve matters supporting Air Force war plans, programming documents, and mobilization actions. Retains administrative control over all Air Force Reserve units except for forces attached to the Commander, Air Force Forces. readiness according to Air Force standards to include combat readiness, medical readiness, and inspection readiness. Provide assistance to, and operational readiness assessment of, assigned units through Operational Readiness Exercises and other discretionary events when warranted. Supervise and assist assigned units in planning for deployment and redeployment actions, major events, and contingencies. Advocate for assigned units. Implement plans, policies, and programs as developed and directed by Headquarters, Air Force Reserve Command. Communicate with Lead Major Command on matters relating to training, inspection, operational mission coordination, and logistical support. Assist units to implement command operational readiness and compliance processes. Manage resources across units. In addition to the contact named above, Suzanne K. Wren, Assistant Director; Timothy J. Carr; Joanna Chan; Susan C. Ditto; Michael J. Hanson; Tobin J. McMurdie; Anna Maria Ortiz; Michael D. Silver; Amie M. Steele; Karen N. Willems; Michael A. Willems; Alex Winograd; and Delia P. Zee made key contributions to this report. | DOD has sought to reduce costs by assessing headquarters and overhead functions. Both the Army and Air Force have two reserve components--a National Guard and Reserve--that have at least 75 headquarters located throughout the United States, its territories, and overseas that manage subordinate units or perform overhead functions. These headquarters have a mix of full-time and part-time personnel. GAO was asked to review issues related to reserve-component headquarters. This report (1) discusses trends in funded positions at reservecomponent headquarters and (2) evaluates the extent to which DOD has established and implemented processes to efficiently size its reservecomponent headquarters. To do so, GAO reviewed statutes and DOD guidance, analyzed personnel data and headquarters assessments, and interviewed DOD and state officials. Between fiscal years 2009 and 2013, the total number of funded positions--both full-time support and part-time--at the Department of Defense's (DOD) 75 Army Reserve and Air Force Reserve (Reserves) component headquarters grew from about 30,200 to 31,900 positions (about 6 percent overall). Some organizations grew more markedly, among them the National Guard Bureau (17 percent); Army National Guard Directorate (44 percent); Air National Guard Readiness Center (21 percent); and the Office of the Chief of the Army Reserve (45 percent). DOD officials attribute growth to the conversion of contractor workload into civilian positions and increased missions assigned at certain headquarters. Over the same period, staff levels at the National Guard's 54 state Joint Force headquarters remained flat and the Air Force Reserve shrank by 4 percent. DOD has processes in place that are intended to ensure that the number of funded positions at its reserve-component headquarters are set at the minimum level needed to accomplish their mission, but it has not consistently followed those processes at 68 of the 75 headquarters that GAO reviewed. As a result, DOD is unable to determine whether National Guard and Reserve headquarters are sized to be efficient. The National Guard has begun evaluating some personnel requirements, but its efforts do not fully address the management issues GAO identified: The National Guard Bureau, which may continue to grow to accommodate its Chief's placement on the Joint Chiefs of Staff, is determining its own requirements without external validation. This is inconsistent with Joint Staff, Army, and Air Force processes, which generally involve an external review. In addition, Congress's ability to oversee the bureau's size is limited because DOD's annual report on its Major DOD Headquarters Activities does not include data on the bureau and its more than 600 staff. The National Guard has not fully assessed its 54 state headquarters--which contain nearly 21,900 funded positions--since the 1980s. GAO's prior work shows that agencies can reduce costs by consolidating and centralizing functions and eliminating unneeded duplication. The National Guard Bureau, Army National Guard Directorate, and Air National Guard Readiness Center each assess a portion of the state headquarters, but there is no process to assess the headquarters' personnel requirements in their entirety and ongoing efforts do not provide a holistic review. The Army and Air Force have not fully reassessed 13 of the 20 reserve component headquarters for which they are responsible. The Army has a reassessment backlog, and the Air Force does not require periodic reassessments and reassesses its headquarters on an ad hoc basis. Some headquarters with significant growth are among those that have not been reassessed, including the Office of the Chief of the Army Reserve and the Air National Guard Readiness Center. In contrast, 5 of the 7 reassessed organizations subsequently reduced their staff levels such as the Air Force Reserve's three numbered air forces, which have shrunk by more than a third since 2009. The Army and Air Force agree their headquarters should be reassessed, but they have not scheduled reassessments across their reserve components. GAO recommends that DOD externally validate the National Guard Bureaus personnel requirements and include the bureau in its annual report to Congress; reassess requirements for the 54 state Joint Force headquarters; and develop schedules for reassessing headquarters overseen by the Army and Air Force. DOD concurred with recommendations to report data to Congress and establish schedules for reassessing headquarters and partially concurred with recommendations to externally validate the bureaus personnel requirements and assess requirements for the state Joint Force headquarters. GAO continues to believe these recommendations are valid as discussed in the report. |
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GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies’ major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after the transmittal of the president’s budget, provide a direct linkage between an agency’s longer-term goals and mission and day-to-day activities. Annual performance reports are to report on the degree to which performance goals were met. The issuance of the agencies’ performance reports, due by March 31 each year, represents a new and potentially more substantive phase in the implementation of GPRA—the opportunity to assess federal agencies’ actual performance for the prior fiscal year and to consider what steps are needed to improve performance and reduce costs in the future. As the nation’s chief law enforcement agency, Justice is charged with, among other things, enforcing laws in the public interest and playing a key role in protecting the public from violence and criminal activity, such as drug smuggling and acts of terrorism. With a fiscal year 2001 budget of over $24 billion and a staff of about 111,000, including attorneys, investigators, and agents, Justice is a multifaceted organization whose functions range from securing the nation’s borders to helping state and local agencies improve their capacity to prevent and control crime. Justice’s responsibilities are divided among a number of major components, including the Drug Enforcement Administration (DEA), the Federal Bureau of Investigation (FBI), INS, the Office of Justice Programs (OJP), and the United States Marshals Service (USMS). This section discusses our analysis of Justice’s performance in achieving the selected key outcomes and the strategies it has in place, particularly strategic human capital management and information technology, when appropriate, for accomplishing these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the agency provided assurance that the performance information it is reporting is credible. Overall progress made by Justice toward achieving less drug- and gang- related violence is difficult to ascertain because (1) three of nine performance measures did not have fiscal year 2000 targets to measure success and (2) Justice fell short of achieving its performance targets for four measures. Justice did not set fiscal year 2000 performance targets for its performance related to dismantling Asian criminal enterprises, dismantling Eurasian criminal enterprises, and cases in Indian Country.Justice did not set performance targets for these measures because it considered two of the measures to be new measures, and for the number of cases in Indian Country, Justice did not want to set performance levels because it believes that setting performance targets could cause the public to perceive law enforcement as engaging in “bounty hunting” or pursuing arbitrary targets merely for the sake of meeting particular goals. In addition, even though Justice indicated that the performance measures for dismantling Asian and Eurasian criminal enterprises were new measures, these same measures were included in Justice’s fiscal year 1999 performance report (albeit Eurasian was called Russian then). Justice fell short of achieving the performance targets for four measures. For example, although close, Justice did not meet its performance target to perform 4.81 million criminal background checks. Justice reported that it had perfomed 4.49 million criminal background checks. Also, Justice did not meet its performance target to prevent 140,244 persons with criminal backgrounds from purchasing firearms. Justice reported it had prevented 71,890 ineligible persons from purchasing firearms. In its explanation of why it did not meet these performance targets, Justice noted that the reported targets for these measures were based on the assumption that all states and territories would be full participants in the National Instant Criminal Background Check System (NICS) program. Justice reported that only 27 states have become full participants since NICS began in November 1998. In an April 2000 report, we reported that the states generally are better positioned than the FBI to conduct background checks and that there are potential barriers to states participating in NICS. Justice’s performance report does not articulate the implications of potential barriers if the intent is for all states to participate. Although close, Justice also did not meet its performance measure to initiate 20,000 new Interpol cases or enter into 10 new mutual legal assistance treaties with other countries. Justice reported that in fiscal year 2000, it had initiated 19,549 new Interpol cases and entered into 8 treaties. Justice noted that it had not met its performance targets for these measures because there are a number of outside entities (such as, state liaison offices, foreign governments, the State Department, the White House, and the U.S. Senate) that have key roles in these efforts and that Justice has limited control over actions of these entities. However, Justice did not discuss any actions that it might take to mitigate the effects of external factors. Our February 1999 report also suggested that to improve the usefulness of annual plans, agencies show how strategies will be used to achieve goals that include describing approaches to leverage or mitigate the effects of external factors on the accomplishment of performance goals. For each performance measure, Justice included a brief explanation about data collection and storage, data validation and verification, and any known data limitations. There were data limitations associated with four of the databases used with the performance measures. Two of the data limitations appear to be more of a clarification rather than a limitation. The other two data limitation explanations were more significant. One limitation noted that a significant number of criminal history records were not complete and that state and local agencies and the courts needed to update and complete the records in a more timely manner. The performance report did not indicate actions or steps that might be taken to mitigate the data limitations with state and local agencies and the courts in order to improve the data’s reliability. For the other limitation, Justice reported that the current reporting system for the number of Interpol cases was severely limited. However, Justice reported that in fiscal year 2001 the database and procedures were to be validated for accuracy and redesigned for efficiency and that a comprehensive and flexible reporting system to extract the statistics from the database was to be developed. Justice’s strategies and initiatives to achieve less drug- and gang-related violence generally seem reasonable and clear. However, Justice could improve its performance strategies by exploring potential coordination efforts that might be used to mitigate external factors and by considering the use of performance evaluations to better assess its progress toward achieving the outcome. For example, on the basis of its fiscal year 2000 performance, Justice modified its fiscal year 2001 performance target from 5.05 million to 4.54 million for the number of criminal background checks performed. Modifying the performance target in the short term is a reasonable step; however, Justice may want to discuss what it has considered in response to only 27 states participating in the NICS since it began in November 1998 and whether other strategies to assist states are needed to achieve the outcome. As mentioned earlier, Justice did not have performance targets for one measure because of concerns about pursuing targets merely for the sake of meeting a goal. We suggest that Justice could compare the relative effectiveness of programs using a program evaluation approach to provide an indication of its progress towards achieving its goals. Specifically, Justice has a goal to provide enforcement assistance and training to tribal governments to combat and reduce the incidence of violent crime on Indian Reservations, especially crime related to gang activity. This is a performance measure for which Justice did not provide performance targets and that Justice reported the number of cases in Indian Country. A program evaluation for this goal could compare the difference in gang activity on reservations where assistance and training is provided with reservations where assistance and training have not been provided. While program evaluations will also be hampered by the lack of underlying data about the drug- and gang-related violence, they might provide some indications of the comparative effectiveness of different interdiction programs. Overall progress made by Justice toward achieving a reduction in the availability and/or use of illegal drugs is difficult to ascertain because it did not have fiscal year 2000 performance targets for two of five measures, and the relationship of one measure to the outcome was not clear. Justice did not have a performance target for measures related to drugs removed and its efforts to seize, dismantle, and dispose of clandestine laboratories. Justice indicated that the measure of the amount of drugs removed is to be discontinued because it does not adequately assess performance and is not results oriented. Justice explained that DEA could not estimate the amount of drugs to be removed by type because these vary from case to case. Rather, Justice reported that DEA seeks to investigate cases that will have the greatest impact on drug trafficking, drug-related crime, and violence and that drug seizures are merely a by-product of those investigations. Regarding not setting targets for its efforts to seize, dismantle, and dispose of clandestine laboratories, as previously noted, Justice does not want the public to perceive that it is pursuing arbitrary targets for the sake of meeting particular goals. Also, we noted that Justice’s fiscal year 2000 actual performance of 1,888 clandestine laboratories seized, dismantled, and disposed had decreased from its fiscal year 1999 actual performance of 2,024. According to Justice, it receives leads from state and local agencies or concerned citizens regarding the location of clandestine laboratories. The number of leads vary from year to year which results in a variance in the number of seizures in a given year. In addition, the performance report did not explain how positive responses for inquiries to Justice’s El Paso Intelligence Center (EPIC) contributes toward achieving the outcome to reduce the availability of drugs. As previously noted, we believe the usefulness of annual reports and plans could be improved by better articulating a results-orientation that would include explanatory information on goals and measures. Justice fell short of achieving the performance targets for three measures. Justice fell somewhat short on its performance target to improve intelligence gathering. Specifically, Justice reported it had 22,624 inquiries to EPIC resulting in positive responses instead of the performance target of 24,602 inquiries. Justice reported that it did not meet its performance measure for the number of EPIC inquiries resulting in positive responses because EPIC did not receive as many requests for information as anticipated. Other unmet performance measures were to identify and dismantle major drug trafficking organizations. Specifically, Justice’s performance target was to identify 250 and dismantle 50 U.S.-based drug organizations. Justice reported that the FBI identified 201 major drug trafficking organizations and dismantled 12. Justice attributed this shortfall to the FBI overestimating what could be accomplished based on resource constraints. Justice also indicated that the Organized Crime Drug Enforcement Task Force (OCDETF) had a base reduction of agents and support staff at the end of fiscal year 2000 and that this would affect FBI’s ability to identify and dismantle major drug trafficking organizations in fiscal year 2001. Accordingly, the performance targets for fiscal year 2001 were revised. In a July 1999 report, we stated that DEA did not have performance targets for disrupting and dismantling drug trafficking organizations. In the absence of such targets, it is difficult to assess DEA’s overall effectiveness in achieving its strategic goals. In our July 1999 report, we recommended that the Attorney General direct the DEA Administrator to work closely with Justice and the Office of National Drug Control Policy to develop measurable DEA performance targets for disrupting and dismantling drug trafficking organizations consistent with the performance targets in the National Drug Control Strategy. In response to our recommendation, DEA (1) developed a new strategic plan, which was approved in May 2000; (2) participated in a Justice work group to define the terms “disrupt” and “dismantle”; and (3) formed an internal GPRA Work Committee to assess and develop a feasible management approach to identify and establish quantifiable performance targets. Justice indicated in its fiscal year 2000 performance report that, under DEA’s new strategic plan, DEA developed another performance measure—percent of major drug trafficking organizations disrupted or dismantled—and is developing a process to capture information and data to report on this measure. Justice anticipates, however, that the system will take between 2 and 3 years to be fully operational. Similar to the previous outcome, Justice’s performance report included a brief explanation about data collection and storage, data validation and verification, and any known data limitations. Except as noted above about DEA developing a new process for capturing data on the percent of major drug trafficking organizations disrupted or dismantled, none of the performance measures noted any data limitations. Justice’s strategies and initiatives to reduce the availability and/or use of drugs generally seem reasonable and clear. Fiscal year 2001 performance targets were revised based on performance results in fiscal year 2000. Although Justice generally explained why it did not meet certain targets and revised those targets downward, its strategies do not articulate what Justice will do differently to achieve its unmet goals in the future. In addition, the strategies did not discuss determining the underlying reason for EPIC not receiving as many requests for information as anticipated—a piece of knowledge that might improve upon the relevancy, appropriateness, and usefulness of the performance measure and contribute to determining whether other measures might be more useful. Furthermore, Justice did not include specific strategies or goals for mitigating the implications of FBI and OCDETF resource constraints, including human capital management issues. Although Justice’s performance plan identifies agencies that have crosscutting activities related to reducing the availability and/or use of drugs, the plan does not discuss efforts in relation to achieving the outcome. For example, the plan has FBI performance measures and expects future DEA performance measures on dismantling drug trafficking organizations, but the plan does not adequately explain how joint planning and coordination will contribute to achieving the overall outcome to reduce illegal drug availability and/or use. According to Justice, interagency cooperation is key to successful drug enforcement, and Justice reported that it has developed a number of programs through which investigators can coordinate. However, the plan does not include strategies for enhancing or measuring the contribution of these programs to the overall achievement of the outcome. In our February 1999 report, we note that the listing of current programs and initiatives that were often included in agencies plans were useful for providing an understanding of what agencies do. However, presentations that more directly explain how programs and initiatives achieve goals would be most helpful to congressional and other decisionmakers in assessing the degree to which strategies are appropriate and reasonable. Overall progress made by INS towards providing timely, consistent, fair, and high-quality services was difficult to fully gauge because the measures did not enable us to assess progress toward achieving this planned outcome. For example, the performance measures on the number of naturalization cases adjudicated, the percent of naturalization and benefit applications found on line, and the number of these applications filed on line do not indicate whether users of INS services are receiving timely, consistent, fair, and high-quality services. Regarding the performance target for achieving a 99-percent level of compliance with INS’ quality standards for naturalization applications, the performance report did not clearly explain what is covered in these standards. Therefore, it is unclear whether compliance with these standards is an indication of timely, consistent, fair, and high-quality services. Again, we believe that opportunities exist for Justice to improve the usefulness of its annual report and plan by better articulating a results-orientation that would include explanatory information on goals and measures. Justice reported that it had not met its performance target for an average case processing time of 6 months for naturalization applications, instead reporting an average case processing time of 8 months during fiscal year 2000. Justice did not explicitly discuss the reason for missing the performance target for average case processing time, but implied that it was a resource issue. Specifically, Justice reported that during peak periods at the end of the year, INS met the targeted 6-month processing time for naturalization applications by shifting resources from other services to increase production. On the basis of its fiscal year 2000 performance, INS expects to achieve a case processing time of 9 months in fiscal year 2001 for naturalization applications. Furthermore, historical data in Justice’s performance report shows that improvement has been made to reduce the average case processing time for naturalization applications from 27 months in fiscal year 1998 to 8 in fiscal year 2000. Similar to the previous outcomes, Justice’s performance report included a brief explanation about data collection and storage, data validation and verification, and any known data limitations. Justice’s performance report indicated data limitations and efforts to improve the accuracy and timeliness of the data. For example, Justice reported that in fiscal year 2001 INS’ naturalization case capability will be fully deployed under its Computer Linked Application Information System (CLAIMS 4) and will allow data for these cases to be fully automated and case-based, providing for timely and accurate data. In a May 2001 report, we said that aliens face long waits for a resolution to their case and have difficulty obtaining accurate information on how long they can expect to wait. We reported that INS did not know how long it took to process aliens’ applications because the agency’s automated application data were incomplete and unreliable. Specifically, we reported that INS’ available servicewide automated systems contained unreliable data and its districts did not have automated systems for tracking many types of applications. We pointed out that, in the absence of information on actual processing times, INS had been estimating processing times, but that the usefulness of the estimation method was limited. We recommended, and Justice agreed, that INS develop the capability to begin to calculate and report actual processing times for applications as soon as reliable automated data are available from its servicewide systems, CLAIMS 3 and CLAIMS 4. Justice’s performance report states that on the basis of its fiscal year 2000 performance, it expects to meet the corresponding 2001 targets for average case processing times of 9 months for naturalization applications and 14 months for adjustment of status applications and expects to meet the 2001 performance target of 99 percent compliance with quality standards for naturalization applications. Justice strategies and initiatives do not sufficiently discuss achieving the outcome to provide timely, consistent, fair, and high-quality services. The strategies primarily address maintaining or improving application process times and generally do not discuss consistent, fair, and high-quality services. As previously noted, INS has quality standards that it is using as a measure, but the performance plan does not articulate the specific quality standards for achieving the outcome. Justice did not discuss the implications of using strategic human capital management as a strategy to help achieve this outcome even though one performance target was not achieved until resources were realigned. Thus, the deployment of available staff appears to be critical to achieving the timeliness performance targets. In addition, the performance plan did not provide as much detail as it could have to describe INS’ strategy to provide electronic filing of applications and the implications for accomplishing timely, consistent, fair, and high-quality services. Although Justice identified that it is deploying CLAIMS 4 software to field offices in fiscal year 2001 and upgrading CLAIMS 3 automated support, the performance report does not explain how the information technology improvements will contribute to achieving better INS services. In our February 1999 report, we note that the listing of current programs and initiatives that were often included in agencies’ plans were useful for providing an understanding of what agencies do. However, presentations that more directly explain how programs and initiatives achieve goals would be most helpful to congressional and other decisionmakers in assessing the degree to which strategies are appropriate and reasonable. Overall progress made by INS towards achieving this outcome is difficult to fully gauge because INS has a new performance measure for which there was no fiscal year 2000 performance target, and the other two performance measures did not enable us to assess progress toward achieving this planned outcome. Because it was a new measure, Justice did not set a performance target for high-priority border corridors demonstrating optimum deterrence, a critical performance measure to determine whether it is securing U.S. borders. Justice did not discuss the rationale for the new measure or how the new measure will better enable INS to assess its progress toward securing our borders. Justice said that during fiscal year 2000, INS continued to refine the border control operational effectiveness measure, in particular by using “corridors” rather than zones, with each sector identifying the corridors within their area of operation. Even though this was a new measure, Justice provided historical data from fiscal years 1994 to 1999, provided actual performance for fiscal year 2000, and projected performance targets for fiscal years 2001 to 2004 for this performance measure as an indication of its progress. The historical data showed that INS has maintained optimum deterrence in 6 of 26 corridors along the Southwest border during fiscal years 1998, 1999, and 2000. In addition, while Justice met the targets for the other two performance measures for this outcome, these measures were not directly linked to the outcome because they omitted some aspects of the performance. For example, to deter illegal immigration at the source, INS has a performance measure to intercept undocumented offshore travelers en route to the United States. Justice reported that these intercepts were accomplished as a result of INS officers working closely with their host country government agencies, diplomatic missions, and others to provide advice, training, and assistance. Justice’s performance report does not sufficiently discuss the working relationship with host countries and others or the quality of INS officers’ training and assistance in relation to deterring illegal immigration at the source. In a May 2000 report, we said that the agency does not believe that overseas efforts have produced long-term impacts because training that INS personnel provided to foreign air carrier and law enforcement personnel diminished within a few months. In addition, INS believes that the non-INS personnel they have trained do not receive continual encouragement and support to perform their jobs professionally and, therefore, revert to their old practices. In its performance report Justice stated that it expects to meet the 2001 performance targets for the three performance measures. Specifically, Justice’s performance report states that on the basis of fiscal year 2000 actual performance for demonstrating optimum deterrence in six corridors, INS expects to meet the 2001 performance target for this measure of deterrence in eight corridors. Justice exceeded, by a significant number, its performance targets for intercepting undocumented offshore travelers en route to the United States (the performance target was 8,283 interceptions and the actual was 19,007) and the offshore prosecutions assisted by INS (the performance target was 107 prosecutions and the actual was 514). Justice reported that improved and thorough reporting of these activities by the INS overseas district offices resulted in a more accurate account of these activities than had been available in the past, and INS significantly exceeded its targets. Justice’s performance plan indicates INS expects to also exceed the fiscal year 2001 performance targets of 9,324 interceptions and 119 prosecutions. Although Justice briefly explained its data collection and storage, and data validation for each performance measure, there is some question about the credibility of the performance data. Specifically, Justice reported that all three performance measures related to securing the U.S. borders from illegal immigration had data limitations. With respect to measuring border corridors demonstrating optimum deterrence, the report states that collecting data to measure this goal is currently an intensive manual process and that INS is implementing a process to standardize recording and reporting of data to ensure consistency and validity. Justice also reported that data provided for corridors demonstrating optimum deterrence prior to fiscal year 1999 were estimated because data was not available for corridors during that period and that projected corridor effectiveness for fiscal years 2001 through 2004 is dependent on sufficient allocation of resources. Justice’s strategy to secure U.S. borders from illegal immigration does not adequately discuss integration of resources to achieve the outcome. Justice’s basic strategy is to apply increased levels of Border Patrol staff, technology, and other resources in the busiest areas until the risk of apprehension is high enough to be an effective deterrent, thus creating acceptable areawide control. Justice’s performance plan does not discuss the mix of staffing, equipment, and technology needed to achieve the desired level of deterrence in each area nor does it clearly discuss the basis upon which a determination is made that a particular corridor has achieved optimum deterrence. In addition, in December 1999, we reported that INS had had difficulties attracting and retaining qualified applicants for Border Patrol positions. Justice’s performance report indicates that INS did not meet its performance target to have 9,377 Border Patrol agents on board at the end of fiscal year 2000, falling short by 196 agents. According to Justice, additional Border Patrol resources (personnel and technology) are needed in fiscal year 2002 to maintain and extend control along the border. INS expects to meet its hiring goals for agents in fiscal year 2001, reaching an on-board strength of 9,807 and projected an on- board strength of 10,377 agents for fiscal year 2002. According to Justice, INS has overcome difficulties in hiring Border Patrol agents. The Justice report also states that INS set records in fiscal year 2000 for the number of qualified applicants and the number passing the required tests. However, Justice did not discuss actions planned to bringing agents on board nor did it explain how having more applicants and candidates passing tests will ultimately result in achieving the targeted level of agents to be on-board in fiscal year 2001. While hiring more agents is a first step, INS did not discuss training and deployment of hired agents--initiatives that also impact on INS’ ability to have agents at the border. Furthermore, the performance plan did not explain Justice’s plans for obtaining equipment and technology needed to implement the border control strategy. As previously mentioned, strategies can be more useful if they describe how they will enable the agency to achieve its goals. Justice stated in its 2002 performance plan that it continuously evaluates the effectiveness of its border control strategies, particularly for the Southwest border, and quarterly evaluates progress through the Commissioner’s Performance Management Reviews. In addition, Justice reported that several special studies have been initiated and are ongoing to evaluate border enforcement effectiveness. In a December 1997 report on the Southwest Border Strategy, we recommended a comprehensive and systematic evaluation plan of INS’ border strategy be developed to obtain information about the effectiveness of the strategy in reducing and deterring illegal entry. Justice anticipates conducting additional studies related to the effectiveness of INS’ enforcement activities at the border that includes one that responds to our recommendation. In a May 1999 report, we concluded that information on INS studies was too limited for us to assess whether these studies will provide the information needed to comprehensively and systematically evaluate the effectiveness of the strategy. For the selected key outcomes, this section describes strengths or remaining weaknesses in Justice’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. This section also discusses the degree to which the agency’s fiscal year 2000 report and fiscal year 2002 plan addresses concerns and recommendations by us and Justice’s OIG. We identified several strengths in Justice’s performance reports. First, both fiscal years 1999 and 2000 performance reports generally included (1) a comparison of actual performance with the projected level of performance (when a goal had a performance projection) as set out in the performance goals and (2) an explanation for why the goal was not met, where a performance goal was not achieved. Second, a key improvement of the fiscal year 2000 report was that, as required under GPRA, the report showed that Justice generally reassessed fiscal year 2001 performance targets on the basis of its performance for fiscal year 2000. Third, Justice’s performance report included historical data to provide perspective on its progress. And finally, we also noted that this year Justice issued a combined fiscal year 2000 performance report and fiscal year 2002 performance plan. The information is now presented in a sequential manner, discussing the results of the past year, then the anticipated performance for the current year, and finally the impact of next year’s performance. Presenting the information in this manner, we believe, provides decisionmakers with a better understanding of the agency’s progression toward achieving its goals. The fiscal year 2000 performance report, like the 1999 report, also contains several weaknesses in that it does not consistently address changes in the performance report as to why certain measures were discontinued, new ones added, or revisions made to existing measures. For example, INS changed its performance goal to measure deterrence in relation to corridors rather than zones; however, there is no discussion as to the rationale for changing the areas of operation to be measured or how the new measure will better enable INS to assess its progress toward securing our borders. We believe an explanation in the performance report would be useful to better understand the relationship of revised or new goals and measures toward achieving the performance goal. Furthermore, although Justice generally explained why it did not meet certain targets and revised those targets downward, its strategies do not articulate what Justice will do differently to achieve its unmet goals in the future. In addition, eight management challenges identified in our 2000 GPRA report continue to be management challenges. Progress in resolving two of the eight management challenges—INS restructuring and internal control weakness at DEA—was not discussed in either the 1999 or 2000 performance report. Our comparison of Justice’s performance plans for fiscal years 2001 and 2002 found that many of the weaknesses previously identified by us in the 2001 plans were present in the 2002 plan. Although the strategic human capital management goals and measures were identified in its 2001 and 2002 performance plans, Justice’s 2002 performance plan did not address human capital strategies in relation to achieving programmatic outcomes for two goals—dismantling major drug trafficking organizations and providing timely processing of naturalization applications. In addition, Justice identified personnel skills that supported each strategic goal, but did not discuss whether it had the staff with these skills or whether it needed to acquire or develop staff to meet agency needs. The performance plans also consistently identified program evaluations related to each of its strategic goals. However, the plans do not discuss whether these evaluations could be used in assessing the achievement of goals or as alternative measures for performance. For example, we noted that Justice reported on a program evaluation to verify and validate CLAIMS, which supports INS’ benefit processing that may provide information to improve operations, but will not provide outcome measures. However, we noted that another program evaluation concerning a multiyear study of the employment verification pilots may provide some information toward measuring progress. We believe that providing information on how the program evaluations would help measure Justice’s achievement of its outcomes could be useful to decision-makers. Like its fiscal year 2001 performance plan, Justice’s fiscal year 2002 performance plan consistently identified crosscutting activities, but its discussion of crosscutting activities generally did not discuss how the activities could be coordinated to improve overall performance within Justice. For example, to disrupt and dismantle major drug trafficking criminal enterprises, the performance plan states that interagency cooperation is key to successful drug enforcement and provides information on a number of programs through which investigators from various agencies can coordinate. The plan cites DEA, FBI, the Criminal Division, and other federal law enforcement agencies as participants in these programs. However, the plan does not explain how the strategies of Justice’s components are mutually reinforcing, nor does it explain common or complementary performance indicators. Justice stated that it has developed new performance measures for goals where in the past it had not set targets. Most of Justice’s performance measures in its 2002 performance plan had targets against which to measure progress. However, we do not know the extent to which the new performance measures will clearly demonstrate results achieved. As mentioned earlier, in our September 2000 report, we provided information and examples to assist agencies in identifying how they might use evaluations to improve their performance reporting. We noted that program evaluations are objective, systematic studies that answer questions about program performance and results. An evaluation study can explore the benefits of a program as well as ways to improve program performance by examining a broader range of information than is feasible to monitor on an ongoing basis through performance measures. For example, a program evaluation was conducted of an INS border control initiative in El Paso, Texas, called Operation Hold the Line. Operation Hold the Line was a new INS enforcement approach introduced in 1993. Rather than apprehending aliens after they had illegally crossed the border in El Paso, INS sought to prevent illegal entry from occurring in the first place by increasing the number of Border Patrol agents in El Paso and position them in high visible locations along the border. The evaluation collected data to assess the effects of Operation Hold the Line on a number of outcomes, including illegal and legal crossings, business activity, crime, education, births, and the use of social services in El Paso. By collecting quantitative and qualitative data on a range of outcome indicators, the researchers were able to draw conclusions about the representativeness, scope, and magnitude of the Operation’s effects. The fiscal year 2002 performance plan clearly identified the OIG management challenges and Justice designated areas of material weaknesses. The plan does not consistently identify our recommendations or concerns in relation to achieving goals and performance measures. For example, the Justice plan provided information on actions taken to address our recommendation to DEA regarding its performance measures but the performance plan did not address actions taken in response to our recommendation to INS regarding its estimation for application processing times. We identified two governmentwide high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, Justice’s performance plan had goals and measures related to human capital, and the agency’s performance report explained its progress in resolving human capital challenges. With respect to information security, Justice’s performance plan had goals and measures related to information security, and the agency’s performance report explained its progress in resolving its information security challenges. In addition, we identified 12 major management challenges facing Justice. Justice’s performance report discussed the agency’s progress in resolving many of its challenges, but it did not discuss the agency’s progress in resolving the following challenges: (1) internal control weaknesses at DEA, (2) options for restructuring INS, (3) weaknesses in Justice’s asset forfeiture program, and (4) program management weaknesses in the Weed and Seed program. As shown in table 1, of the agency’s 12 major management challenges, its performance plan (1) had goals and measures that were directly related to five challenges; (2) had a goal but no measures that were directly related to one challenge; (3) had goals and measures that were indirectly applicable to one of the challenges; (4) had no goals and measures related to two of the challenges, but discussed strategies to address them; or (5) had no goals, measures, or strategies to address three of the challenges. Appendix I provides detailed information on how Justice addressed these challenges and high-risk areas as identified by us and its OIG. As agreed, our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from the Office of Management and Budget (OMB) for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of Justice’s operations and programs, GAO identification of best practices concerning performance planning and reporting, and our observations on Justice’s other GPRA- related efforts. We also discussed our review with officials in the Department of Justice and its OIG. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Committee on Governmental Affairs as important mission areas for the agency and do not reflect the outcomes for all of Justice’s programs or activities. The major management challenges confronting Justice, including the governmentwide high-risk areas of strategic human capital management and information security, were identified in our January 2001 performance and accountability series and high-risk update and were identified by Justice’s OIG in December 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from our other work in assessing the validity, reliability, and timeliness of Justice’s performance data. We conducted our review from April through June 2001 in accordance with generally accepted government auditing standards. We discussed our draft report with Justice officials on June 13 and 14, 2001, and received written comments on June 19, 2001. The full text of Justice’s written comments is included in appendix II. In its letter, Justice discussed four major areas—our report’s overall focus, outcome goals that were evaluated, limited consideration of new goals and measures in its performance plan, and the presentation of progress on management challenges. Overall focus. Justice believes that our report focuses heavily on what its performance report and plan do not discuss, on targets not established, or on targets not met. In addition, Justice believes that our report does not focus on improvements the agency has made. For example, in addressing INS’ goal for ensuring that immigration benefit services are timely, fair, and consistent, Justice said that our report focused on the agency missing the naturalization case processing time by 2 months. Justice believes that reaching an 8-month processing time is an incredible achievement, given that the processing time was 27 months just 2 years earlier. We addressed many of the improvements that Justice made under the section comparing the performance report and plan with the previous year’s report and plan. The sections discussing achieving outcomes are an assessment of progress toward achieving results on the basis of performance measures and targets, historical data, and our work related to program areas. We acknowledge that Justice’s performance report included historical data for fiscal years 1998 and 1999 for many of its measures. But other than the example Justice cited in its comments, the historical data for the other measures did not clearly demonstrate improvements. Furthermore, after meeting with Justice to discuss the draft report, we revised the text to include the historical data regarding reported improvement to reduce the processing time of naturalization cases (the example Justice cited). Outcome goals. Justice acknowledged that the outcomes we used in our analysis were prescribed by the requestor, but believes that the outcome of reduced availability and/or use of illegal drugs is not part of its mission. Instead, Justice stated that its strategic goal relative to enforcing the nation’s antidrug laws is to reduce the threat and trafficking of illegal drugs by identifying, disrupting, and dismantling drug trafficking organizations. Thus, Justice does not believe that any of its annual goals or measures will relate directly to the achievement of the outcome to reduce the availability and/or use of illegal drugs, giving the false impression that its report and plan are deficient. Justice also believes that, while reducing drug- and gang-related violence is part of its mission, only four of its measures under this outcome, not nine, should have been used in our analysis. Thus, Justice believes that the other five measures in assessing this outcome should be deleted. In our opinion, reducing the threat and trafficking of illegal drugs by identifying, disrupting, and dismantling drug trafficking organizations is directly related to reducing the availability and/or use of drugs. If drug trafficking organizations are disrupted and dismantled, clearly this will affect the availability of drugs on the street. Concerning Justice’s contention that five of the measures under the planned outcome to reduce drug- and gang-related violence should be deleted, we disagree. The five measures in question are (1) number of criminal background checks, (2) number of persons with criminal backgrounds prevented from purchasing firearms, (3) number of cases in Indian Country, (4) number of new Interpol cases, and (5) number of new treaties with other countries. In its performance report, Justice included these five measures under its strategic goal to reduce the threat, incidence, and prevalence of violent crime, especially as it stems from gun crime, organized crime, and drug and gang-related violence. While Justice’s strategic goal is not an exact match to the planned outcome, we believe that the performance measures included in our analysis are appropriate. Specifically, all of these measures, in our opinion, have the potential, in part, to be related directly or indirectly to drug- or gang-related violence. For example, members of gangs may be prevented from purchasing firearms because of criminal background checks. Additionally, under the measure for the number of cases in Indian Country, growing juvenile gangs is one of the major issues discussed in Justice’s performance report. Likewise, Justice’s performance report indicated that international law enforcement cooperation is critical to addressing the dramatic growth of transnational crime such as narcotics trafficking and terrorism, which may, in part, relate to drug- and gang-related violence on an international level. New goals and measures. Justice believes that its performance measures have matured over time and indicated that it has discontinued old and added new measures as appropriate. Since some measures are new in fiscal year 2002, performance targets did not exist for the fiscal year 2000 plan. Nevertheless, Justice reported on its accomplishments by providing historical data for fiscal years 1999 and 2000 whenever possible. Justice believes that this is particularly significant for two outcomes: (1) timely, consistent, fair, and high-quality services provided by INS and (2) U.S. borders secure from illegal immigration. Concerning the first outcome, Justice noted that it has a new performance measure for the level of compliance with quality standards for processing naturalization cases, and Justice reports that it has achieved 99 percent compliance with those standards since fiscal year 1999. Concerning the second outcome, Justice believes that it is unfair for us to report that its performance was not considered sufficient to assess progress merely because there was no performance target against which to measure. Furthermore, Justice believes that it is particularly discouraging for the managers and analysts that worked to develop a measure which Justice believes is an excellent example of reporting outcomes. While we used performance measures and targets in our analysis, our evaluation was also based on other factors, such as previous reports and evaluations by us and others, our knowledge of Justice’s operations and programs, and our identification of best practices concerning performance planning and reporting. Furthermore, we added text to reflect the development of new measures in our comparison of the performance report and plan with the previous year’s report and plan. Concerning the quality standards issue, we did not indicate that INS had not met the 99- percent standard. We merely indicated that the performance report does not explain what is covered by these standards. While Justice believes that the existence of quality standards implicitly explains the relationship to the outcome, we believe that the report could articulate what aspects of quality service have been achieved. Moreover, we included information from our previous work relative to CLAIMS that indicated that data limitations could affect Justice’s assessment of the quality of services. Management challenges. Justice believes that the format used in appendix I of our report did not lend itself to an accurate description of its performance report and plan. In the column describing how Justice assessed its progress in resolving the management challenges, we sometimes indicated that progress relative to a management challenge was not discussed. Justice believes that, although technically correct, this is misleading because information about some of the management challenges may be included in the third column of the table, which discusses applicable goals and measures in Justice’s performance plan. Justice suggested that, where appropriate, we should indicate in the report column that information about a particular challenge is included under the “plan” column. Further, Justice noted that, in some instances, more complete discussions of its progress in addressing some issues can be found in other, more applicable, documents. We included text in the first paragraph of appendix I to explain that Justice did not have performance goals and measures for fiscal year 2000 to assess progress and that, for some of the management challenges, Justice discussed the challenge in its fiscal year 2002 performance plan. We did not verify whether additional information about Justice’s management challenges may be found in other documents, but if information in other documents is relevant to assessing Justice’s progress, it would have been useful to decisionmakers if Justice were to identify these documents in the performance report. In addition to the four areas discussed above, Justice raised one final issue. Justice noted that it continues to face conflicting pressures to keep its performance report and plan streamlined and yet to include more detailed information. Justice characterized our position as one desiring considerably more detail in its performance report and plan. Our point is not necessarily that Justice needs to include more detailed information, but rather that it needs to better articulate and explain how performance and strategies relate to achieving desired goals. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies of this report to appropriate congressional committees; the Attorney General; and the Director, Office of Management and Budget. Copies of this report will also be available to others on request. If you or your staff have any questions, please call me at (202) 512-8777. Key contributors to this report were Linda Watson, Tim Outlaw, Mary Hall, Julia Duquette, David Irvin, and Charles Vrabel. The following table identifies the major management challenges confronting the Department of Justice (Justice), which includes the governmentwide high-risk areas of strategic human capital management and information security. The first column lists the 19 management challenges identified by our office and/or Justice’s Office of the Inspector General (OIG). The second column discusses what progress, as discussed in its fiscal year 2000 performance report, Justice made in resolving its challenges. The third column discusses the extent to which Justice’s fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and the OIG identified. We found that Justice’s performance report discussed the agency’s progress in resolving many of its challenges, but it did not discuss the agency’s progress in resolving the following challenges: (1) internal control weaknesses at the Drug Enforcement Administration (DEA), (2) options for restructuring the Immigration and Naturalization Service (INS), (3) weaknesses in Justice’s asset forfeiture program, (4) program management weaknesses in the Weed and Seed program, (5) proper management of grant funds, and (6) enforcement efforts along the northern border. However, Justice officials pointed out that progress for these management challenges are not discussed in the fiscal year 2000 performance report because there were no goals, measures, or strategies in its fiscal year 2000 performance plan. Furthermore, Justice noted that some of these management challenges are included in its fiscal year 2002 performance plan. Of the agency’s 19 major management challenges identified by us and Justice’s OIG, Justice’s performance plan (1) had goals and measures that were directly related to ten challenges; (2) had a goal but no measures that were directly related to one challenge; (3) had goals and measures that were indirectly applicable to two of the challenges; (4) had no goals and measures related to two of the challenges, but discussed strategies to address them; or (5) had no goals, measures, or strategies to address four of the challenges. | This report reviews the Department of Justice's fiscal year 2000 performance report and fiscal year 2002 performance plan required by the Government Performance and Results Act of 1993 and assesses Justice's progress in achieving selected key outcomes that were identified as important mission areas. Justice's overall progress toward achieving the key outcomes was difficult to ascertain because generally the performance report lacked fiscal year 2000 performance targets to measure success and lacked clear linkage between performance measures and outcomes. Justice did not set fiscal year 2000 performance targets for some measures because the measures were new, and for some measures Justice believes that setting performance targets could cause the public to perceive law enforcement as engaging in "bounty hunting" or pursuing arbitrary targets merely for the sake of meeting particular goals. Justice's strategies varied in the extent to which they included sufficient information to inform decisionmakers about initiatives to achieve these outcomes. GAO notes opportunities for Justice to improve the usefulness of its reports and plans. |
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The Department of Defense (DOD) has been recovering nonrecurring research and development and one-time production costs on sales of weapon systems to foreign governments since 1967. The requirement to recover a proportionate amount of these costs was codified in the Arms Export Control Act in 1976, 22 U.S.C. section 2761 (e)(1)(B). The intent of the act was to control U.S. costs and the extent of weapons sales to foreign governments. The law required the recovery of costs on foreign military sales (government-to-government sales), but DOD retained its policy to collect nonrecurring costs on direct commercial sales (between the contractor and the buying entity) as it had been doing before the law was enacted. In 1992, DOD canceled its policy to recover nonrecurring costs on direct commercial sales in an effort to increase the competitiveness of U.S. firms in the world market. In 1995, a number of bills were introduced that could affect the recovery of nonrecurring costs on military sales. DOD interpreted the Arms Export Control Act as requiring the recovery of research and development costs on a pro rata basis. Between 1974 and 1977, DOD used a pro rata rate up to 4 percent of the total sales price. Currently, the services calculate the pro rata rate by dividing total research and development and other one-time production costs by the anticipated total number of units to be produced for both domestic and foreign use. A separate charge is calculated for each item of major defense equipment. The Defense Security Assistance Agency (DSAA) must approve all charges. They are published in the Major Defense Equipment List (MDEL) as part of DOD Manual 5105.38-M. DSAA officials acknowledged that the current pro rata calculation is complex and subject to error, particularly if sales fall short of or exceed projections. Nonrecurring cost charges are considered offsetting proprietary receipts and are deposited into the U.S. Treasury General Fund. They are credited to DOD’s total budget authority and total outlays but cannot be spent unless specifically appropriated. The Arms Export Control Act also specifies that waivers or reduced charges of nonrecurring costs are permitted on sales to the North Atlantic Treaty Organization (NATO) countries, Australia, New Zealand, and Japan to further standardization and mutual defense treaties. However, each waiver and reduction requires written justification. DOD collected $181 million in nonrecurring costs under the foreign military sales program in fiscal year 1994. Fiscal year 1990-92 collections total $559.4 million—$337.3 million for foreign military sales and $222.1 million for direct commercial sales. Fiscal year 1993 collections totaled $177.9 million. DSAA estimated in February 1995 that collections during fiscal years 1995-99 could amount to $845 million. DSAA based these estimates primarily on past sales. DSAA also estimated that if the charge on foreign military sales is dropped as proposed, collections would decrease by $73 million through 1999. Some collections would continue based on deliveries to be made on current contracts. (See fig. 1.) A DSAA official stated that collections would probably stop completely in fiscal year 2002 if the charge is repealed in fiscal year 1995. In May 1995, DSAA estimated that if a requirement to collect nonrecurring costs on direct commercial sales were reimposed in fiscal year 1996, it would resume collections in fiscal year 1998, given production and delivery lead times, and recover about $198 million through fiscal year 1999. Table 1 shows estimated collections on both foreign military and direct commercial sales (including a charge on direct commercial sales). DOD waived $273 million in nonrecurring costs to NATO members and Japan in fiscal year 1994, about $92 million more than DOD collected in nonrecurring cost charges in the same year. About 90 percent of the waivers involved Norway’s purchase of missiles and Turkey’s purchase of missiles, aircraft, gun mounts, sonars, and vertical launchers. DOD’s justification for the waivers involving Norway was to help achieve standardization, and the justification for waivers involving Turkey related to base rights agreements. Table 2 shows the aggregated totals of authorized waivers to NATO, 12 individual NATO countries, Australia, and Japan for fiscal years 1991 to 1994. Waivers on direct commercial sales represent sales agreements signed before the 1992 repeal. We focused our analysis on the comparison of current pro rata charges with flat rate charges of 3, 5, 8, and 10 percent on the acquisition cost of 68 weapon systems sold. First, we calculated the charges on four categories of weapons—projectiles, missiles, aircraft, and aircraft engines. The flat rate charges of 3 and 5 percent generally resulted in lower total charges for each category of weapon systems—in the aircraft category, the charge was considerably less at 3 percent—than the total pro rata charges. Flat rate charges of 8 and 10 percent in most cases resulted in comparable or considerably higher total charges than the current pro rata charges for the four categories of weapon systems. For example, a 3-percent flat rate charged on the sale of each of 27 aircraft resulted in total charges of $20.4 million, or $9.5 million less than the $29.9 million recovered under the pro rata system. On the other hand, a 10-percent flat rate charge on the sale of each of the 27 aircraft resulted in a total charge of $67.9 million, or $38 million more than the $29.9 million recovered under the pro rata system. On the 68 weapon systems we examined, current pro rata charges ranged from 0.07 percent to 15.95 percent of acquisition cost and averaged 5.18 percent. Thus, for a given flat rate of 3, 5, 8, or 10 percent, the difference between the flat rates and pro rata charges varies widely. For example, a 3-percent flat rate would be greater than a pro rata charge for 19 of the 27 aircraft we examined whereas a 3-percent flat rate was larger than the pro rata charge for only 2 of the 13 missiles we examined. However, on some sales of commonly sold military items, DOD might not recover the same level of charges using a nominal flat rate that it would under the pro rata system. For example, DOD anticipated collections of $279 million in nonrecurring cost charges on the sales of 228 F-16 A/B aircraft and 131 F-16 C/D aircraft when they are delivered to the buying countries. A flat rate of 3 percent on these sales would yield about one-half the pro rata charges; a 6-percent flat rate would yield an amount comparable to the pro rata charges. On sales of HARM AGM-88 missiles to three countries, total pro rata charges for the 181 missiles sold amount to $3.85 million. A 3-percent flat rate on these sales would provide only 40 percent of the pro rata charges; a 7.5-percent flat rate would yield an amount comparable to the pro rata charges. Appendix I compares the current pro rata charges with flat rate charges of 3, 5, 8, and 10 percent on the weapon systems we examined. The benefit of computing nonrecurring cost charges with a flat rate is its ease of administration. In addition, some of the U.S. government’s research and development investment would be recovered, though perhaps not accurately or equitably for some specific weapons or categories of weapons. Total recoveries are affected by sales, which are affected by a buyer’s assessment of economic factors such as price, quality, availability, and competition, and must also be considered. We did not analyze flat rate charges on commercial sales because of the proprietary nature of commercial sales prices. However, DSAA officials stated that the same rate would apply to both types of sales should the nonrecurring cost charge be reimposed on direct commercial sales. We reported in 1986 that the pro rata system had inaccuracies that prevented DOD from collecting accurate nonrecurring cost charges. For example, DOD was unable to accurately predict future costs and future U.S. and foreign quantity requirements. At that time, we recommended that DOD improve the existing pro rata system or develop a new approach for recovering research and development costs. The approach we suggested was to apply a flat rate to the acquisition price of all equipment sold abroad. We reported that with the use of a flat rate, DOD would recover comparable research and development costs yet simplify the complex administrative and review process of calculating a pro rata fee. In 1986, DOD opted to retain the pro rata calculation and stated that the Arms Export Control Act would need to be revised to permit the use of a flat rate fee. DOD’s reasoning at the time was that a flat rate would not recover a “proportionate” share of investment on individual items as the law required. DSAA’s General Counsel now interprets 22 U.S.C. section 2761 (e)(1)(B) as allowing a flat rate to be collected because the law requires recovery of a proportionate amount, not a pro rata share. Thus, the DSAA General Counsel concluded that the law would not have to be amended to permit the use of a flat rate. In our view, it is not clear that DOD would have authority under current law to use a flat rate. Supporters and opponents of recovery of nonrecurring costs differ on its benefits and drawbacks. On one hand, supporters of nonrecurring cost recovery that we spoke with, including arms control advocates, argue that nonrecurring cost charges should be collected on both foreign military sales and direct commercial sales for a number of reasons. Some supporters believe that, from an economic standpoint, the United States should recover all its costs and not subsidize the weapons industry by forgoing recovery of a portion of its research and development investments. Others believe that arms sales decisions should be based on national security concerns, not the economic interests of private firms. One group pointed to successful conversions of elements of the defense industry to competitive members of the international market for civilian goods as a means to counter declining defense production. Some arms control advocates assert that higher prices may deter sales and lessen any threat to the United States by reducing the availability of arms worldwide. Some supporters told us that recovered charges are deposited into the U.S. Treasury and thus relieve the U.S. budget deficit and benefit U.S. taxpayers. Some groups believe waivers to NATO and other foreign countries should be abolished as well. Opponents of recovery that we spoke with, generally industry representatives, favor repeal of the charge on foreign military sales and are adamantly against reimposing it on direct commercial sales. They expressed concerns that the charges raise sales prices and inhibit U.S. businesses’ competitiveness in the world market. They asserted that any addition to the cost of weapons could price U.S. industry out of the world market with a cascading adverse impact on U.S. jobs, income, and tax revenue. They also stated that lost sales, whether government-to-government or direct commercial sales, raise prices to the U.S. military services because they lose the benefit of lower unit costs. Industry officials also stated that the charge is an unfair tax that does not accurately represent U.S. research and development investment and is applied in an arbitrary manner. Many industry representatives said that the U.S. research and development investment benefits U.S. forces regardless of foreign sales and should not be imposed on foreign customers. DOD officials stated that they believe the elimination of the recovery charge would not negatively affect national security interests and the elimination of the recovery charge would, overall, be beneficial to the United States. In a May 1995 report, we compared U.S. government support for military exports with that of France, Germany, and the United Kingdom. We pointed out that, among other things, (1) the United States has been the world’s leading defense exporter since 1990, with almost 50 percent of the global market; (2) based on orders placed but not yet filled, U.S. industry will likely remain strong in the world market, at least for the short term; and (3) the U.S. government already provides substantial financial and other support to the U.S. defense exporters. Because of the large size of the U.S. domestic defense program, European businesses believe they are at a disadvantage when competing with U.S. firms. In written comments on a draft of this report, DOD concurred with the report. DOD indicated that (1) the Department fully supported the administration’s proposal to repeal the statutory requirement to recover nonrecurring costs on foreign military sales of major defense equipment, (2) a consistent policy for foreign military and direct commercial sales is essential, and (3) the current imbalance between the two types of sales should be eliminated. DOD’s comments are reprinted in appendix II. DOD also provided technical suggestions to clarify the report and they have been incorporated where appropriate. It should be pointed out that our review was not to assess the legislative proposals, but rather to focus primarily on the financial effects of using a flat rate instead of the current pro rata fees. We obtained information for this review from officials of DOD, DSAA, and the military services. We reviewed applicable statutes and DOD regulations governing recovery of nonrecurring costs on foreign military sales. We also discussed the benefits and drawbacks of recovering nonrecurring costs with supporters and opponents of recovery. To determine the effect of imposing a flat rate charge, we obtained from each of the services the acquisition value of selected major defense equipment sold under the foreign military sales program. We calculated nonrecurring cost charges using flat rates of 3, 5, 8, and 10 percent of the acquisition values of the selected weapon systems. We did our work between January and March 1995 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 from its issue date. At that time, we will send copies to the Chairmen of the Senate and House Committees on Appropriations, the Secretaries of Defense and State, and the Director of the Office of Management and Budget. Copies will also be made available to others on request. Please contact me on (202) 512-4128 if you or your staff have any questions concerning this report. Major contributors to this report were Diana Glod, Barbara Schmitt, and George Taylor. Table I.1: Pro Rata and Flat Rate Charges on Projectiles Nonrecurring pro rata charge (percent of acquisition cost) Table I.2: Pro Rata and Flat Rate Charges on Missiles Nonrecurring pro rata charge (percent of acquisition cost) Table I.3: Pro Rata and Flat Rate Charges on Aircraft Nonrecurring pro rata charge (percent of acquisition cost) (Table notes on next page) Without two J-85 engines. Without engines, AN/APG-63 radars, multistage improvement program, and towed electronic warfare system. With engines. Nonrecurring pro rata charge (percent of acquisition cost) 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. | Pursuant to a congressional request, GAO provided information on military exports, focusing on: (1) the government's recovery of nonrecurring research and development costs on sales of major defense equipment; (2) the effect of charging a flat or standard rate rather than the current pro rata fee; and (3) views from supporters and opponents on the recovery of these costs. GAO found that: (1) the Department of Defense recovered $181 million in nonrecurring costs on foreign military sales in fiscal year (FY) 1994 and estimated, based on historical trends, that collections could amount to $845 million between FY 1995 and 1999; (2) the Defense Security Assistance Agency waived almost $273 million in nonrecurring cost charges on sales to North Atlantic Treaty Organization countries and Japan in FY 1994; (3) the total value of waivers for FY 1991 through 1994 amounted to $773 million; (4) if the charge for nonrecurring costs is repealed, some collections would continue for a few more years as the charges are recovered on deliveries associated with prior years' sales; (5) if the legislative requirement to collect nonrecurring cost charges is not repealed, one alternative to the current pro rata charge is a flat rate charge, which would be easy to calculate and would not need to be periodically updated, as is the case in calculating a pro rata charge; (6) the effect of a flat rate varies depending on the way it is applied, in some cases the amount the U.S. government would collect on each unit sold would be less than the pro rate charge, in others it would be considerably more; (7) the total charges for each of four categories of 68 weapons systems (projectiles, missiles, aircraft, and aircraft engines) were generally lower than the current pro rata charges when using three and five percent flat rates but were comparable or higher for the most part when using eight and ten percent flat rates; (8) the differences between the pro rata charges and the flat rate charges for each of the 68 weapons systems varied widely for the same four flat rates and, for example, were considerably higher for some aircraft but lower for some missiles; (9) the average of the current pro rata charge on the acquisition cost of the 68 weapons systems was 5.18 percent; (10) supporters and opponents of recovery of nonrecurring costs differ on its benefits and drawbacks; (11) supporters, including some arms control advocates, believe that the charges serve national security interests by keeping weapons systems out of unstable regions of the world and the weapons industry should not be subsidized at taxpayers' expense; (12) opponents believe the charges adversely affect U.S. industry's competitiveness in the world market and could affect the U.S. economy in the long run; and (13) the United States has been the world's leading defense exporter since 1990, and based on orders received but not yet filled, the United States is likely to retain its first place position in the world market for at least the short term. |
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In recent years, reservists have regularly been called on to augment the capabilities of the active-duty forces. The Army is increasingly relying on its reserve forces to provide assistance with military conflicts and peacekeeping missions. As of April 2003, approximately 148,000 reservists from the Army National Guard and the U.S. Army Reserve were mobilized to active duty positions. In addition, other reservists are serving throughout the world in peacekeeping missions in the Balkans, Africa, Latin America, and the Pacific Rim. The involvement of reservists in military operations of all sizes, from small humanitarian missions to major theater wars, will likely continue under the military’s current war fighting strategy and its peacetime support operations. The Army has designated some Army National Guard and U.S. Army Reserve units and individuals as early-deploying reservists to ensure that forces are available to respond rapidly to an unexpected event or for any other need. Usually, those designated as early-deploying reservists would be the first troops mobilized if two major ground wars were underway concurrently. The units and individual reservists designated as early- deploying reservists change as the missions or war plans change. The Army estimates that of its 560,000 reservists, approximately 90,000 are reservists who have been individually categorized as early-deploying reservists or are reservists who are assigned to Army National Guard and U.S. Army Reserve units that have been designated as early-deploying units. The Army must comply with the following six statutory requirements that are designed to help ensure the medical and dental readiness of its early- deploying reservists. All reservists including early-deployers are required to have a 5-year physical examination, and complete an annual certificate of physical condition. All early-deploying reservists are also required to have a biennial physical examination if over age 40, an annual medical screening, an annual dental screening, and dental treatment. Army regulations state that the 5- and 2-year physical examinations are designed to provide the information needed to identify health risks, suggest lifestyle modifications, and initiate treatment of illnesses. While the two examinations are similar, the biennial examination for early- deploying reservists over age 40 contains additional age-specific screenings such as a prostate examination, a prostate-specific antigen test, and a fasting lipid profile that includes testing for total cholesterol, low- density lipoproteins, and high-density lipoproteins. The Army pays for these examinations. The examinations are also used to assign early-deploying reservists a physical profile rating, ranging from P1 to P4, in six assessment areas: (a) Physical capacity, (b) Upper extremities, (c) Lower extremities, (d) Hearing-ears, (e) Vision-eyes, and (f) Psychiatric. (See app. II for the Army’s Physical Profile Rating Guide.) According to the Army, P1 represents a non-duty-limiting condition, meaning that the individual is fit for duty and possesses no physical or psychiatric impairments. P2 means a condition may exist; however, it is not duty-limiting. P3 or P4 means that the individual has a duty-limiting condition in one of the six assessment areas. P4 means the individual functions below the P3 level. A rating of either P3 or P4 puts the reservist in a nondeployable status or may result in the changing of the reservist’s job classification. Beginning in January 2003, early-deploying reservists with a permanent rating of P3 or P4 in one of the assessment areas must be evaluated by an administrative screening board—the Military Occupational Specialty/Medical Retention Board (MMRB). This evaluation determines if reservists can satisfactorily perform the physical requirements of their jobs. The MMRB recommends whether a reservist should retain a job, be reassigned, or be discharged from the military. Army regulations that implement the statutory certification requirement provide that all reservists—including early-deploying reservists—certify their physical condition annually on a two-page certification form. Army early-deploying reservists must report doctor or dentist visits since their last examination, describe current medical or dental problems, and disclose any medications they are currently taking. (See app. III for a copy of the annual medical certificate—DA Form 7349.) In addition, the Army is required to conduct an annual medical screening for all early-deploying reservists. According to Army regulations, the Army is to meet the annual medical screening requirement by reviewing the medical certificate required of each early-deploying reservist. In addition, Army early-deploying reservists are required to undergo, at the Army’s expense, an annual dental examination. The Army is also required to provide and pay for the dental treatment needed to bring an early- deploying reservist’s dental status up to deployment standards—either dental class 1 or 2. (See table 1 for a general description of each dental classification.) According to Army officials, most of the 5-year and 2-year physical examinations, the dental examinations, and the dental treatments that have been performed were administered by military medical personnel. However, beginning in March 2001, the Army started outsourcing some examinations through the Federal Strategic Healthcare Alliance (FEDS_HEAL)—an alliance of private physicians and dentists and other physicians and dentists who work for the Department of Veterans Affairs and HHS’s Division of Federal Occupational Health. FEDS_HEAL is a program that allows Army early-deploying reservists to obtain required physical and dental examinations and dental treatment from local providers. The Army contracts and pays for these examinations. About 12,000 of these providers nationwide participate in FEDS_HEAL. The Army plans to increase its reliance on FEDS_HEAL to provide physical and dental examinations, and dental treatment for early-deploying reservists. Medical experts recommend physical and dental examinations as an effective means of assessing health. For some people, the frequency and content of physical examinations vary according to the specific demands of their job. Because Army early-deploying reservists need to be healthy to fulfill their professional responsibilities, periodic examinations are useful for assessing whether they can perform their assigned duties. Furthermore, the estimated annual cost to conduct periodic examinations—about $140—is relatively modest compared to the thousands of dollars the Army spends for salaries and training of early- deploying reservists—an investment that may be lost if reservists can not perform their assigned duties. Physical and dental examinations are geared towards assessing and improving the overall health of the general population. The U.S. Preventive Services Task Force and many other medical organizations no longer recommend annual physical examinations for adults—preferring instead a more selective approach to detecting and preventing health problems. In 1996, the task force reported that while visits with primary care clinicians are important, performing the same interventions annually on all patients is not the most clinically effective approach to disease prevention. Consistent with its finding, the task force recommended that the frequency and content of periodic health examinations should be based on the unique health risks of individual patients. Today, many health associations and organizations are recommending periodic health examinations that incorporate age-specific screenings, such as cholesterol screenings for men (beginning at age 35) and women (beginning at age 45) every 5 years, and clinical breast examinations every 3 to 5 years for women between the ages of 19 and 39. Further, oral health care experts emphasize the importance of regular 6- to 12-month dental examinations. Both the private and public sectors have established a fixed schedule of physical examinations for certain occupations to help ensure that workers are healthy enough to meet the specific demands of their jobs. For example, the Federal Aviation Administration requires commercial pilots to undergo a physical examination once every 6 months. U.S. National Park Service personnel who perform physically demanding duties have a physical examination once every other year for those under age 40, and on an annual basis for those over age 40. Additionally, guidelines published by the National Fire Protection Association recommend that firefighters have an annual physical examination regardless of age. In the case of Army early-deploying reservists, the goal of the physical and dental examinations is to help ensure that the reservists are fit enough to be deployed rapidly and perform their assigned jobs. Furthermore, the Army recognizes that some jobs are more demanding than others and require more frequent examinations. For example, the Army requires that aviators undergo a physical examination once a year, while marine divers and parachutists have physical examinations once every 3 years. While governing statutes and regulations require physical examinations at specific intervals, the Army has raised concerns about the appropriate frequency for them. In a 1999 report to the Congress, the Offices of the Assistant Secretaries of Defense for Health Affairs and Reserve Affairs stated that while there were no data to support the benefits of conducting periodic physical examinations, DOD was reluctant to recommend a change to the statutory requirements. The report stated that additional research was needed to identify and develop a more cost-effective, focused health assessment tool for use in conducting physical examinations for reservists—in order to ensure the medical readiness of reserve forces. However, as of February 2003, DOD had not conducted this research. For its early-deploying reservists, the Army conducts and pays for physical and dental examinations and selected dental treatments at military treatment facilities or pays civilian physicians and dentists to provide these services. The Army could not provide us with information on the cost to provide these services at military hospitals or clinics primarily because it does not have a cost accounting system that records or generates cost data for each patient. However, the Army was able to provide us with information on the amount it pays civilian providers for these examinations under the FEDS_HEAL program. Using FEDS_HEAL contract cost information, we estimate the average cost of the examinations to be about $140 per early-deploying reservist per year. We developed the estimate over one 5-year period by calculating the annual cost for those early-deploying reservists requiring a physical examination once every 5 years, calculating the cost for those requiring a physical examination once every 2 years, and calculating the cost for those requiring an initial dental examination and subsequent yearly dental examinations. The FEDS_HEAL cost for each physical examination for those under 40 is about $291, and for those over 40 is about $370. The Army estimates that the cost of annual dental examinations under the program to be about $80 for new patients and $40 for returning patients. The Army estimates that it would cost from $400 to $900 per reservist to bring those who need treatment from dental class 3 to dental class 2. For the Army, there is likely value in conducting periodic examinations because the average cost to provide physical and dental examinations per early-deploying reservist—about $140 annually over a 5-year period—is relatively low compared to the potential benefits associated with such examinations. These examinations could help protect the Army’s investment in its early-deploying reservists by increasing the likelihood that more reservists will be deployable. This likelihood is increased when the Army uses examinations to identify early-deploying reservists who do not meet the Army’s health standards and are thus not fit for duty. The Army can then intervene by treating, reassigning, or dismissing these reservists with duty-limiting conditions—before their mobilization and before the Army needs to rely on the reservists’ skills or occupations. Furthermore, by identifying duty-limiting conditions or the risks for developing them, periodic examinations give early-deploying reservists the opportunity to seek medical care for their conditions—prior to mobilization. Periodic examinations may provide another benefit to the Army. If the Army does not know the health condition of its early-deploying reservists, and if it expects some of them to be unfit and incapable of performing their duties, the Army may be required to maintain a larger number of reservists than it would otherwise need in order to fulfill its military and humanitarian missions. While data are not available to estimate these benefits, the benefit associated with reducing the number of reservists the Army needs to maintain for any given objective could be large enough to more than offset the cost of the examinations and treatments. The proportion of reservists whom the Army maintains but who cannot be deployed because of their health may be significant. For instance, according to a 1998 U.S. Army Medical Command study, a “significant number” of Army reservists could not be deployed for medical reasons during mobilization for the Persian Gulf War (1990-1991). Further, according to a study by the Tri-Service Center for Oral Health Studies at the Uniformed Services University of the Health Sciences, an estimated 25 percent of Army reservists who were mobilized in response to the events of September 11, 2001, were in dental class 3 and were thus undeployable. In fact, our analysis of the available current dental examinations at the seven early-deploying units showed a similar percentage of reservists—22 percent—who were in dental class 3. With each undeployable reservist, the Army loses, at least temporarily, a significant investment that is large compared to the cost of examining and treating these reservists. The annual salary for an Army early-deploying reservist in fiscal year 2001 ranged from $2,200 to $19,000. The Army spends additional amounts to train and equip each reservist and, in some cases, provides allowances for subsistence and housing. Additionally, for each reservist it mobilizes, the Army spends about $800. If it does not examine all of its early-deploying reservists, the Army risks losing its investment because it will train, support, and mobilize reservists who might not be deployed because of their health. The Army has not consistently carried out the requirements that early- deploying reservists undergo 5- or 2-year physical examinations, and the required dental examination. In addition, the Army has not required early- deploying reservists to complete the annual medical certificate of their health condition, which provides the basis for the required annual medical screening. Accordingly, the Army does not have current health information on early-deploying reservists. Furthermore, the Army does not have the ability to maintain information from medical and dental records and annual medical certificates at the aggregate or individual level, and therefore does not know the overall health status of its early-deploying reservists. We found that the Army has not consistently met the statutory requirements to provide early-deploying reservists physical examinations at 5- or 2-year intervals. At the seven Army early-deploying reserve units we visited, about 66 percent of the medical records were available for our review. Based on our review of these records, 13 percent of the reservists did not have a current 5-year physical examination on file. Further, the Army is also required to provide physical examinations every 2 years for Army early-deploying reservists over the age of 40. However, our review of the available records found that approximately 68 percent of early- deploying reservists over age 40 did not have a record of a current biennial examination. Army early-deploying reservists are required by statute to complete an annual medical certificate of their health status, and regulations require the Army to review the form to satisfy the annual screening requirement. In performing our review of the records on hand, we found that none of the units we visited required that its reservists complete the annual medical certificate, and consequently, none of them were available for review. Furthermore, Army officials stated that reservists at most other units have not filled out the certification form and that enforcement of this requirement was poor. The Army is also statutorily required to provide early-deploying reservists with an annual dental examination to establish whether reservists meet the dental standards for deployment. At the seven early-deploying units that we visited, we found that about 49 percent of the reservists whose records were available for review did not have a record of a current dental examination. The Army’s two automated information systems for monitoring reservists’ health do not maintain important medical and dental information for early- deploying reservists—including information on the early-deploying reservists’ overall health status, information from the annual medical certificate form, dental classifications, and the date of dental examinations. In one system, the Regional Level Application Software, the records provide information on the dates of the 5-year physical examination and the physical profile ratings. In the other system, the Medical Occupational Database System, the records provide information on HIV status, immunizations, and DNA specimens. Neither system allows the Army to review medical and dental information for entire units at an aggregate level. The Army is aware of the information shortcomings of these systems and acknowledges that having sufficient, accurate, and current information on the health status of reservists is critical for monitoring combat readiness. According to Army officials, in 2003 the Army plans to expand the Medical Occupational Database System to provide the Army with access to current, accurate, and relevant medical and dental information at the aggregate and individual levels for all of its reservists—including early-deploying reservists. According to Army officials, this information will be readily available to the U.S. Army Reserve Command. Once available, the Army can use this information to determine which early-deploying reservists meet the Army’s health care standards and are ready for deployment. Army reservists have been increasingly called upon to serve in a variety of operations, including peacekeeping missions and the current war on terrorism. Given this responsibility, periodic health examinations are important to help ensure that Army early-deploying reservists are fit for deployment and can be deployed rapidly to meet humanitarian and wartime needs. However, the Army has not fully complied with statutory requirements to assess and monitor the medical and dental status of early- deploying reservists. Consequently, the Army does not know how many of them can perform their assigned duties and are ready for deployment. The Army will realize benefits by fully complying with the statutory requirements. The information gained from periodic physical and dental examinations, coupled with age-specific screenings and information provided by early-deploying reservists on an annual basis in their medical certificates, will assist the Army in identifying potential duty-limiting medical and dental problems within its reserve forces. This information will help ensure that early-deploying reservists are ready for their deployment duties. Given the importance of maintaining a ready force, the benefits associated with the relatively low annual cost of about $140 to conduct these examinations outweighs the thousands of dollars spent in salary and training costs that are lost when an early-deploying reservist is not fit for duty. The Army’s planned expansion, in 2003, of an automated health care information system is critical for capturing the key medical and dental information needed to monitor the health status of early-deploying reservists. Once collected, the Army will have additional information to conduct the research suggested by DOD’s Offices of Health Affairs and Reserve Affairs to determine the most effective approach, which could include the frequency of physical examinations, for determining whether early-deploying reservists are healthy, can perform their assigned duties, and can be rapidly deployed. To help ensure that early-deploying reservists are healthy to carry out their duties, we recommend that the Secretary of Defense direct the Secretary of the Army to comply with existing statutory requirements to ensure that the 5-year physical examinations for early-deploying reservists under 40 and the biennial physical examinations for early-deploying reservists over 40 are current and complete, all early-deploying reservists complete their annual medical certificate of health status and that the appropriate Army personnel review the certificate, and the required dental examinations and treatments for all early-deploying reservists are complete. The Department of Defense provided written comments on a draft of this report, which are found in appendix IV. DOD concurred with the report’s recommendations. DOD raised some concerns about our evaluation. For example, DOD stated that the intermittent use of the terms “The Army,” “Reserve Component,” and “Army Reserve” would lead to a misunderstanding of the organization of Army Components. While DOD did not offer specific examples, we reviewed the draft to ensure that terms were used appropriately and did not make any changes. DOD also raised the concern that we used a very narrow subject group that may not reflect a valid representative sample and that the report findings could be incorrectly applied to the Army National Guard. As we noted in our draft report, our work was conducted at seven early deploying U.S. Army Reserve units— geographically dispersed in the states of Georgia, Maryland, and Texas— and our analysis of the information collected at these units is not projectable. Finally, DOD stated that methods for annually certifying physical conditions could also include completing the statement of physical condition that is preprinted on the Personnel Qualification Record, and that we did not consider whether such alternatives were used for certification. During our visits we reviewed the medical files at all locations, the personnel files at one location, and interviewed military personnel who were responsible for maintaining the records of early- deploying reservists at all locations. We were unable to find one annual medical certificate that was reviewed by military personnel to meet the statutory requirements. In addition, some military personnel were not aware of the requirement. We are sending copies of this report to the Secretary of Defense, appropriate congressional committees, and other interested parties. Copies will also be made available to others on request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7101. Another contact and major contributors are listed in appendix V. We reviewed statutes and Army policies and regulations governing annual medical and dental screenings, and periodic physical and dental examinations. We obtained data from the Office of the Chief, U.S. Army Reserve on the physical and dental examinations performed since 2001 on early-deploying reservists. We reviewed our past reports that addressed medical and dental examinations. We conducted site visits to seven U.S. Army Reserve Units located in Georgia, Maryland, and Texas—where we obtained and reviewed all available medical and dental records. There were 504 early-deploying reservists assigned to the seven units we visited. Medical records for 332 reservists were available for our review. Army administrators told us that the remaining files were in transit, with the reservist, or on file at another location. Our analysis of the information gathered at these units is not projectable. We did not review medical or dental records at Army National Guard units, but obtained information from the Guard on its medical policies. To calculate an average annual cost to provide physical and dental examinations for Army early-deploying reservists, we obtained estimates from the Army’s Federal Strategic Healthcare Alliance (FEDS_HEAL) administrator on the costs of outsourcing the examinations. We calculated the annual cost for those reservists requiring a physical examination once every 5 years and those requiring a physical examination once every 2 years. In developing the annual cost estimate, we used DOD information on the number of Army reservists that are under 40 (approximately 75 percent), and those over 40 (approximately 25 percent). We also included the initial dental examination cost and subsequent yearly dental examination costs. All costs were averaged over one 5-year period. The average annual cost does not include allowances for inflation, dental treatment, or specialized laboratory fees such as those for pregnancy, phlebotomy, and tuberculosis. We also obtained estimates of the cost to perform dental treatments from the Army Office of the Surgeon General and Army Dental Command. We obtained from DOD, HHS’s Office of Public Health and Science, the Centers for Disease Control and Prevention, medical associations, and dental associations studies and information concerning the advisability of periodic physical and dental examinations. From these organizations we also obtained published common practices and standards concerning periodic medical and dental examinations, age and risk factors, and the value and relevance of patients’ self-reporting of symptoms. Upper extremities Strength, range of motion, and general efficiency of upper arm, shoulder girdle, and upper back, including cervical and thoracic vertebrae. Lower extremities Strength, range of movement, and efficiency of feet, legs, lower back, and pelvic girdle. Hearing-ears Auditory sensitivity and organic disease of the ears. Vision-eyes Visual acuity and organic disease of the eyes and lids. No loss of digits or limitation of motion; no demonstrable abnormality; able to do hand-to- hand fighting. No loss of digits or limitation of motion; no demonstrable abnormality; able to perform long marches, stand over long periods, and run. Audiometer average level for each ear not more than 25 dB at 500, 1000, or 2000 Hz with no individual level greater than 30 dB. Not over 45 dB at 4000 Hz. Uncorrected vision acuity 20/200 correctable to 20/20 in each eye. Psychiatric Type, severity, and duration of the psychiatric symptoms or disorder existing at the time the profile is determined. Amount of external precipitating stress. Predispositions as determined by the basic personality makeup, intelligence, performance, and history of past psychiatric disorder impairment of functional capacity. No psychiatric pathology; may have history of transient personality disorder. Upper extremities Slightly limited mobility of joints, muscular weakness, or other musculo- skeletal defects that do not prevent hand-to- hand fighting and do not disqualify for prolonged effort. Lower extremities Slightly limited mobility of joints, muscular weakness, or other musculo- skeletal defects that do not prevent moderate marching, climbing, timed walking, or prolonged effort. Vision-eyes Distant visual acuity correctable to not worse than 20/40 and 20/70, or 20/30 and 20/100, or 20/20 and 20/400. Psychiatric May have history of recovery from an acute psychotic reaction due to external or toxic causes unrelated to alcohol or drug addiction. Defects or impairments that require significant restriction of use. Defects or impairments that require significant restriction of use. Hearing-ears Audiometer average level for each ear at 500, 1000, or 2000 Hz, not more than 30 dB, with no individual level greater than 35 dB at these frequencies, and level not more than 55 dB at 4000 Hz; or audiometer level 30 dB at 500 Hz, 25 dB at 1000 and 2000 Hz, and 35 dB at 4000 Hz in better ear. (Poorer ear may be deaf.) Speech reception threshold in best ear not greater than 30 dB HL measured with or without hearing aid, or chronic ear disease. Uncorrected distant visual acuity of any degree that is correctable to not less than 20/40 in the better eye. Functional level below P3. Functional level below P3. Functional level below P3. Functional level below P3. Satisfactory remission from an acute psychotic or neurotic episode that permits utilization under specific conditions (assignment when outpatient psychiatric treatment is available or certain duties can be avoided). Functional level below P3. The following staff members made key contributions to this report: Aditi S. Archer, Richard J. Wade, Krister P. Friday, Helen T. Desaulniers, and Mary W. Reich. Military Personnel: Preliminary Observations Related to Income, Benefits, and Employer Support for Reservists During Mobilizations. GAO-03-549T. Washington, D.C.: March 19, 2003. Defense Health Care: Most Reservists Have Civilian Health Coverage but More Assistance Is Needed When TRICARE Is Used. GAO-02-829. Washington, D.C.: September 6, 2002. Reserve Forces: DOD Actions Needed to Better Manage Relations between Reservists and Their Employers. GAO-02-608. Washington, D.C.: June 13, 2002. Department of Defense: Implications of Financial Management Issues. GAO/T-AIMD/NSIAD-00-264. Washington, D.C.: July 20, 2000. Reserve Forces: Cost, Funding, and Use of Army Reserve Components in Peacekeeping Operations. GAO/NSAID-98-190R. Washington, D.C.: May 15, 1998. Defense Health Program: Future Costs Are Likely to Be Greater than Estimated. GAO/NSIAD-97-83BR. Washington, D.C.: February 21, 1997. Wartime Medical Care: DOD Is Addressing Capability Shortfalls, but Challenges Remain. GAO/NSIAD-96-224. Washington, D.C.: September 25, 1996. Reserve Forces: DOD Policies Do Not Ensure That Personnel Meet Medical and Physical Fitness Standards. GAO/NSIAD-94-36. Washington, D.C.: March 23, 1994. Operation Desert Storm: Problems With Air Force Medical Readiness. GAO/NSIAD-94-58. Washington, D.C.: December 30, 1993. Reserve Components: Factors Related to Personnel Attrition in the Selected Reserve. GAO/NSIAD-91-135. Washington, D.C.: April 8, 1991. | During the 1990-1991 Persian Gulf War, health problems prevented the deployment of a significant number of Army reservists. To help correct this problem the Congress passed legislation that required reservists to undergo periodic physical and dental examinations. The National Defense Authorization Act for 2002 directed GAO to review the value and advisability of providing examinations. GAO also examined whether the Army is collecting and maintaining information on reservist health. GAO obtained expert opinion on the value of periodic examinations and visited seven Army reserve units to obtain information on the number of examinations that have been conducted. Medical experts recommend periodic physical and dental examinations as an effective means of assessing health. Periodic physical and dental examinations for early-deploying reservists provide a means for the Army to determine their health status. Army early-deploying reservists need to be healthy to meet the specific demands of their occupations; examinations and other health screenings can be used to identify those who cannot perform their assigned duties. Without adequate examinations, the Army may train, support, and mobilize reservists who are unfit for duty. The Army has not consistently carried out the statutory requirements for monitoring the health and dental status of Army early-deploying reservists. At the early-deploying units GAO visited, approximately 66 percent of the medical records were available for review. For example, we found that about 68 percent of the required 2-year physical examinations for those over age 40 had not been performed and that none of the annual medical certificates required of reservists were completed by reservists and reviewed by the units. The Army's automated health care information system does not contain comprehensive physical and dental information on early-deploying reservists. According to Army officials, in 2003 the Army plans to expand its system to maintain accurate and complete medical and dental information to monitor the health status of early-deploying reservists. |
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Following the Persian Gulf War, the Department of Defense (DOD) identified a number of problems with its deep attack weapons and suggested improvements designed to ensure target destruction with minimum casualties, delivery sorties, weapons, and unwanted collateral damage. In response, the services initiated a number of programs to upgrade existing guided weapons and to acquire new ones. However, because the defense budget, in accordance with the balanced budget agreement, is likely to be relatively fixed for the foreseeable future, Congress expressed concern about the need and affordability of all these programs. The Joint Chiefs of Staff (JCS) acknowledge that they are facing flat budgets and increasingly expensive readiness and modernization and that to retain effectiveness, the services must integrate their capabilities. The JCS anticipate leveraging technological opportunities to reach new levels of effectiveness in joint military operations. The current military doctrine also recognizes that new technologies are a key component in increasing the effectiveness of military operations. Guided weapons play an important role in implementing this doctrine. Guided weapons are more accurate than unguided weapons because they have the capability for in-flight guidance correction. They can be powered or unpowered. The range from which they can be launched varies from a few miles for the unpowered Guided Bomb Unit (GBU) series of weapons to several hundred miles for the Tomahawk cruise missile and the Conventional Air-Launched Cruise Missile (CALCM). Most guided weapons are launched from aircraft or helicopters, but the Tomahawk is launched from Navy surface ships and submarines; and the Army Tactical Missile System (ATACMS) is launched from the Multiple Launch Rocket System. They can be guided by the Global Positioning System (GPS), infrared sensors, electro-optical sensors, or lasers. Some weapons have single warheads, others carry many antipersonnel or antiarmor submunitions. The specific guided weapon used depends on the type of target, the defenses around the target, and whether areas adjacent to the target must be avoided. Deep attack guided weapons are used for operations carried out beyond the areas where friendly ground forces are operating. These weapons can be released very close to the target or at standoff ranges many miles from the target, either vertically or horizontally. “Standoff” range is the distance between the weapon launcher and the target. Guided weapons were first used in the Vietnam War to destroy targets that previously required tons of unguided general purpose weapons. However, guided weapons proved their value in the Persian Gulf War, when the world watched them make precision attacks against targets in Iraq. Guided weapons were subsequently recognized as having the potential to revolutionize warfare. Before the Gulf War, aircrew training focused on a potential Central European conflict and emphasized low-altitude tactics using aircraft and weapons designed for such missions. However, Iraqi air defenses included large numbers of antiaircraft artillery that could put up a “wall of iron” against low-flying aircraft. After several aircraft losses, and to avoid the risk of losing a B-52H to antiaircraft artillery, pilots were ordered to drop weapons from higher altitudes than anticipated. At these altitudes, however, bombing with general purpose bombs was not accurate, and wind forces became a factor. While guided weapons achieved better results, a relatively small number of them were used, and their effectiveness was often limited by weather, target location uncertainty, and other factors. As a consequence, bombing accuracy was poor, and multiple weapons—in some cases multiple attacks—were used on each target. Incomplete and delayed bomb damage assessments were also a factor in the need for multiple attacks. Following the Gulf War, several DOD studies identified a number of changes that could improve the accuracy, standoff range, and lethality of its guided weapons as well as target identification and damage assessment capabilities. The aim of these improvements is to ensure target destruction with the minimum number of delivery sorties and weapons and to avoid unwanted collateral damage and minimize exposure of friendly aircraft to enemy defenses. In response, the services initiated a number of programs to upgrade existing guided weapons—such as CALCM, the Tomahawk cruise missile, the Standoff Land Attack Missile (SLAM), and Air-to-Ground Guided Missile (AGM) 130—and to acquire new guided weapons, including the Joint Direct Attack Munition (JDAM), the Wind-Corrected Munition Dispenser (WCMD), the Joint Standoff Weapon (JSOW), and the Joint Air-to-Surface Standoff Missile (JASSM). Still more guided weapon programs are planned. To take full advantage of new and improved guided weapons, launch aircraft capabilities are improving. More than nine times as many F-16s and many more F-15E fighters can employ guided weapons today than in 1991. All DOD combat aircraft will be able to use GPS by the end of fiscal year 2000 (GPS allows precise positioning and navigation and permits weapon release in all types of weather). Additionally, the number of aircraft with night-fighting and target acquisition capabilities has increased significantly since fiscal year 1991. Currently, more than 600 Air Force fighters can use all or part of the Low-Altitude Navigation Targeting Infrared for Night System, and hundreds of Navy F/A-18 aircraft have forward-looking infrared pods for night vision. DOD’s management of its guided weapon capabilities, requirements, and acquisition programs has been of interest to Congress and others for many years. In 1995, we reported that the services had bought or were developing 33 types of guided weapons with over 300,000 individual weapons to attack surface targets. We also stated that the services had initiated development programs both to increase the number of guided weapons and to gain additional capability through technical improvements to weapons in the inventory. The 1995 Report of the Commission on Roles and Missions of the Armed Forces recommended an assessment of the services’ deep attack systems to determine the appropriate force size and mix. The report questioned whether DOD had the right mix, asserted that DOD may have greater quantities of deep attack weapon systems than it needs, and recommended a DOD-wide cost-effectiveness study to determine the appropriate mix. The report concluded that “only by approaching capabilities in the aggregate, from the Commanders in Chiefs’ (CINC) perspective rather than the services’, can this particular ‘who needs what’ question be answered.” The 1996 National Defense Authorization Act required DOD to report to Congress on (1) the process for approving development of guided weapons, (2) the feasibility of the services’ jointly developing weapons and integrating them in multiple aircraft, and (3) the cost-effectiveness of developing interim weapons or of procuring small quantities of weapons. DOD was also asked to provide a quantitative analysis of deep attack weapons mix options. In April 1996, the Secretary of Defense issued a report informing Congress of the steps DOD was taking to avoid duplicate and redundant guided weapon programs and explaining how requirements and inventory levels were being determined. DOD also responded to congressional concerns regarding the economy and effectiveness of the continued acquisition of smaller quantities of some guided weapons whose unit costs had increased over 50 percent since December 1, 1991. DOD’s report to Congress is discussed in chapter 5. In May 1997, DOD issued its report on the Quadrennial Defense Review.The review was a comprehensive examination of America’s defense needs from 1997 to 2015 and included military modernization programs and strategy. It was intended to serve as DOD’s overall strategic planning document and made several recommendations involving guided weapons modernization programs. In November 1997, DOD reported on the results of its Deep Attack Weapons Mix Study. The results of this study and the recommendations of the review are discussed in chapter 4. In December 1997, the National Defense Panel reported on its congressionally directed assessment of DOD’s Quadrennial Defense Review. The Panel considered the review a significant step in the adjustment of U.S. forces to reflect the collapse of the Warsaw Pact. However, the Panel differed over emphasis or priorities in a number of areas. We discuss the Panel’s assessment in chapter 5. In response to the request of the Chairmen of the National Security Subcommittee, House Committee on Appropriations, and of the Subcommittee on Military Research and Development, House Committee on National Security, we sought to determine whether the services’ plans for developing and/or procuring guided weapons can be carried out as proposed within relatively fixed defense budgets, the number of guided weapons the services plan to buy are consistent with projected threats and modernization requirements, the current and planned guided weapon programs duplicate or overlap each other, and DOD is providing effective oversight in the development and procurement of deep attack weapons. To determine whether the services’ plans for developing and/or procuring guided weapons can be carried out as proposed within expected defense budgets, we obtained program cost and schedule information from weapon program offices and compared current weapon procurement plans with previous procurement history. We discussed and obtained copies of weapon program plans at the Aeronautical Systems Center, Eglin Air Force Base, Florida; Ogden Air Logistic Center, Hill Air Force Base, Utah; and Naval Air Warfare Center, Point Mugu Naval Air Weapons Station, California. To determine whether the numbers of guided weapons the services plan to buy are consistent with projected threats and modernization requirements, we obtained information on DOD’s weapons inventories from the Office of the Joint Chiefs of Staff, Washington, D.C. We reviewed the Navy’s nonnuclear ordnance requirement process and the Air Force’s nonnuclear consumables annual analysis model with personnel from those offices in Washington, D.C. Worldwide threat information was obtained from the Defense Intelligence Agency, Washington, D.C. We discussed targeting procedures and weapon employment tactics with officials at the U.S. Central Command and Navy Central Command, MacDill Air Force Base, Florida, and the Air Force Central Command, Shaw Air Force Base, South Carolina. We also obtained and analyzed information from the Commander of U.S. Forces Korea on guided weapon requirements, capabilities, tactics, and operational plans. We visited the Office of the Joint Chiefs of Staff to determine its role in establishing weapon requirements, and we discussed out-year threats with personnel from the Defense Intelligence Agency, Washington, D.C. We also had discussions with DOD Inspector General personnel who were auditing the Navy and the Air Force requirements models. To determine whether current and planned guided weapon programs are duplicative and/or overlapping, we compared weapon capabilities such as range, potential target sets, and warhead types of similar weapons. In the course of this examination, we visited the JASSM program office at Eglin Air Force Base, Florida; the JSOW program office at Patuxent River Naval Air Station, Maryland; and the Standoff Land Attack Missile—Expanded Response (SLAM-ER) test site at Naval Air Warfare Center, Point Mugu Naval Air Weapons Station, California. We also discussed acquisition responsibilities with personnel from the Office of the Joint Chiefs of Staff and the Navy Aviation Requirements Branch, Washington, D.C., and the Air Combat Command, Langley Air Force Base, Virginia. To assess DOD’s oversight of the services’ deep attack weapon requirements and acquisition programs, we evaluated oversight processes and procedures in place and the extent to which guided weapon requirements and programs were assessed in the aggregate. We discussed the effectiveness of the current oversight processes—as well as alternative processes—with officials from the Joint Chiefs of Staff and the Office of the Under Secretary of Defense (Acquisition & Technology). We also reviewed DOD’s Deep Attack Weapons Mix Study and obtained documents and interviewed officials from the Office of the Joint Chiefs of Staff; Office of the Under Secretary of Defense (Comptroller/Chief Financial Officer), Program Analysis and Evaluation directorate; and the Institute for Defense Analyses. We conducted our audit work from July 1997 through October 1998 in accordance with generally accepted government auditing standards. To acquire the guided weapons now planned during fiscal years 1998-2007, DOD plans to spend about $16.6 billion (then-year dollars) for 158,800 weapons—doubling its average yearly spending compared with fiscal years 1993-97. The current investment strategy for guided weapons may not be executable as proposed because of the potential imbalance between funds likely to be available for actual procurement and projected spending. The projected imbalance may be greater than it appears because acquisition programs have traditionally cost more than originally projected, and several other weapons programs are expected to be approved for procurement. Furthermore, technology improvements will likely offer better weapon investments in the years ahead, generating even more programs to compete for the same resources. In the past, when faced with similar funding shortfalls, DOD’s approach has been to stretch out programs, delay procurement, and reduce annual production quantities. These strategies increased unit production costs and delayed deliveries. They could also limit DOD’s flexibility to shift resources from older weapons to more innovative systems. According to the fiscal year 1999-2003 Future Years Defense Program and longer-term program plans, the services plan to continue procuring guided weapon systems now in low-rate initial or full-rate production such as WCMD, JDAM, the Sensor Fuzed Weapon (SFW), SLAM-ER, the Baseline version of JSOW, the ATACMS Block I, and the Longbow Hellfire missile. The services also plan to begin production of several guided weapon systems now under development. These include JASSM, the Brilliant Antiarmor (BAT) submunition, the Bomb/Live Unit (BLU)-108 and Unitary versions of JSOW, and the ATACMS Block II and IIA. For about 127,000 of the 158,800 guided weapons to be acquired, a guidance kit will be added to an existing unguided weapon. These weapons include JDAM and WCMD. As shown in table 2.1, these programs range in dollar value from the $26-million procurement of AGM-130s to the $3.3-billion procurement of the ATACMS Block II and IIA, which includes the BAT submunition. Nine of these programs are expected to cost over $1 billion each. According to their procurement plans, the services plan to spend an average of $1.7 billion a year to procure guided weapons over the next 10 years—doubling the $848-million average yearly spending during fiscal years 1993-97. Figure 2.1 shows the planned annual procurement funding for guided weapons during fiscal years 1998-2007. Table 2.1 and figure 2.1 do not include all of the costs for the services’ planned modifications or upgrades to several existing guided weapons. For example, the Air Force and the Navy plan to equip approximately 500 GBU-24s and 500 GBU-27s with GPS guidance (which guides the weapon more accurately under all weather conditions). Additional quantities of these weapons may be upgraded in the future. Also, table 2.1 and figure 2.1 do not include funding requirements for proposed guided weapon programs that have not yet been approved for procurement. For example, DOD has potential requirements for the Small Smart Bomb, Low Cost Autonomous Attack System, Unmanned Combat Air Vehicles, Land Attack Standard Missile, and the Navy’s Vertical Gun. Further, rapidly evolving weapons technology could offer better weapon investments in the years ahead, generating even more programs to compete for the same resources. Last, acquisition programs, including guided weapon programs, have historically cost more than originally projected. Unanticipated cost growth has averaged at least 20 percent over the life of acquisition programs. Any cost growth in DOD’s guided weapon programs will increase the amount of funding needed to support them. (In the 1999 Future Years Defense Program, DOD included an acquisition program stability reserve to address unforeseeable cost growth that can result from technical risk and uncertainty. We have not evaluated the program stability reserve or the way DOD plans to implement it. However, the fund is budgeted at about $2.4 billion for fiscal years 2000-2003 to address possible cost growth in all defense programs. Further, the services are attempting to manage cost growth through initiatives such as “cost as an independent variable.” We have not evaluated the effectiveness of these initiatives.) DOD’s planned investment strategy for guided weapons is based on projections of increased procurement funding, as shown in figure 2.2, even though DOD’s overall budget is expected to remain relatively fixed. In the balanced budget agreement, the President and Congress agreed that the total national defense budget will remain relatively fixed in real terms at least through fiscal year 2002. While Congress has not discussed the defense budget beyond fiscal year 2002, DOD officials said their long-term planning now assumes no real growth in the defense budget. Within a relatively fixed defense budget, any proposed increase in spending for a particular account or project must be offset elsewhere. However, DOD has not identified specific budget reductions to offset the proposed increases in procurement funding for guided weapons. Furthermore, DOD’s other procurement programs, such as aircraft, shipbuilding, and missile defense, are also anticipating increases in procurement funding. Dollars in billions (then-year) DOD expects to increase its overall procurement spending to about $63.5 billion in fiscal year 2003 from the fiscal year 1998 level of about $44.8 billion while keeping overall defense spending at current levels at least through fiscal year 2003. This is an increase of about 42 percent. DOD’s planned procurement spending for guided weapon programs is projected to increase about 169 percent during the same period. To increase procurement funding and keep overall defense spending unchanged, DOD proposes to reduce personnel, make some modest changes in force structure, achieve infrastructure savings through fundamental reforms and base realignments/closures, and continue to improve its business operations. However, we recently reported that by 2002, funding for military personnel, operations and maintenance, and research, development, testing, and evaluation is projected to be higher while procurement funding is projected to be lower than anticipated. And for the fourth straight budget year, DOD in 1998 did not achieve the procurement goals established in the previous Future Years Defense Programs. DOD consistently projects increased procurement funding for the latter years in each Future Years Defense Program but, as subsequent Future Years Defense Programs are developed, significantly reduces those projections in response to budget-year realities. Savings from infrastructure reductions too often have not been as high as anticipated and have been absorbed by unplanned or underestimated expenses in day-to-day operations. According to DOD, the most common underestimated expenses are for depot and real property maintenance, military construction, and medical care. Because of unrealized savings, weapons modernization plans have repeatedly been underfunded. In its review of the Quadrennial Defense Review, the National Defense Panel concluded that DOD’s modernization plan has more budget risk than it acknowledges. The Panel considered DOD’s key assumptions for maintaining a $60-billion annual procurement goal somewhat tenuous and concluded that, collectively, the assumptions represent a budget risk that could potentially undermine DOD’s entire strategy. Weapon programs have typically projected annual procurement quantities and costs based on optimistic assumptions about funding availability. Our work has shown that the funds actually made available for procurement have often been much less than those projected when the program was proposed. When faced with funding shortfalls, DOD’s traditional approach has been to reduce annual procurement quantities and extend production schedules, without eliminating programs. Such actions have usually resulted in significantly higher average unit procurement costs and delayed deliveries to operational units. For example, in 1997, we reported that production costs for 17 of 22 weapon systems we reviewed had increased by $10 billion (fiscal year 1996 dollars) above original estimates through fiscal year 1996 because completion of the weapons’ production had been extended an average of 8 years (170 percent) longer than originally planned. We found that actual production rates averaged less than half the originally planned rates. These stretch-outs were caused primarily by funding limitations. The services’ procurement of guided weapons between fiscal year 1993 and 1998 also had higher unit costs because of schedule slippage, reduced procurement quantities, and cost growth. For example, the Air Force at one time planned to procure about 4,000 AGM-130s but now plans to buy only 711. As a result, the unit procurement cost is about $832,000 versus earlier projections of under $300,000. Reductions in planned procurement funding for the SFW have forced the program to reduce annual procurement rates and stretch out the schedule. As a result, SFW unit costs have increased from about $320,000 to over $358,000. The BAT program has also been unstable, and its schedule has been extended by 5 years. BAT’s procurement quantities have also dropped by 36 percent, while program costs have increased by almost 8 percent. The existing inventory of 1.3 million weapons, which could be used for deep attack, contains many guided munitions and hundreds of thousands of general purpose bombs. The current inventory is considered sufficient to meet current national defense objectives. The deep attack weapons used in the Gulf War would represent about 17 percent of the current inventory. Yet DOD plans to add 158,800 guided weapons over the next 10 years, almost doubling its existing inventory of guided weapons. DOD expects the new weapons to enable warfighters to accomplish the same objectives with fewer weapons and casualties and less unintended collateral damage. We believe some new weapons may indeed be needed to resolve specific performance problems and to replace those retired or used in training. However, since DOD has not prepared an overall requirements estimate for weapons capable of deep attack (see chs. 4 and 5), we question DOD’s rationale for nearly doubling its inventory of guided weapons. The higher projected effectiveness of these new systems—in terms of accuracy, standoff range, and lethality—along with the employment of advanced tactics is expected to allow wartime objectives to be accomplished with fewer weapons. Further, changing world conditions have altered, perhaps for many years, the nature of the threats to U.S. interests. However, we believe the assumptions used by the services to estimate individual weapon requirements are conservative, overstate the potential threat and target base, favor long range and accurate guided weapons, and require large quantities of reserve weapons. As a result, the quantity requirements for guided weapons appear to be inflated, particularly in today’s budgetary and security environments. DOD retains about 1.3 million weapons that could be used for deep attack missions. They range from the accurate, long-range Tomahawk cruise missiles to hundreds of thousands of relatively inexpensive general purpose bombs. The total inventory of these weapons today is about 15 percent smaller than it was in 1992, soon after the end of the Cold War. Guided weapons currently account for about 12 percent of the total inventory of deep attack weapons. The guided weapons on hand or in procurement totaled over 170,000 units as of the end of fiscal year 1997. The current inventory includes AGM-130, AGM-142, CALCM, Harpoon, GBU-10, GBU-12, GBU-15, GBU-24, GBU-27, GBU-28, Maverick, SFW, ATACMS Block I, Hellfire II, High-Speed Anti-Radiation Missile (HARM), SLAM, Tomahawk Anti-Ship Missile (TASM), and Tomahawk Land Attack Missile (TLAM). As discussed in chapter 2, the services plan to add about 158,800 guided weapons to the existing inventory through fiscal year 2007. Although some weapons would be used for testing, training, and other purposes, planned acquisitions would approximately double the current inventory. To place the existing inventory in perspective, about 227,000 deep attack weapons, or about 17 percent of the current inventory, were used in the Persian Gulf air war. Of these weapons, 92 percent were unguided and 8 percent were guided. Of the guided weapons used, about half were laser-guided (GBU-10, 12, and 24) and the remainder used other types of guidance such as preprogrammed maps for the Tomahawk and an electro-optical sensor for the Maverick. According to two recent Defense studies and discussions with U.S. Central Command officials, the current inventory of guided and unguided weapons is sufficient to accomplish current defense objectives. The national defense strategy directs the services to retain the capability to fight and win two overlapping major theater wars. Two regions containing significant military threats to U.S. interests are (1) East Asia and the Pacific Rim with its increased strategic significance and (2) the Middle East and South Asia where the United States has vital and enduring interests. We believe some new weapons may indeed be needed to resolve specific performance problems and to replace those retired or used in training. The services, however, justify each of their weapon acquisition programs on a case-by-case basis, and DOD does not assess the DOD-wide capabilities and programs on an aggregate basis. Moreover, an overall requirements estimate for weapons capable of deep attack has not been established. As a result, DOD has not specifically justified doubling its inventory of guided weapons, as the services’ current acquisition plans would do. New and improved guided weapons are expected to enable warfighting objectives to be accomplished with fewer weapons, lower aircraft attrition, and less unintended damage. Major improvements are projected in the areas of accuracy, standoff range, and lethality. A study by the Center For Naval Analysis examined the potential impact of guided weapons on the battlefield and concluded that substantially fewer weapons would be required when guided weapons are used extensively. The study estimated that guided weapons offer a 10 to 1 advantage over unguided general purpose bombs for strategic targets such as airfields or chemical storage facilities and about a 20 to 1 advantage for battlefield targets such as armored vehicles and rocket launchers. Projecting these efficiencies to the Gulf War, the study estimated that had guided weapons been used extensively, the same damage levels could have been achieved with 60 percent fewer weapons. Other recent studies have come to similar conclusions. A Rand study, for example, found that for most targeting situations, one guided weapon could achieve the same destruction as 35 unguided weapons. In our 1997 report, we discussed the use and effectiveness of guided and unguided weapons and other aspects of the air campaign during the Gulf War. Both guided and unguided weapons were less effective than expected because, among other things, (1) higher altitude deliveries were used to avoid Iraqi air defenses, (2) aircraft sensors had inherent limitations in identifying and acquiring targets, (3) DOD failed to gather intelligence information on some critical targets, and (4) DOD was unable to collect and disseminate timely battle damage assessments. DOD has undertaken initiatives since the war to address many of these problems, including the introduction of specific design features for new guided weapons. However, the effectiveness of some of the new guided weapons has not yet been fully demonstrated. Nevertheless, DOD projects that its new guided weapons will significantly improve warfighting capability in the areas of accuracy, standoff range, and lethality. Accuracy is an important element of a weapon’s effectiveness. A more accurate weapon can be smaller and carry less explosive power and yet still achieve desired damage levels. Since the Gulf War, the services have been acquiring GPS-based guidance kits for existing weapons (such as AGM-130, SLAM-ER, JDAM, and Tomahawk) and integrating this technology into new weapons (such as JSOW and JASSM) to improve accuracy from higher altitudes and greater distances and in bad weather. GPS is a global, day-night, all-weather, space-based navigation system that can provide highly accurate position, velocity, and time information to both civilian and military users. For military users, GPS is accurate to 9 to 12 meters and insensitive to weather or battlefield conditions. By using auxiliary systems such as ground based locators, the accuracy of GPS-based guidance systems can be further improved. Under the JDAM program, GPS guidance systems are being added to over 86,000 unguided bombs. Some laser-guided bombs and long-range cruise missiles like SLAM-ER, Tomahawk, and CALCM either have or are to receive GPS guidance systems. (Once in the target area, some weapons—such as SLAM-ER and Tomahawk—use other guidance systems to more precisely attack their targets.) DOD also plans to acquire 7,800 new JSOW-unitary guided weapons and 2,400 new JASSMs with GPS-aided guidance systems. The services are also developing new weapons with submunition dispensers that use GPS guidance to reach mobile armor and other targets. These include ATACMS and JSOW. These systems carry submunitions that autonomously identify and attack specific targets after they are released in the battle area. Standoff range, as used in this report, is the distance between the launch vehicle and the target. Greater standoff range is important for the survival of the launch vehicle when enemy defenses are active in the target area. Some powered guided weapons such as CALCM and SLAM-ER have a standoff range of well over 100 miles, providing a high degree of launch vehicle safety. Launch vehicle safety is also enhanced by JSOW’s long glide range, which enables launch aircraft to stand off outside the range of most target-area surface-to-air threat systems. Some protection is also obtained from antiaircraft guns and hand-held missile launchers through medium altitude launches of unpowered weapons such as JDAM. Similarly, the Air Force’s WCMD kit is expected to provide some protection for launch aircraft from medium altitudes. In addition to better accuracy and longer range, the services are increasing the lethality of guided weapons by improving warhead cases and fuzes. This is accomplished by designing warhead cases that can withstand high-velocity impact and penetrate earth, reinforced concrete, and other barriers to reach a protected target before exploding. Unitary and submunition warheads are also being designed to maximize their blast effects on or above the battlefield, and improved fuze technology is expected to provide more control over warhead detonation. For example, modern warheads and fuzes can destroy a command bunker or an aircraft shelter by penetrating the protective structure and then exploding. Similarly, a warhead can be detonated above the battlefield to destroy a missile site, radar, or fuel cell. In addition, submunitions have been developed that are expected to autonomously identify and attack separate armored vehicles. Specially designed submunition dispensers and carriers have been developed to carry and launch submunitions over the target area. Such improvements to weapon lethality are expected to act as force multipliers, allowing fewer weapons to achieve the results of many. The improved accuracy and lethality of the new deep attack weapons are expected to facilitate the use of advanced tactics, such as nodal targeting. Nodal targeting can be defined as attacking critical infrastructure targets that cripple an adversary’s capability to attack with its forces. Nodal targets could include, for example, command centers, power plants, or logistics choke points such as bridges. Such tactics are also expected to reduce unwanted collateral damage and post-war reconstruction hardships. For example, to destroy a power plant in Iraq during the Gulf War, several 1-ton bombs were dropped over a 3-day period. The facility was completely destroyed, causing significant hardship to the residents of the neighboring town. Air Force officials told us they could have achieved the same objectives using one accurate weapon, thus allowing the facility to be repaired more quickly after the war. This strategy is possible only if there is high confidence in the precise location of the targets and the accuracy and the amount of damage that can be achieved from a given weapon. With its modern guided weapons and better battlefield information, DOD hopes to have this confidence in future conflicts. Recent international trends, according to the Defense Intelligence Agency (DIA), argue against the likelihood of a large-scale regional war in the foreseeable future. The most pressing current challenges (terrorism, narcotics trafficking, and other criminal activity with national security implications) and the biggest emerging threats (weapons of mass destruction and missile proliferation) have limited use as the basis for sizing and defining future force requirements. Instead, it is more probable that U.S. involvement will occur along the lower end of the conflict spectrum with military assistance, various peacekeeping contingencies, or operations other than war. Limited local or regional conflicts may also occur. The DIA Director reported to Congress in February 1997 (and reiterated again in January 1998) that the world is in the midst of an extended post-Cold War transition that will last at least another decade. From a national security standpoint, the threats facing the United States have diminished by an order of magnitude, and the Director believes the United States is unlikely to face a global military challenger on the scale of the former Soviet Union for at least the next two decades. World expenditures for military hardware are significantly less today than they were during the height of the Cold War. Despite these developments, the Director views this period of transition as complex and dangerous. According to DIA, Iraq and North Korea are currently the most likely U.S. opponents in a major theater conflict, with weapons of mass destruction developing as an emerging threat. Iraq will remain a threat to U.S. regional policies and interests as long as the current government remains in power. However, its military capability continues to erode. There are significant weaknesses in leadership, morale, readiness, logistics, and training that would limit Iraq’s effectiveness in combat. Iraq has rebuilt some key installations destroyed in the Gulf War, but their location, construction characteristics, and other factors are well known. North Korea is characterized as a failing state, and the potential for internal collapse, instability, and leadership change is rising. In the meantime, its overall military readiness continues to erode in line with its worsening economic situation. Some nations are building or acquiring weapons of mass destruction (i.e., nuclear, chemical, or biological weapons). Many states view the acquisition of these weapons as vital to countering U.S. conventional warfighting superiority and to providing a measure of power, respect, and deterrent value within a regional context. Chemical weapons are relatively easy to develop, deploy, and conceal and are based on readily available technology. The proliferation of weapons of mass destruction constitutes a direct threat to U.S. interests worldwide. We believe the assumptions used by the services to estimate individual weapon requirements are conservative, overstate the potential threat and target base, favor long range and accurate guided weapons, and require large quantities of them among reserve weapons. As a result, the quantity requirements for each weapon appear to be inflated, particularly in today’s budgetary and security environments. The services use the capabilities-based munitions requirements process to determine their requirements for weapons procurement. Each year, the services analyze how many weapons and of what type are needed to fully support the CINCs’ war plans and provide for post-war reserves, storage requirements, and other needs. These weapon requirements become the basis for the services’ weapon procurement programs and budget requests. The services rely on DIA to identify specific military targets in those regions specified in defense guidance for the period included in the Future Years Defense Program. The resulting out-year threat report is used by the CINCs responsible for those regions to determine attack objectives for each type of target and to assign responsibility for target destruction to the services. Using this allocation of targets and destruction objectives, the services simulate combat to estimate the number of weapons needed. Each of the services uses its own battle simulation models and other tools to determine the number of weapons needed to meet the CINCs war objectives. The models receive performance information for each type of weapon and delivery vehicle, as well as the construction characteristics of each type of target. The models then determine how many weapons of a specific type, delivered by a particular vehicle under various battle conditions, are needed to damage each target to a particular level. The factors influencing the modeling results include target lists and characteristics, weapon effectiveness, choice of weapons, and reserve requirements. Despite DIA’s projections on recent international trends, the sizable inventory of capable weapons, and the current budgetary situation, the services determine their weapons requirements and, in turn, the weapons to be acquired each year using worst-case scenarios for each of the two major theaters of war. Navy and Air Force requirements models include nearly all the targets identified in the regions specified by defense guidance. The target list includes thousands of mobile targets, including ships, surface-to-air missile batteries, armored combat vehicles, tanks, aircraft, artillery, trucks, and troops on the battlefield. It also includes thousands of fixed targets such as airfields, bridges, buildings, port facilities, radar sites, and power plants. Central Command officials told us it is unlikely that all or even most of the identified targets would be attacked in a potential war in Southwest Asia (in the case of the Gulf War, the targets struck represented only a small portion of all identified targets). DIA has prepared a smaller list of critical targets with the highest military value, but the Central Command includes nearly all of the identified targets in its most comprehensive war plans and service allocations. We believe the effects of including such a large target base are significant. For example, the Air Force and the Navy estimate that the number of guided weapons needed to damage and/or destroy all the potential targets in the Central Command target base for Southwest Asia would be significantly higher than the number of guided weapons used during the Gulf War. It should be noted, however, that only a small fraction of the target base was attacked during the Gulf War. Central Command and service officials explained that including nearly all targets in the service models may inflate weapon requirements, but they do not want to risk having insufficient weapons, should some unforeseen conflict require them. After examining the CINCs’ target distribution in 1997, the DOD Inspector General reported that more needs to be done to improve the threat distribution input provided to the services for generating munitions requirements. Specifically, the Inspector General recommended that the CINCs establish procedures that (1) identify and include the capabilities of emerging weapons, (2) identify post-major theater war missions, (3) distribute threats to coalition forces, and (4) establish procedures that document and coordinate the rationale for final threat distributions. Following the Inspector General’s logic, we believe that using a smaller target list would reduce the number of weapons the services’ models identify as required. The Air Force and Navy requirements models show a strong preference for using guided weapons against most targets. The models place a premium on avoiding any aircraft or aircrew losses or collateral damage. As a result, the models select weapons that are most effective in meeting those objectives. The weapons’ target destruction capabilities and costs are secondary considerations. The models tend to select the most accurate and longest standoff weapons, even though these may not have the best target-killing characteristics and may be much more costly than alternatives with better target-killing characteristics. For example, the Navy’s model selects Tomahawk missiles, costing about $1 million each, for many types of targets, even against certain targets where its effectiveness is poor. While the specific situation may dictate the use of a Tomahawk due to target location or threat, other weapon choices could be more effective and less costly, if other factors such as aircraft attrition do not overcome the weapon’s cost advantage. According to service officials, this outcome reflects the models’ tendency to use standoff weapons versus direct attack weapons (thereby avoiding enemy air defenses) and their preference for more accurate weapons. As a result, the models fail to recognize the full impact of defense suppression and may overstate the need for the more costly, highly precise standoff guided weapons. While these types of weapons are more effective against some types of targets, direct attack guided weapons as well as unguided weapons are quite adequate against other targets, particularly when enemy defenses have been suppressed. The services’ models also calculate the weapons needed by U.S. forces not directly engaged in major theaters of war and those needed to ensure U.S. forces are able to deter or, if necessary, fight a limited conflict following two major theaters of war. While these reserves represent only a portion of the total weapons requirement, they include several times more guided weapons than were used in the entire Gulf War. We believe strategic reserves of that magnitude are questionable in the current international security environment and would likely be reduced significantly if the models were revised to better reflect realistic target lists, weapon effectiveness factors, and choices of weapons. DOD currently has substantial quantities of many different guided weapons to attack most, if not all, targets. Taken individually, DOD’s acquisition plans for guided weapons can be justified and are expected to add significant capabilities. However, DOD reviews and justifies its deep attack weapon acquisition programs on a case-by-case basis and does not assess its existing and projected capabilities in this area on an aggregate basis. Although they are good candidates for joint programs, most of these new types of weapons are being integrated into only one service’s platforms. When reviewing the services’ currently planned programs in the aggregate, we found (1) widespread overlap and duplication of guided weapon types and capabilities, (2) questionable quantities being procured for each target class, and (3) a preference for longer standoff and more accurate weapons rather than for other options that may be as effective and less costly. When the services acquire multiple systems for similar purposes, they pay higher costs to develop, integrate, procure, and maintain these systems. DOD’s 1997 Deep Attack Weapons Mix Study was expected to critically review overall deep attack capabilities and to provide an analytical basis for recommendations about specific programs. However, the study stopped short of recognizing overlap and duplication and did not recommend curtailment or cancellation of any programs. DOD’s Quadrennial Defense Review, which based its recommendations on the study’s results, recommended that current acquisition plans for guided weapons continue with only modest adjustments. The Air Force, the Navy, and two DOD-sponsored independent reviews concluded that the computer models used in the study were outdated and did not adequately represent modern warfare. Accordingly, while we believe the study was certainly a step in the right direction, DOD still does not have a sound basis to ensure that it has the proper and cost-effective mix of deep attack weapon programs. While modeling plays a role, the ultimate decisions on that mix will require sound military and business judgment. DOD categorizes ground and naval surface targets in five target classes. Two classes are for mobile targets—one for heavily armored targets such as tanks and artillery and a second for lightly armored or unprotected trucks, vans, and personnel. Two classes are for fixed targets—one for bridges and underground or heavily reinforced facilities and one for general purpose buildings, manufacturing facilities, roads, and rail yards. The fifth class is for maritime surface targets and includes ships at sea. DOD has several types of guided weapons in the inventory to attack each of the five target classes. DOD also has additional types of guided weapons in development and production to attack each of the five target classes. Table 4.1 lists the guided weapons in inventory, production, and development by target class. The list includes air-to-surface and surface-to-surface weapons. According to Air Force and Navy officials, none of the guided weapons in the inventory will be retired in the foreseeable future. The services are producing more types of available guided weapons and plan to add even more types when those currently under development transition to production. Most of the guided weapon types in the inventory or in production and development are expected to be used by only one service. While the JDAM, the BLU-108 and Baseline versions of JSOW, and the Hellfire are expected to be joint programs, all of the other development and production programs listed in table 4.1 involve only one service. Guided weapons are good candidates for joint programs because the services plan to use them for similar purposes and in similar ways. In addition, most guided weapons can be launched from several different platforms with relatively minor, if any, modifications. Each service is responsible for identifying its own deficiencies in meeting the CINCs’ target destruction allocations and for developing and obtaining approval of its mission need statements. If a service determines that a new weapon is required, its requirements branch establishes the operational requirements for the weapon. According to requirements personnel, both mission need and operational requirement documents are reviewed by the other services, making joint requirement plans possible. However, for most guided weapons now in development and production, a joint requirement either was not established or was not sustained. For example, although the JASSM was designated as a joint program, Navy requirements officials have stated that the Navy does not currently plan to integrate the weapon in its aircraft and is not currently planning to buy any. Similarly, the Air Force plans to procure two JSOW variants (Baseline and BLU-108) but is not currently planning to integrate the Navy’s Unitary variant of the JSOW in its aircraft and is not planning to buy any. Other single-service guided weapons (such as the WCMD and the SLAM-ER) could be modified and integrated for use with another service’s platforms. But the services have not favored this option. DOD reviews and justifies its guided weapon acquisition programs on a case-by-case basis and does not assess its existing and projected capabilities in this area on an aggregate basis. When reviewing the services’ currently planned programs from an aggregate perspective, we found (1) widespread overlap and duplication of guided weapon types and capabilities, (2) questionable quantities being procured for each target class, and (3) a preference for longer standoff and more accurate weapons rather than for options that may be as effective and less costly. Table 4.2 provides details of quantities, status, and production costs for the guided weapons planned to be acquired for use against four target classes. The total procurement cost for the Unitary version of the JSOW, JASSM, Tactical Tomahawk, and SLAM-ER is projected to be about $7.2 billion for 12,153 weapons. These weapons do not constitute all of the weapons potentially available against the fixed hard and soft target sets from a standoff distance. As shown in table 4.1, additional weapons such as the TLAM, AGM-130, AGM-142, and CALCM are also available. Three weapons—SLAM-ER, Tactical Tomahawk, and JASSM—are designed to attack targets from outside the range of long-range enemy air defenses. A fourth weapon, the Unitary variant of the JSOW, is a Navy-developed weapon designed to attack targets outside mid-range enemy air defenses. Each of these weapons will be used by a single service because only the developing service is currently planning to buy or integrate the weapon on its platforms. Each of the weapons, considered alone, was justified by the services within DOD’s system acquisition process as adding capability to the existing force. But considered in the aggregate and in terms of economy and efficiency, four new types of standoff guided weapons may not be needed to attack this target set in addition to other standoff guided weapons that are already available. The services also have several types of guided and unguided direct attack weapons that could be effectively used in a reduced threat environment against these targets. In addition, the Air Force has the F-117 stealth fighter for delivery of direct attack guided weapons against critical targets and has invested over $40 billion in the development and procurement of the B-2 bomber to penetrate heavily defended areas to attack high-value targets. DOD’s key directive on defense acquisition matters encourages modifying a current system to meet operational requirements before beginning development of a new system. It would thus have been reasonable and technically feasible for the Navy to acquire additional SLAM-ERs in lieu of beginning development and production of the Unitary version of JSOW. Likewise, it would have been reasonable and technically feasible to modify SLAM-ER for the Air Force requirement for a long-range standoff weapon rather than develop and produce JASSM. In addition, the need to add 12,153 new standoff guided weapons to those already in the inventory for this target set is questionable, particularly when the number of critical targets in defense guidance scenarios have declined and are projected to continue to do so. DOD has many guided weapons—mostly laser-guided bombs—in the inventory capable of attacking critical fixed targets. In addition to the new standoff weapons discussed above, DOD also plans to buy over 86,000 JDAMs (a direct attack weapon) for possible use against this same target set. While the long-range, highly accurate, and expensive standoff weapons that DOD plans to procure are most effective in the early stages of a conflict—when enemy air defenses are expected to be most potent—they may not be needed in large numbers throughout an entire conflict. As enemy air defenses decline, less costly but still accurate and effective direct attack weapons such as laser-guided bombs or JDAMs can be used. Using this generally accepted strategy, DOD developed a mix of weapons. However, the services plan to acquire both large numbers of new standoff guided weapons (2,400 JASSMs and 7,800 Unitary versions of JSOW) and new direct attack guided weapons (86,000 JDAMs and 40,000 WCMDs). Furthermore, the services have not fully addressed the possibility of improving the accuracy of less costly direct attack guided weapons so as to reduce the number of more expensive standoff weapons. The Air Force planned to increase the accuracy of the JDAM, but the program is not currently funded. The Navy also expressed an interest in improving the JDAM’s accuracy and has provided some funding for research. Both the Air Force and the Navy are funding an effort to add GPS to a limited number of GBU-24s and GBU-27s. The Air Force is buying some new GBU-28s with GPS guidance capability. DOD acknowledges the potential benefits of improving the accuracy of these guided weapons but has not assessed the potential effect on the numbers of weapons needed. The weapons planned for attacking area targets and multiple armored targets from medium ranges present a similar case of duplicative procurement plans when viewed in the aggregate. Together, the Army, the Navy, and the Air Force plan to buy over 58,000 weapons to attack these targets for an estimated cost of over $10.7 billion. The Navy has begun production of the Baseline variant of JSOW, which can be used to attack area targets (such as runways and motor pools), and plans to start production in fiscal year 1999 of the BLU-108 variant, which can be used to attack multiple armored targets (such as tanks and armored personnel carriers). The Air Force and the Navy together plan to buy 16,000 of these two JSOW variants. However, since the JSOW variants were developed, the Air Force has also developed the WCMD tail kit for higher altitude release of weapons such as the SFW, the CEM, and the Gator mine munition. Each of these weapons, with the WCMD tail kit, can be used to attack the same target classes as the Baseline and BLU-108 versions of JSOW. The Air Force plans to buy 40,000 tail kits. Also, the Army is buying 652 ATACMS Block IA missiles with antipersonnel, antimateriel submunitions for attacking area targets, and it is developing the BAT submunition to be carried in 1,806 ATACMS Block II/IIA missiles against multiple armored targets. With unit costs of about $929,300 for each ATACMS Block IA missile and $1.9 million for each ATACMS Block II/IIA missile with the BAT submunitions, these weapons are the most expensive of the three. Each of these weapons has been justified as offering advantages, but when assessed in the aggregate, their combined capabilities overlap and duplicate each other and may be unnecessary, particularly when likely threats are in decline. In addition, the Air Force and the Navy have many Maverick missiles to attack individual armored targets after longer range air defenses are suppressed. The Army and the Marine Corps have procured over 13,000 Hellfire II missiles and plan to buy over 11,000 Longbow Hellfire missiles that could be used by attack helicopters against individual armored targets. Furthermore, the Army has procured over 1,800 ATACMS Block 1 missiles to attack area targets. The 40,000 WCMD-equipped weapons are planned to be integrated only with Air Force aircraft. The Air Force configurations have several advantages over the Navy-developed JSOW variants: the WCMD/CEM variant for area targets costs less per unit ($19,200 versus $225,300); the WCMD/SFW variant costs slightly more ($377,400 versus $366,900) but holds more antiarmor submunitions (40 versus 24); and more WCMD-equipped weapons can be carried on the B-1 bomber (30 versus 12). These facts would appear to make the Air Force variant more cost-effective and operationally efficient than its Navy-developed counterpart and could reduce the number of JSOW variants procured by the Air Force and the Navy together. The Navy, however, is not planning to modify its aircraft to carry the WCMD-equipped weapons. Officials from the Joint Chiefs of Staff and CINCs told us that having a variety of weapons allows flexibility in countering threats. These officials also acknowledged that the current deep attack capability is adequate to meet the current objectives of defense guidance. However, in terms of acquisition economy and efficiency, questions arise about duplicative development costs, higher than necessary unit production costs, larger than necessary procurement quantities, higher than necessary logistics costs, and reduced interoperability. First, each of these weapons has a distinct development cost. The total development cost for the weapons in production and development shown in table 4.2 is estimated at $5.2 billion (then-year dollars). If even just two or three development programs had been avoided, the savings could have been substantial. Considered singly, each of these weapons offers incrementally different capabilities, but considered in the aggregate, the services have individually incurred development costs for substantially similar capabilities. For example, each of the four weapons being acquired to attack fixed hard and soft targets is projected (1) to be launched beyond the range of at least mid-range if not long-range enemy air defenses, (2) to have pinpoint accuracy, and (3) to have improved lethality over currently available weapons. Moreover, there is a distinct cost to integrate each weapon into the aircraft that will deliver it to the target area. Second, the services have bought some weapons in extremely small quantities at high unit costs. For example, the Air Force procured 711 AGM-130s during fiscal years 1990-98 at an average unit cost of $832,000. It had originally planned to buy as many as 600 a year at an average unit cost of under $300,000, but it never bought more than 120 per year. In fiscal year 1998, the Navy plans to buy only 45 SLAM-ERs, fewer than it bought in fiscal year 1997. It also plans to buy an average of about 40 missiles per year until fiscal year 2011 at an average unit cost of about $709,100. The high average production unit cost is due at least in part to the low annual procurement quantities, which in turn are a result of the proliferation of individual systems being procured each year and the relatively fixed defense budget situation described in chapter 2. Third, associated logistics costs increase if more types of weapons must be supported. For example, providing sufficient quantities of many weapon types to major theaters of war increases the resources that must be used in fuel and lift capacity. Fourth, overall procurement quantities could be reduced with fewer weapon types because not all of the production quantity is used to support combat requirements. For example, for seven munitions cited in the Deep Attack Weapons Mix Study, an average of about 36 percent of the production units are expected to be used for reserves, training, and testing. With fewer types of weapons, quantities for testing and training could be reduced. Fifth, fewer types of weapons increase interoperability among the services. By using the same weapon, the services have more opportunities for common training, preparation of training, maintenance manuals, and test equipment. The Deep Attack Weapons Mix Study was a significant undertaking by the Office of the Secretary of Defense and the Joint Staff (with input from the services) to assess the overall mix and affordability of existing and planned weapons. The study based its analysis on wartime scenarios defined by defense guidance and on threat levels and numbers of targets established by DIA. The study used 2006 as a base year and also developed results for conflicts in 1998 and 2014. The study used two primary computer models: the tactical warfare model, which simulates air and ground combat, and the weapons optimization and resource requirements model, which provides an optimized weapons mix using predetermined budget constraints, weather, range, altitude, and the different phases of the war. (These models are used throughout DOD for a variety of purposes, including the determination of weapons quantity requirements.) The major variables used were weather, air defense threats, target identification, and force levels at the start of a conflict. The selection of weapons was limited to those in the inventory or in production and new ones already in development. The number and type of weapons bought were limited by a $10.5-billion ceiling for purchases from fiscal year 2005 for the baseline case. Cost data were supplied by the services. The unclassified portions of the study’s analysis concluded that the programmed weapon investment budget of about $10.5 billion was sufficient to maintain a qualitative advantage over potential aggressors. It recommended only modest adjustments to current programs and did not recommend the termination of any guided weapon programs. DOD’s Quadrennial Defense Review based its recommendations on the weapons mix study and determined that the current guided weapon programs, with modest adjustments, would provide the capability to defeat potential aggressors in the years ahead. Accordingly, the review recommended no change in procurement plans for the WCMD with CEM and SFW submunitions, the ATACMS with BAT and BAT improved submunitions, and the Unitary version of the JSOW. The review said DOD would consider decreasing procurement quantities of the Baseline and BLU-108 versions of JSOW, increasing procurement quantities of JASSM and laser-guided bombs, and changing the mix of JDAM variants. Finally, DOD stated that it would continue procuring Hellfire II missiles while the Army analyzed the appropriate mix of Hellfire II and Longbow Hellfire missiles. We compared the review’s recommendations with DOD’s most current plans in the fiscal year 1999 budget. We found little change in procurement plans for guided weapons as compared to previous plans. For example, the procurement quantities for the Baseline and BLU-108 variants of JSOW were unchanged, the number of ATACMS Block 1A missiles was reduced from 800 to 652, and no programs were eliminated. Further, DOD later concluded that it would continue as planned with its Longbow Hellfire procurement. While we believe the weapons study (and by extension the defense review) was a step in the right direction in the assessment of DOD-wide requirements for weapons, its impact was, at best, limited. We did not make an independent review of the models used for the Deep Attack Weapons Mix Study, which provided the basis for DOD’s strategy for developing and procuring deep attack weapons. According to several observations, however, the weapons study used outdated computer models and assumptions in developing its recommendations. According to a congressionally directed assessment of the Quadrennial Defense Review by the National Defense Panel, one of the key models used in the weapons mix study was developed for the North Atlantic Treaty Organization-Warsaw Pact scenario and 10 years ago was seen as having significant shortcomings. The Panel also found that the two models used in the study are even less relevant today because of improved weapons technology and changes in warfare. The Panel concluded that the Quadrennial Defense Review sees major theater warfare as a traditional force-on-force challenge (such as that envisioned in Central Europe during the Cold War) and “inhibits the transformation of the American military to fully exploit our advantages as well as the vulnerabilities of potential opponents.” The 1997 Defense Science Board Task Force on the Deep Attack Weapons Mix Study and the services’ official comments on the weapons mix study also contended that the models were limited in their analysis of potential future conflicts. The Task Force Board stated that the weapons mix study models were very limited in their representation of modern warfare maneuvers. The Board concluded that while the study was conducted with the best available methods, “our confidence in the modeling results must be limited, and our conclusions and acquisition plans must be shaped by military experience and common sense.” The Air Force concluded in its official remarks that the study clearly illustrated the limited ability of DOD’s current models to analyze critical components such as suppression of enemy air defenses and the impacts of strategic attack and interdiction; nodal target analysis; logistics; and command, control, communications, computers, intelligence, surveillance, and reconnaissance. The Air Force said that such impacts, “if properly captured in future modeling efforts, may reduce the numbers of weapons required to achieve CINC objectives.” In its official statement, the Navy reported that any computer model output attempting to replicate the dynamic environment of the battlefield must be tempered with military judgment, experience, and common sense. The Navy further stated that the JCS conceptual doctrine of the future should be considered when developing a future weapons mix but that the models were incapable of doing this. Instead, an attrition, force-on-force war in direct opposition to Joint Vision 2010 was modeled. The National Defense Panel, the Defense Science Board, and the Air Force recommended that new models be developed for future studies and decisions concerning ongoing force structure. DOD is developing a new warfighting model called the Joint Warfare System, but its introduction is several years away. The National Defense Panel said the Joint Warfare System and other potential models are essential for ongoing force structure decisions and recommended that DOD broaden the range of models and accelerate their availability. The Defense Science Board stated that its members know of no existing model that can assess the relative value of multimission weapon systems over a range of conflicts. The Board recommended that DOD develop innovative concepts for rapid evaluation of broad military force structure issues and concluded that the Joint Warfare System may provide the modeling capability to overcome shortcomings in the current analytical process. The Air Force stated that, if properly developed, future modeling efforts may reduce the number of weapons needed to meet the CINCs’ objectives. The Air Force also said that DOD’s Joint Warfare System model may address some of these concerns but that, in the end, sound military judgment is the remedy for modeling limitations that may never be resolved. Coupled with our findings of optimistic funding projections, inflated weapon requirements, duplicative guided weapon programs, and questionable quantities, we believe that DOD does not yet have a sound basis to ensure that it has the proper and cost-effective mix of deep attack weapon programs. While modeling is an important aspect in evaluating alternative mixes of weapons and associated risks, the ultimate decisions on the proper and cost-effective mix of weapons will require sound and disciplined military and business judgment. The JCS Strike Joint Warfighting Capabilities Assessment working group will conduct another deep attack weapons mix/affordability assessment in 1998. This group, according to a JCS official, was not directly involved in the Deep Attack Weapons Mix Study. While plans for this assessment are not complete, it is not expected to re-do the weapons mix study. However, it will consider the weapons mix needed to meet CINC requirements and will also review the weapons requirement determination process. The results of the study will be presented to the JCS. DOD does not have a central oversight body or mechanism to examine weapon programs in the aggregate and to determine how many weapons it needs or how many it can afford. The task of developing and procuring weapons rests with the services, and DOD examines weapon requirements and capabilities on an individual basis rather than in the aggregate before beginning production. DOD’s oversight has not prevented, among other things, duplication of development, service-unique programs, and production schedule stretch-outs. Some DOD officials believe improved oversight is needed, and DOD is considering a proposal to expand the Joint Tactical Air-to-Air Missile Office’s responsibilities to include the coordination of air-to-ground weapon requirements and programs. DOD is not providing effective management oversight and coordination of the services’ guided weapon capabilities and programs to contain development costs, control logistics impacts, maximize warfighting flexibility, and avoid production stretch-outs. This problem is not new. In 1996, in our review of combat air power, we reported that DOD has not been adequately examining its combat air power force structure and its modernization plans from a joint perspective. We found that DOD does not routinely develop information on joint mission needs and aggregate capabilities and therefore has little assurance that decisions to buy, modify, or retire air power systems are sound. We concluded that the Chairman could better advise the Secretary of Defense on programs and budgets if he conducted more comprehensive assessments in key mission areas. We added that broader assessments that tackle the more controversial issues would enable the Chairman to better assist the Secretary of Defense in making the difficult trade-off decisions that will likely be required. The Commission on Roles and Missions of the Armed Forces reported that it is not clear that DOD has the correct balance of deep attack weapons and stated that “currently, no one in DOD has specific responsibility for specifying the overall number and mix of deep attack systems.” The report concluded that this situation illustrates the lack of a comprehensive process to review capabilities and requirements in the aggregate. Current institutional practices “allow the Services to develop and field new weapons without a rigorous, DOD-wide assessment of the need for these weapons and how they will be integrated with the other elements planned for our arsenal.” The individual services have always been the primary players in the acquisition process and have been given broad responsibilities to organize, train, and equip their forces under title 10 of the U.S. Code. Officials in both the Office of the Joint Chiefs of Staff and the Office of the Secretary of Defense view their own role in determining weapon requirements and acquisition programs only as advisory. Neither office has taken responsibility for critically assessing the overall capability of the guided weapons in development, production, and inventory or for determining the long-term cost-effectiveness of the services’ guided weapon acquisition plans. To achieve a stronger joint orientation within DOD, Congress enacted the Goldwater-Nichols Department of Defense Reorganization Act of 1986. This act gave the Chairman of the Joint Chiefs of Staff and the CINCs of the combatant commands stronger roles in DOD matters, including the acquisition process. As principal military adviser to the Secretary of Defense, the Chairman is now expected to assess military requirements for defense acquisition programs from a joint warfighting military perspective and to advise the Secretary on the priority of requirements identified by the CINCs and the extent to which program recommendations and budget proposals of the military departments conform to these priorities. The Chairman is also expected to submit to the Secretary alternative program recommendations and budget proposals to achieve greater conformance with CINC priorities. Subsequent legislation has given the Chairman additional responsibilities to examine ways DOD can eliminate or reduce duplicative capabilities. Within the Joint Chiefs of Staff, the J8 Directorate tracks the progress of weapon acquisition programs, assesses the current capabilities available to CINCs, and advises the services of apparent deficiencies. In addition, a second group associated with JCS—the Joint Requirements Oversight Council (JROC)—has the authority to advise the Chairman of the Joint Chiefs of Staff and the Secretary of Defense on CINC requirement priorities, assess military requirements for defense acquisition programs, submit alternative program and budget recommendations, and prepare net assessments of capabilities. JROC validates the mission need statement required for initiating major acquisition programs as well as the key operational performance parameters for the proposed weapon. Finally, the Chairman of the Joint Chiefs of Staff evaluates the extent to which the services’ proposed guided weapon budgets conform to the priorities established in DOD’s strategic plans (such as the Quadrennial Defense Review) and to CINCs’ requirements and makes recommendations to the Secretary of Defense. The Defense Acquisition Board, chaired by the Under Secretary of Defense for Acquisition and Technology, is the senior advisory group within DOD chartered to oversee the defense acquisition process. The Board’s mission is to help define and validate new system requirements, examine trade-offs between cost and performance, explore alternatives to new research and development, and recommend full-scale development and full-rate production. The Board has broad review responsibility for decision milestones during critical acquisition phases. In addition to reviewing the mission need statements and operational requirements documents in the initial phases of development, the Board also reviews the detailed analyses of alternative solutions prepared by the services. These analyses provide the rationale for one alternative over another and should include a comparison of current and upgraded weapons with new proposed weapons. In 1996, Congress, in addition to asking DOD to conduct its Deep Attack Weapons Mix Study, requested a report on how DOD approves development of new guided weapons and avoids duplication and redundancy in guided weapon programs. It also sought information on the feasibility of carrying out joint development and procurement of guided weapons. In response, the Secretary of Defense issued a report to Congress in April 1996 on the process for approving and initiating development programs. The report noted that through reviews by JROC and the Defense Acquisition Board, several major guided weapon acquisition programs had been designated as joint programs. DOD concluded that redundancies and duplication in the services’ weapon acquisitions had been minimized as a result of reviews by the Office of the Secretary of Defense and the Joint Chiefs of Staff. To the contrary, DOD’s oversight approach to the services’ weapon acquisition and procurement has had very limited effect on guided weapon programs. DOD’s oversight has not prevented inflated funding projections for guided weapons, as discussed in chapter 2; inflated requirements for guided weapons, as discussed in chapter 3; and instances of service-unique weapons, overlap and duplication, production inefficiencies, increased logistics burdens, and reduced interoperability, as discussed in chapter 4. For example, JROC and the Defense Acquisition Board have approved the acquisition of several guided weapon programs with very similar capabilities—JASSM, SLAM-ER, the Tactical Tomahawk, and the Unitary version of the JSOW—without adequate consideration of available aggregate capabilities or aggregate requirements for such weapons. Some DOD officials have recognized a need for increased oversight of guided weapon programs. According to these officials, the Department established an office to oversee acquisition of air-to-ground weapons within the Air Force Office of Requirements and within the Navy’s Aviation Requirements Branch. However, these oversight responsibilities are adjunct to the regular duties of these offices, and no meetings have taken place in over 4 years. DOD has had more success in providing oversight of air-to-air missile programs. In fiscal year 1989, in response to congressional concerns, the Joint Tactical Air-to-Air Missile Office was established to eliminate duplication in air-to-air missile programs. The Office has representatives from the Navy and the Air Force requirements branches, and its operations are guided by a memorandum of agreement and a charter. Representatives are assigned to the Office rather than fulfilling their duties as adjunct responsibilities. In recent years, the Office was successful in avoiding duplication in the services’ air-to-air missile programs by ensuring the continued joint development and procurement of the Advanced Medium Range Air-to-Air Missile and the Air Intercept Missile-9X by the Navy and the Air Force. Currently, no joint coordinating office exists for the requirements and acquisition of deep attack weapons. A proposal is circulating within the Air Force and the Navy to expand the responsibilities of the current Joint Tactical Air-to-Air Missile Office to include the coordination of air-to-ground weapons. Although the scope of such an office would have to be expanded significantly to address all guided weapons, the success of the Air-to-Air Missile Office has shown that the Air Force and the Navy can effectively coordinate their requirements and establish joint programs for the acquisition of similar weapons. Expanding the Office’s purview to include guided weapons would, in our view, provide some assurance that decisions in the deep attack area have been assessed from the perspective of the services’ combined requirements, capabilities, and acquisition plans. DOD’s current investment strategy for guided weapons may not be executable as proposed because it is contingent on sizable increases in procurement funding within a relatively fixed defense budget. As major commitments are made to the initial procurement of the planned guided weapon programs over the next several years, a significant imbalance is likely to result between funding requirements and available funds. As a result of understated cost estimates and overly optimistic funding assumptions, more programs have been approved than can be supported by available funds. Such imbalances have historically led to program stretch-outs, reduced annual procurement rates, higher unit costs, and delayed deliveries to operational units. Every effort needs to be made to avoid these “pay more for less” outcomes. Further, these imbalances may be long-term and may restrict DOD’s flexibility to respond to unexpected requirements or to procure potentially innovative systems. The current inventory of deep attack weapons (guided and unguided) is both large and capable, and DOD is improving some weapons to make them even more effective. Although the existing inventory is considered sufficient to support the current objectives of defense guidance, DOD’s plans for individual weapons will, in the aggregate, almost double the size of the guided weapon inventory at a time when worldwide threats are stable or declining. DOD expects the new, more modern weapons to enable warfighters to accomplish the same objectives with fewer weapons and casualties and less unintended collateral damage. DOD needs to establish an aggregate requirement for deep attack capabilities and assess the incremental contribution of its guided weapon acquisitions. Without such a requirement and analyses, it is difficult to understand DOD’s rationale as to why, in the aggregate, it needs to almost double the size of its guided weapon inventory, particularly in today’s budgetary and security environment. Further, the services’ requirement processes are focused on individual systems and appear to inflate the quantity of each system needed. For example, the services use conservative assumptions concerning threats and target lists, appropriate weapon choices, the use of advanced tactics, and strategic reserves. The use of more realistic assumptions would lead to lower weapon requirements. The services have had numerous opportunities to develop and procure guided weapons in a more cost-effective and economical manner. However, when reviewing the services’ currently planned programs in the aggregate, we found (1) widespread overlap and duplication of guided weapon types and capabilities, (2) questionable quantities being procured for each target class, and (3) a preference for longer standoff and more accurate weapons rather than for options that may be as effective and less costly. DOD’s Deep Attack Weapons Mix Study was an opportunity for DOD to critically assess its weapons procurement programs and provide a basis for restructuring them. However, despite the significant effort that went into the study, it still does not, in our view, give DOD the assurance that it has the proper and cost-effective mix of deep attack weapon programs. Therefore, DOD cannot be confident that force structure and modernization decisions will result in the most cost-effective mix of forces to fulfill the national military strategy. Because DOD does not routinely develop information on joint mission needs and aggregate capabilities, it has little assurance that decisions to buy, modify, or retire deep attack weapons are sound. Broader assessments that tackle the more controversial deep attack issues would enable the Secretary of Defense to make the difficult trade-off decisions that will likely be required. Broadening the current joint warfare capabilities assessment processes would be a good starting point. Alternatively, the establishment of a DOD-wide coordinating office for requirements and possible joint programs for the acquisition of deep attack weapons, modeled after the Joint Tactical Air-to-Air Office, would provide some assurance that decisions in the deep attack area have been assessed from the perspective of the services’ combined requirements, capabilities, and acquisition plans. DOD’s planned spending for guided weapons will escalate rapidly over the next few years, and key decisions will be made to start procurement of some very costly and possibly unneeded guided weapons. Instead of continuing to start procurement programs that may not be executable as proposed, DOD should determine how much procurement funding can realistically be expected to be available for guided weapons over the long term and cost-effectively execute those programs within that level of funding. In doing so, DOD should also consider the already large inventory of guided weapons and the advances in technologies that are expected to increase the effectiveness of future weapons as well as the current and projected decline in threat. Therefore, we recommend that the Secretary of Defense, in conjunction with the Chairman of the Joint Chiefs of Staff and the Secretaries of the Army, the Navy, and the Air Force, establish an aggregate requirement for deep attack capabilities; reevaluate the assumptions used in guided weapon requirements determination processes to better reflect the new international situation, realistic target sets, enhanced weapon effectiveness, proper weapon selection, and the use of advanced tactics; and reevaluate the planned guided weapon acquisition programs in light of existing capabilities and the current budgetary and security environment to determine whether the procurement of all planned guided weapon types and quantities (1) is necessary and cost-effective in the aggregate and (2) can clearly be carried out as proposed within realistic, long-term projections of procurement funding. Further, we recommend, as we did in 1996 in our combat air power reports, that the Secretary of Defense, with the Chairman of the Joint Chiefs of Staff, develop an assessment process that yields more comprehensive information on procurement requirements and aggregate capabilities in key mission areas such as deep attack. This can be done by broadening the current joint warfare capabilities assessment process or developing an alternative mechanism. One such alternative could be the establishment of a DOD-wide coordinating office to consider the services’ combined requirements, capabilities, and acquisition plans for deep attack weapons. This office could be modeled after the Joint Tactical Air-to-Air Missile Office. In written comments on a draft of this report, DOD partially concurred with our recommendations, stating that the Joint Staff will be conducting a follow-up to the Deep Attack Weapons Mix Study and that a coordinating office will be established to assess joint weapon requirements. However, DOD stated that our report takes a snapshot of today’s inventory and ignores how and why DOD got there and how it is profiting from that experience. DOD said our report fails to recognize its significant efforts to improve its requirements, acquisition, and oversight processes. A follow-on study to the Deep Attack Weapons Mix Study is a good step but we urge DOD to conclude the study with decisions on which programs to cut back and which to end in order to ensure that its programs are fully executable within expected budgets. Also, as a partial solution to the need for more comprehensive assessments, we see DOD’s agreement to establish a body to review and deconflict joint air-to-surface requirements as important. We agree with DOD that such a body might better resolve issues among the services with less DOD intervention. We urge DOD to pursue the establishment of such a body and believe it should address all deep attack requirements, not just air-to-surface requirements. This report focuses on DOD’s plans to acquire additional guided weapons for deep attack missions within the context of the existing inventory of deep attack weapons. DOD has a variety of acquisition reform initiatives underway that may have an impact on the structure and management of individual acquisition programs. However, these initiatives have little bearing on the determination of DOD-wide requirements for deep attack weapons or on how to procure those requirements in the most cost-effective manner possible. We have also considered DOD’s efforts to improve its processes. In the recent past, we have examined in considerable depth DOD’s requirements, acquisitions, and oversight processes. While we acknowledge DOD’s efforts and progress to date in improving those processes, the problems reported here of optimistic funding projections, inflated requirements, overlapping and duplicative programs, and service-unique programs continue. We urge DOD to continue its acquisition reforms and other initiatives but also to reexamine the oversight process to determine ways to provide more discipline in its processes and to fund fewer programs. Although DOD’s official comments do not address the mismatch between commitments and resources, DOD officials stated at the exit meeting on this report that, due to the mismatch between commitments and resources, DOD plans to reduce fiscal year 2000 procurement quantities for several guided weapon programs. Reductions in annual procurement quantities and stretch-outs in procurement schedules should not be the inevitable solutions to the mismatch between its commitments to programs and expected resources. Every effort should be made to avoid these “pay more for less” outcomes. | Pursuant to a congressional request, GAO examined the Department of Defense's (DOD) major guided weapon programs, focusing on whether: (1) the services' plans for developing or procuring guided weapons can be carried out as proposed within relatively fixed defense budgets; (2) the number of guided weapons the services plan to buy is consistent with projected threats and modernization needs; (3) the current and planned guided weapon programs duplicate or overlap each other; and (4) DOD is providing effective oversight in the development and procurement of deep attack weapons. GAO noted that: (1) DOD's planned increase in procurement spending for guided weapons is based on overly optimistic funding projections; (2) to acquire all the guided weapons now planned over the next 10 years, DOD plans to spend more than twice as much as it has on average between fiscal years 1993 and 1997; (3) without an increase in overall defense spending, increased resources may not be available as expected; (4) for the past several years, DOD has been unable to increase its procurement budgets as planned, and other programs could more than absorb any available increases; (5) while DOD has enough deep attack weapons in its inventory today to meet national objectives, the services plan to add 158,800 additional guided weapons to the inventory; (6) each of the new weapons has been justified by the services on a case-by-case basis and is projected to provide significant advantages in accuracy, lethality, delivery vehicle safety, and control of unintended damage; (7) in calculating the number of weapons needed, the services use assumptions which overstate the potential threat and target base; (8) as a result, the quantity requirements for guided weapons appear to be inflated, particularly in today's budgetary and security environment; (9) when reviewing the services' planned programs in the aggregate, GAO found: (a) widespread overlap and duplication of guided weapon types and capabilities; (b) questionable quantities being procured for each target class; and (c) a preference for longer standoff and more accurate weapons when other options may be as effective and less costly; (10) in contrast, DOD's Deep Attack Weapons Mix Study and Quadrennial Defense Review suggested only minor changes in guided weapon programs and did not address possible instances of duplication and overlap; (11) GAO believes that DOD does not yet have a sound basis to ensure that it has the proper and cost-effective mix of deep attack weapon programs; (12) DOD's oversight of the services' guided weapons programs has not prevented inflated requirements or program overlap and duplication; (13) the central oversight bodies and mechanisms already in place do not address requirements and capabilities on an aggregate basis and have had a very limited effect on guided weapon programs; and (14) some DOD officials believe improved oversight is needed, and a proposal is under consideration to expand the purview of the Joint Tactical Air-To-Air Missile Office to include the coordination of air-to-ground weapon requirements and programs. |
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The PARIS interstate match program was initiated to help state public assistance agencies share information with one another. Its primary objective is to identify individuals or families who may be receiving or having duplicate payments improperly made on their behalf in more than one state. In this voluntary project, the participating states agree to share eligibility data on individuals who are receiving TANF, Food Stamps, Medicaid, or benefits from other state assistance programs. The participating states are primarily responsible for the day-to-day administration of PARIS, and each state designates a coordinator for the project. PARIS uses computer matching to identify improper benefit payments involving more than one state. This process entails comparing participating states’ benefit recipient lists with one another, using individuals’ SSNs. Other items of information are included in the files that the states share, such as the individual’s name, date of birth, address, case number, public assistance benefits being received, and dates that benefits were received. Matches are conducted by the Defense Manpower Data Center (DMDC) in February, May, August, and November of each year.DMDC produces a file of all the SSNs on the list submitted by the participating state that are the same as the SSNs appearing on the list of some other state and provides the matched records, known as match hits, to ACF, who forwards them to the appropriate states. To be considered a working member of PARIS, states agree to participate in at least the August match each year. Once the participating states receive the file of matched SSNs from DMDC, they are expected to send the match hits to the appropriate staff for follow-up or investigation. The staff may take a number of steps to verify information that affects individuals’ eligibility for benefits. These steps include requiring an individual to come into the office to show proof of residency and contacting other states to verify whether the individual is still receiving benefits from those states. Improper benefit payments may be made because of client error, agency administrative error, or fraud and abuse. A client error might occur when an individual receiving program benefits in one state moves to another state but fails to report the move to program authorities. An administrative error could occur when a local benefit worker is informed that the recipient is moving out of the state but fails to update the record. Without PARIS matching, such errors might not be detected until the individual is asked to reverify program eligibility, which could occur as much as a year later. Additionally, the reverification of eligibility might not detect fraud or abuse when a person deliberately obtains benefits in more than one state by providing false information to program authorities. If after investigating the match hit, state or local officials determine that an individual is improperly receiving public assistance benefits in their state, they may initiate action to cut off benefits. In general, to protect the rights of the recipients, administrative due process requirements must be followed before benefits can be cut off. For example, an individual may be given up to 30 days to respond to a formal notice that benefits will be stopped. Moreover, if the recipient can demonstrate that he or she is residing in the state and is eligible for assistance, then benefits may be continued or reinstated. “…will ensure that confidential recipient information received pursuant to this Agreement shall, as required by law, remain confidential and be used only for the purpose of the above described match and for verifying eligibility and detecting and preventing fraud, error and abuse in respective Programs.” Our review focuses on three benefit programs covered by PARIS interstate matches: TANF, Medicaid, and Food Stamps. Benefits for TANF and Food Stamps are provided directly to recipients; however, Medicaid payments are made directly to those who provide health care services, such as MCOs and other health care providers. All three programs are generally administered at the state and local level, but are funded with federal money or a combination of federal and state money. Depending on the state, the same staff in local offices may determine eligibility and benefit levels for all three programs. However, some states administer the TANF and Food Stamp programs separately from the Medicaid program. Table 1 provides a brief description of the three programs. A fourth program—the SSI Program administered at the federal level by SSA—is indirectly related to the PARIS interstate matches. In many states, SSI recipients are automatically qualified to receive Medicaid and are therefore included in PARIS matches. PARIS coordinators in most of the 16 participating states and the District of Columbia told us they believe the interstate match is effective in identifying improper TANF, Medicaid, and Food Stamps benefit payments in more than one state. By eliminating these duplicate recipients from the rolls, states can prevent future improper payments and save program dollars. However, few states tracked the actual savings realized from the PARIS match. Four states and the District of Columbia reported a total of about $16 million in estimated savings from various PARIS matches conducted in 1997, 1999, and 2000. A substantial proportion of the estimated savings was attributed to the Medicaid program. While officials in only three states have compared the costs to the benefits that result, their studies indicate that the matching is cost-beneficial. We prepared our own analysis, which also suggests that PARIS may help states save program funds by identifying and preventing future improper payments. PARIS helps to identify improper benefit payments in bordering and nonbordering states according to most of the PARIS coordinators we spoke with. The February 2001 match identified almost 33,000 instances in which improper payments were potentially made on behalf of individuals who appeared to reside in more than one state. Of these, 46 percent of the potential hits involved Medicaid benefits alone, while the remaining 54 percent involved some combination of TANF, Medicaid, and Food Stamps. However, most of the states did not maintain detailed records on the number of potential match hits that were, in fact, found to be instances of improper payments. Nor were they able to tell us what proportion of improper TANF and Food Stamp payments were due to client error, administrative error, or fraud and abuse. Some PARIS coordinators believe that fraud and abuse may be more common in areas where two states share an urban border. For example, one coordinator told us that individuals living in the District of Columbia metropolitan area could travel in minutes to Maryland and Virginia and apply for benefits in each place. Figure 1 depicts participating states and the District of Columbia and their shared borders. Independent of PARIS, some states conduct interstate matches with bordering states to prevent improper payments caused by either error or potential fraud and abuse. Many of these states now participate in the PARIS match. PARIS coordinators told us that the PARIS approach offers significant advantages over single state-to-state matches. For example, PARIS makes it possible for a state to match with numerous other states by simply submitting a file to a central agency. In addition, a uniform data-sharing agreement covers the exchange, and the DMDC adjusts for incompatibilities between different computer systems. This unified approach can be more efficient than individual state-to-state matches and can help to reduce the expense of matching. In addition to simplifying matches with bordering states, PARIS also facilitates data sharing with nonbordering states. This is important because even when two states do not share a border, improper payments can still be made, whether due to error or deliberate deception, such as fraud and abuse. For example, PARIS officials in New York discovered a woman receiving TANF benefits in New York for five children who were actually living with relatives and receiving benefits in Illinois. Table 2 shows the results from the February 2001 PARIS match for selected states, including nonbordering states. About 80 percent of the match hits listed in table 2 are between states that do not border one another. For example, North Carolina has more match hits with Florida and New York than it does with neighboring Virginia. In addition, in New York and Pennsylvania, match hits with nonbordering states represented 73 percent and 50 percent of their total match hits, respectively. Although both of these states have matched recipient data with bordering states for years, the PARIS match identified numerous instances of potential duplicate benefits in nonbordering states that might not otherwise have been detected. While most states do not track the savings they have achieved or the costs they incurred because of the PARIS match, a small number of states were able to document the results of participating in the project. Four states and the District of Columbia provided us with their estimated savings from participating in PARIS. Three of the states also performed cost-benefit analyses, demonstrating that they found PARIS to be cost-beneficial. Pennsylvania estimated that two quarterly matches in 2000 produced more than $2.8 million dollars in annual savings in the TANF, Medicaid, and Food Stamp programs and achieved a savings-to-cost ratio of almost 12 to 1. About $2.5 million (87 percent) of the total estimated savings are attributed to the Medicaid program. Maryland estimated that its first PARIS match in 1997 produced savings of $7.3 million in the Medicaid program alone. The match identified numerous individuals who were originally enrolled in Medicaid due to their SSI eligibility, but at the time of the match no longer lived in the state. Subsequent matches conducted between November 1999 and August 2000 have produced savings of about $144,000 in the TANF, Medicaid, and Food Stamp programs, with a savings-to-cost ratio of about 6 to 1. Kansas estimated that two PARIS matches in 1999 and 2000 resulted in savings of about $51,000 in the TANF, Medicaid and Food Stamp programs, with a savings-to-cost ratio of about 27 to 1. New York reported that improper payments identified in four matches conducted in 1999 and 2000 produced estimated savings of $5.6 million; however, the state did not collect data on the costs associated with investigating these matches. The District of Columbia estimated that one PARIS match conducted in 1997 resulted in savings of about $311,000 in the TANF and Food Stamp programs; however, officials did not collect savings data for the Medicaid program, nor did they collect cost data. Our discussions with numerous state and federal officials have led us to conclude that the substantial variation in the estimated program savings and savings-to-cost ratios across these states is attributable to a number of factors. These factors, which could also apply to any participating state, include differences in the extent to which state and local officials follow up on (or fail to pursue) match hits and take action to cut off benefits where appropriate; the methods and assumptions states use to estimate their savings; the proportion of match hits that are valid in that they are found to reflect actual improper benefits being paid in more than one state (a higher proportion of valid match hits will generally yield more program savings than a lower rate, and is more likely to be cost-beneficial);the estimated number of months of avoided benefit payments; the size of the recipient population and the monthly benefits provided in each state under the TANF, Medicaid, and Food Stamp programs; how long it takes local office staff or fraud investigators to follow up on match hits; the salary costs of state and local staff involved with PARIS; and the cost to create an automated list of recipients at the state level to be sent to DMDC. Because so few states had analyzed their savings and costs from participating in PARIS, we performed an independent analysis to assess how certain factors might influence the extent to which participating in PARIS could achieve program savings. We studied how certain key variables, such as the number of programs included, the proportion of match hits that are valid, and the estimated number of months of avoided benefit payments could affect the overall savings a state might achieve by participating in PARIS. We used national data where available (such as average benefits paid to recipients for each program). When national data were not available, we used the experiences of five states for our analysis. We used professional judgment to determine the values for several key assumptions in our analysis. Specifically, using a hypothetical example in which 100 match hits are sent to local benefit offices for staff to investigate, we assumed that each match hit requires 2 hours to determine whether benefits are improperly being paid in more than one state and costs $68.97 on average, resulting in a total of $6,897 in salaries and related expenses to follow up on all 100 match hits; the average state cost is about $440 to generate the automated list; 20 percent of the match hits investigated are found to be valid; and program savings come entirely from the future benefit payments that are avoided. (See app. I for a more detailed description of the data and assumptions used in our analysis.) Our analysis suggests that PARIS, as it currently operates, could help save both federal and state program funds. In particular, our analysis indicates that if states include the TANF, Medicaid, and Food Stamp programs in their matching activities, the net savings could outweigh the costs of participation. Using our hypothetical example in which 100 match hits are sent to local benefit office staff for follow-up, we illustrate in table 3 how the savings to a state from participating in one PARIS match could vary depending on (1) the number of programs included in the match and (2) differences in the valid hit rate. The table assumes that the savings for each program accrue for 3 months. If 20 percent of the match hits are valid (they accurately identify 20 out of 100 instances in which improper benefits are being paid in more than one state) and the individuals identified are enrolled in all three programs, the match would produce gross savings of almost $42,000, yielding a savings- to-cost ratio of about 5 to 1. Ultimately, the match would result in net savings of more than $34,000, as shown in table 3, taking into account total match costs of about $7,000. Conversely, costs exceed savings under only one scenario in this example. A valid hit rate of 10 percent, in which the match only includes the Food Stamp program—a rate substantially below what participating states have reported—would result in a net cost to the state of about $3,300. The number of months that future benefit payments are avoided can also influence the amount of savings that result from a PARIS match. Table 4 illustrates the variation in program savings that could result depending on the number of months of future benefits that are avoided and the number of programs matched, given a 20-percent valid hit rate. As the table shows, there are three scenarios under which a state in our analysis would experience a net loss from participating in PARIS. One month’s worth of TANF, Medicaid, or Food Stamp benefits avoided would yield a net cost to the state of between approximately $2,000 and $5,000. However, the match would produce savings in all other possible scenarios. For example, it would yield over $83,000 in gross savings if 6 months of benefits are avoided and the match was performed for all three programs (a savings-to-cost ratio of about 11 to 1). The net savings would be about $76,000. Our analysis assumes that only a small number of match hits are sent for follow-up (100), which results in a small number of valid hits (20). A larger number of valid hits would likely result in greater savings as well. For example, while some states, such as Kansas, with smaller recipient populations have reported relatively small numbers of valid hits and lower levels of savings, other states, such as Pennsylvania and New York, with larger recipient populations have had much higher numbers of valid hits and much greater levels of savings. Although the information provided by states and our analysis indicate that participating in PARIS interstate matches can save federal and state funds, savings are not the only benefit of participating in PARIS. Interstate matches are an important internal control to help states meet their responsibility for ensuring that public assistance payments are only made to or on behalf of people who are eligible for them. In addition, PARIS officials in eight states told us they believe the PARIS interstate matches can help deter people from applying for duplicate public assistance payments. The PARIS project’s interstate matching has helped identify cases of duplicate benefits that otherwise would likely have gone undetected; however, PARIS has been limited by several factors. First, only one-third of the states are participating in the matches, and a large portion of the public assistance population is not covered by the matching. Second, the project has some problems with coordination and communication among project participants. Third, some states are giving inadequate attention to the project. As a result, match hits are not being resolved, and in particular, duplicate payments made for Medicaid beneficiaries receive low priority. Finally, the project cannot help prevent duplicate benefits from occurring in the first place, but can only identify and help stop them after they have started. Only one-third of the states are participating in the PARIS interstate matches. At the time of our review, 16 states and the District of Columbia were participating. As a result, the public assistance records of the other 34 states were not being shared with participating states. These nonparticipating states contain 64 percent of the population that is likely to be eligible for public assistance. We spoke to officials in seven nonparticipating states to learn their reasons for not participating. They noted the state’s preoccupation with more urgent matters, such as implementing new programs or systems, and the fact that information about the project had not reached someone with the interest and authority to get the state involved. They also cited some concerns about the project. These include lack of data showing that participating would produce savings for their state; nonparticipation of bordering states, which are perceived as the most likely sources of valid match hits; lack of written guidance on coordinating the resolution of match hits with other states; and inadequate federal sponsorship of PARIS and the resulting lack of assurance that the project will continue. Efforts by federal agencies to increase participation in the project have been minimal. ACF, the lead agency on the project, has not officially recognized PARIS and devotes very little resources to it. ACF management has not taken actions, such as sending letters to state TANF directors to inform them about the project and encourage them to participate. Also, ACF management has not asked other federal agencies to work with ACF on the project and help get more states involved. CMS, the federal agency that stands to reap the greatest savings from the project, has made no effort to encourage state Medicaid agencies to participate. In 1999, FNS sent a letter to state Food Stamp agencies encouraging them to participate in PARIS interstate matches; otherwise, FNS has had little involvement in the project. This lack of official support for the PARIS project may contribute to the low participation rate. For example, the TANF officials that we spoke with in one of the nonparticipating states who were relatively new to their positions said they had never heard of PARIS. In another nonparticipating state, a Medicaid official told us the state would be much more likely to participate in PARIS if CMS encouraged it to do so. The PARIS project has had various problems with coordination and communication that limit the project’s effectiveness. The problems include the following. Difficulties contacting other states. Benefit workers in four of the five participating states that we visited said they have had difficulties contacting benefit workers in some other states to obtain information to resolve match hits or to get the evidence needed to take action against clients. Problems making contacts occur because the telephone numbers that states provide for obtaining information on individual cases are sometimes inaccurate or never answered or are central numbers that are just the starting point for finding the right person. Submission of incomplete and incompatible data. We noted that some of the states submit data for matching that are likely to increase the number of invalid match hits and the amount of work other states will have to do to determine if match hits are valid. For example, we found that some states include closed cases among the active cases submitted for matching, cases with improper SSNs, or cases that omit the dates clients started receiving benefits. Uncertainties concerning responsibilities for collecting overpayments from individuals. PARIS officials from three states said it is not clear which state should assess and collect an overpayment when it is found that a client has been receiving TANF or Food Stamp benefits from two or more states. For example, it is not clear if the state where the client does not reside should assess an overpayment because, as a nonresident, the client was not eligible to receive benefits from the state or if the state where the client does reside should assess the overpayment because it is much more likely to be able to collect the overpayment. Also, it is not clear how to determine which state should assess an overpayment when the client claims two residences very near each other but in different states, and it is not known where the client actually lives. Although some coordination and communication problems are likely to occur in any project that involves multiple states and different federal agencies, the project’s lack of formal guidance and processes makes these problems more likely to occur. Currently, the formal guidance for the program only includes the file format the states need to provide for the match. However, it does not address matters such as the type of case information other states’ benefit workers should be able to get when they call the telephone number provided for a case. Also, the guidance does not have written definitions of some key terms, such as “active case,” or explanations of how the various data fields are to be used by states to investigate match hits. Further, the project has no guidance or protocols for coordinating the assessment and collection of overpayments. However, ACF, CMS, and FNS have not provided the management or administrative support—such as a formal focal point at the federal level—that would be needed to coordinate the project more effectively and help develop such guidance and protocols. In some states, management has given little or no attention to the PARIS interstate matches and has allowed match hits to go unresolved. This problem is more pronounced with Medicaid match hits because, in some states, they are given a lower priority than match hits involving TANF or Food Stamps. We found evidence that in at least three states that have participated in the PARIS project since August 1999, match hits for the entire state or for some densely populated areas were not being resolved. The PARIS coordinator in one state told us that match hits in his state have never been sent out to workers to be resolved. In a second state, a large metropolitan area had not received any match hits from its district office until shortly before our visit in February 2001. The PARIS coordinator in a third state told us that a large county sometimes ignored the PARIS match hits sent to it for resolution. The problem of not resolving match hits appears to be most pronounced in the Medicaid program. Information we received from DMDC indicates that some states may not be focusing sufficient attention on their Medicaid match hits. Because DMDC does not retain state data used for the PARIS matches, we were not able to determine how many match hits involving Medicaid are not resolved and thus recur each quarter. However, data provided by DMDC for the February 2001 PARIS matches show that some states have a relatively large percentage of match hits involving Medicaid. For example, if 40 percent of the records a state submitted for matching were for clients receiving benefits in a particular program, then one might reasonably expect to find that about 40 percent of the match hits involved that program. Thus, finding a disproportionately higher rate of match hits involving that program could suggest a possible problem. Such is the case with six states that have participated in PARIS since February 2000 or before. For each of the six states, the February 2001 PARIS match resulted in a proportionately higher percentage of match hits involving Medicaid than would generally be expected. For example, in one state, 60 percent of the records submitted for matching were cases involving only Medicaid benefits (not TANF or Food Stamps), but 78 percent of the resulting match hits were for such cases. In another state, 31 percent of the records submitted were for cases involving Medicaid received due to eligibility for SSI, but 69 percent of the resulting match hits were for such cases. Match hits involving duplicate Medicaid benefits frequently occur, not because of fraud or abuse, but because Medicaid beneficiaries often do not notify the state when they move out of state. Therefore, a state will keep beneficiaries on the rolls until it discovers that they have moved. The state may make this discovery during a routine reverification of eligibility, which is generally performed once a year or less often. However, officials from several states have told us that their states never reverify the eligibility of a certain type of Medicaid beneficiary, such as one who is eligible based on his or her receipt of SSI. Therefore, the PARIS matches often involve this type of beneficiary. Although a state receives notifications from SSA when SSI clients move out of the state, states often do not remove Medicaid beneficiaries from their rolls based on these notifications, according to an SSA official. The PARIS coordinators for two states told us this problem came to light after they examined their first PARIS interstate match results and found a startling number of match hits involving SSI recipients who were on the state’s Medicaid rolls. One state compared the Medicaid match hits from its first PARIS run with SSA files and found 5,000 SSI recipients on the state’s Medicaid rolls who, according to SSA records, were not residing in the state. This prompted the state to do a similar match with SSA records using all the state’s Medicaid beneficiaries. The state then followed up with letters to Medicaid enrollees who the matches indicated no longer lived in the state. As a result of the PARIS and subsequent SSA matches, the state identified 17,000 people on its Medicaid rolls who were no longer eligible for Medicaid in the state. We heard a similar story from another state. Both states, we were told, had been making monthly payments to MCOs for the Medicaid beneficiaries, who would have stayed on the states’ rolls indefinitely if the state had not participated in the PARIS matches. Yet even after receiving large numbers of Medicaid match hits, some states appear not to be resolving them or addressing the problems with their Medicaid rolls. We have been told by some PARIS coordinators that the departments administering Medicaid are focusing their efforts on getting people on the Medicaid rolls rather than removing people who are no longer eligible. PARIS officials in two states said that they believe the local benefit workers or the offices responsible for Medicaid have not adjusted their thinking to recognize the shift from a fee-for-service to a managed care environment. In the past, when Medicaid services were provided on a fee-for-service basis, costs were incurred only if beneficiaries sought medical treatment and providers submitted bills for the treatment. Therefore, if a beneficiary moved out of state but remained on the state’s Medicaid rolls, medical expenses were not incurred for the beneficiary if he or she did not seek treatment in the state. However, when the state makes a fixed monthly payment to an MCO for each Medicaid beneficiary, as is done under some managed care arrangements, the state makes payments to the MCO regardless of whether the beneficiary ever seeks medical treatment. The PARIS project was designed to identify duplicate benefits after they have been provided, not to prevent the duplicate benefits from occurring in the first place. Therefore, the PARIS matches are part of what has been described as a “pay and chase” process, in which states pay benefits to clients and then try to recover overpayments when they discover the clients were not eligible for the benefits. Preventing an improper payment in the first place is preferable to “pay and chase” because overpayments are often difficult to collect from low-income clients who no longer live in the state. Also, when states make payments to MCOs for beneficiaries who should no longer be on their Medicaid rolls, these funds are wasted unless they can be recouped. According to a Medicaid official, it may be difficult for states to recoup overpayments to MCOs caused by errors in states’ Medicaid rolls. Officials from most states we spoke with said they would like a data- sharing process that could be used before benefits are provided—that is, a process that would allow state caseworkers to check other states’ data to see if an applicant was already receiving benefits elsewhere before the state approved an application for benefits. Such a process would have to provide prompt responses (probably within 24 hours) to inquiries— something very different from the quarterly PARIS matches. One option for this process includes a national database of clients receiving public assistance in any state. Such a database would be maintained by the federal government and would consist of records submitted and regularly updated by the states. Implementing such an option would require federal leadership and funding to address programming and operating expenses and potentially the standardization of data and information systems among participating states. Also, while implementing this option could help prevent duplicate payments, it must be balanced against the additional privacy concerns that might arise. The PARIS project offers states a potentially powerful tool for improving the financial integrity of their TANF, Medicaid, and Food Stamp programs. However, the project has fallen short of realizing its full potential, as is most clearly evidenced by relatively low state participation. While PARIS’ success ultimately rests in the hands of the states, key federal players have not done enough to provide a formal structure to the project that encourages and facilitates state participation. More specifically, ACF, CMS, and FNS have not taken the lead in establishing a focal point in the federal government for coordinating the project. This is crucial given the complicated relationships among the three programs and among the federal, state, and local government entities responsible for implementing them. Additionally, the three federal agencies have not worked together to develop guidance and protocols that are key for helping states share information and best practices. Finally, these agencies have not formally recognized, nor devoted sufficient resources to, the project, despite its potential to identify improper payments and save program funds. Importantly, this lack of formal federal recognition might signal to some states that the project should not be taken seriously. To help states improve the effectiveness of PARIS and prevent duplicate benefit payments to TANF and Medicaid recipients, we recommend that the Secretary of HHS direct the Administrators of ACF and CMS to formally support PARIS and provide guidance to participating states. Such support and guidance should include the following actions: Create a focal point charged with helping states more effectively coordinate and communicate with one another. An existing entity, such as the Interagency Working Group, could provide the mechanism for such a focal point. This entity could also serve as a clearinghouse for sharing best practices information that all states could use to improve their procedures, such as comparisons of match filtering systems. Take the lead to help the PARIS states develop a more formal set of protocols or guidelines for coordinating their match follow-up activities and communicating with one another. Develop a plan to reach out to nonparticipating states and encourage them to become involved in PARIS. At a minimum, all states should be encouraged to provide their TANF and Medicaid recipient data for other states to match, even if they choose not to fully participate in PARIS. This would help to ensure that all recipients nationally are included in PARIS matches. Coordinate with the USDA/FNS Food Stamp program to encourage their participation in PARIS at the federal level as well as their working more closely with individual states to improve the effectiveness of PARIS and helping more states to participate. Officials from the Department of Health and Human Services and the Food and Nutrition Service provided comments on our report, the full text of which appear in appendixes II and III, respectively. The agencies also included some technical comments, which we have incorporated where appropriate. In general, HHS agreed with the overall intent of our recommendations, but consistently stressed the need for additional funding and staff resources to increase their PARIS activities. With regard to our first recommendation, HHS commented that it had created a PARIS work group composed of representatives from ACF and DMDC and has encouraged other agencies, such as CMS and FNS, to participate more actively in PARIS. HHS also stated that additional funding and staff resources from all involved agencies could help the work group to improve its services. We believe that while the PARIS workgroup provides useful guidance to participating states, to date it has been unable to resolve the problems and limitations we identified during our review. As we note in the report, this is due in part to ACF, CMS, and FNS not providing the management or administrative support necessary to correct these problems. Our recommendation is intended to encourage greater leadership by ACF, CMS, and FNS and a more coordinated proactive approach among the agencies to working together and with the states to address the limitations in PARIS. With regard to our second recommendation, HHS cautioned that it is not appropriate for a federal agency to dictate or appear to dictate the protocol states use in their interaction with other states. HHS also argued that states are best able to determine the necessary procedures for PARIS. However, HHS acknowledged that with additional resources, ACF could help states develop such procedures and disseminate them to other states as necessary. We continue to believe that active federal leadership is needed to solve the communication and coordination problems discussed in the report. Consequently, we believe that ACF should act as a facilitator at the federal level to help states overcome some of the challenges they have reported communicating and coordinating with one another. Moreover, such facilitation can and should occur without impinging on the states’ ability to administer the TANF, Medicaid, and Food Stamp programs in a manner that best fits their needs. With respect to our third recommendation, HHS generally agreed that ACF could do a better job to reach out to additional states to persuade them to participate in PARIS. However, HHS did not agree with our statement that states could, at a minimum, provide their data for others to use, even if they do not directly participate in PARIS themselves. We believe that while full participation by all the states is clearly the preferred outcome, the inclusion of nonparticipating states’ public assistance data for use by states participating in PARIS could help save additional benefit funds in the TANF, Medicaid, and Food Stamp programs. Finally, with regard to our fourth recommendation, HHS noted that ACF has consistently coordinated with FNS in all PARIS activities, but agrees that a closer working relationship with FNS would add to the effectiveness of PARIS. We concur with HHS’ assessment that ACF and FNS should work more closely together to improve existing PARIS operations and persuade additional states to participate. FNS noted that the report is a balanced and fair description of the PARIS project, but they expressed a concern that certain passages in the report suggest that FNS should have a more formal role in PARIS, despite the fact that PARIS is primarily an ACF project. They also identified several reasons why PARIS is not used more by the Food Stamp program. They emphasized that FNS is not required by statute to track interstate receipt of Food Stamp benefits and that many states are already engaging in such activity on their own. Although we recognize that FNS is not the lead agency responsible for PARIS, we do believe that FNS could take a more proactive stance to help coordinate the program at the federal level and persuade additional states to participate in PARIS. Moreover, we believe that although FNS is not mandated by statute to participate in PARIS, the benefits of PARIS in terms of potential program savings and enhanced program integrity warrant a more active role for the agency. Our analysis suggests that federal leadership from each of the involved federal agencies is critical to the success of PARIS, particularly with regard to expanding the number of states that participate in the project. In addition, while some states engage in interstate matching as noted in the report, we believe a more structured, far-reaching approach like that offered by PARIS is more effective. FNS also commented that PARIS cannot prevent the initial duplicate payment of benefits and that the matching activity may not be cost- effective. We believe that although PARIS cannot prevent duplicate benefits from being provided when states initially determine individuals’ eligibility for benefits, using PARIS is preferable to not matching at all. Finally, the report notes that matching for the Food Stamp program alone may not be cost-effective and emphasizes the advantage of matching for multiple programs simultaneously. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies to the Chairman, Senate Committee on Governmental Affairs; Secretary of HHS; Administrator for CMS; Administrator for FNS; and to other interested parties. Copies will also be made available to those who request them. Please contact me or Kay Brown at (202) 512-7215 if you have any questions concerning this report or need additional information. Jeremy Cox, Kathleen Peyman, James Wright, and Jill Yost made key contributions to this report. In the table below, we describe the data and assumptions used to support our discussion on pages 12-15. Our analysis incorporated data from five states (Kansas, Maryland, New York, Pennsylvania, and Texas), two federal agencies (Centers for Medicare & Medicaid Services and Food and Nutrition Service), and selected research studies. S= (A x F + B x I) x X S = Savings per benefit case avoided, A = Proportion of match hits in which entire case is closed, F = Family (case) monthly benefit, B = Proportion of match hits where household members are removed from the case, I = Monthly benefit for that number of individuals, and X = Months of future benefit payments avoided. This calculation was performed for each of the three programs (TANF, Food Stamps, and Medicaid) separately to demonstrate how the cost- effectiveness of a “good” PARIS match hit could change depending on the number of programs that are included in a match. C = (N x W) + L C = Costs the state incurs for each case sent to field office staff for followup, N = Number of hours required to work an average case, W = Average hourly wage of individuals following up on match hits, and L = Average cost per case that the state incurs to create the automated list of recipients each time it participates in the PARIS matches. R = S / C R = Ratio of savings to costs, S = Savings, and C = Costs. The savings that a state might experience from participating in PARIS could differ from those we have reported in the report, depending on which assumptions are used. Tables 6 and 7 illustrate the possible savings a state could realize if we use the averages reported by each state instead of the more conservative assumptions cited in the report. The assumptions used in these tables, where they vary from the values used in the report, are as follows: Number of benefit months avoided per valid match hit: 7 months; Valid hit rate: 30 percent; Each match hit requires 60 minutes (1 hour) to resolve; Cost to follow up on 1 match hit: $31.77; and Cost to follow up on all 100 match hits: $31.77 x 100 hits = $3,177 + $440 (cost of creating file of recipients for matching each time the PARIS match is performed) = $3,617 total cost. Using our hypothetical example in which 100 match hits are sent to local benefit office staff for follow up, table 6 illustrates how the savings to a state from participating in one PARIS match could vary depending on the number of programs included in the match and differences in the valid hit rate. The table assumes that the savings for each program accrue for 7 months. If 30 percent of the match hits are valid (they accurately identify 30 instances of duplicate benefits being paid) and the individuals identified are enrolled in all three programs, the match would produce gross savings of more than $146,000 yielding a savings-to-cost ratio of about 40 to 1. After factoring in total costs of $3,617 to participate and follow up on the match hits, the net savings are more than $142,000. A valid hit rate of 10 percent—a rate substantially below what participating states have reported—in which the match only includes the Food Stamp program would still result in gross savings of about $9,500 (a savings-to-cost ratio of almost 3 to 1). The number of months that future benefit payments are avoided can also influence the amount of savings that result from a PARIS match. Table 7 illustrates the variation in program savings that could result depending on the number of months of future benefits that are avoided and the number of programs matched, given a 30 percent valid hit rate (30 match hits out of the 100 match hits sent for follow up result in some savings). As the table shows, the state would experience net savings from participating in PARIS under each scenario, although the range of potential savings varies considerably. Three months’ worth of Food Stamp benefits avoided would yield gross savings of more than $12,000, (a savings-to-cost ratio of about 3 to 1). The net savings would be about $8,600. However, the match could produce gross savings of about $313,000 if 15 months of benefits were avoided and the match was performed for all three programs (a savings-to-cost ratio of about 87 to 1). Net savings would be about $309,600. The following is GAO’s comment on the Department of Health and Human Services’ letter dated August 17, 2001. The HHS comment concerning “the stated need for a real-time, GAO on- line system” is inaccurate. Although we discuss a national database as one option for providing prompt responses to interstate inquiries about public assistance applicants’ eligibility for benefits, the report does not state that we or any other agency should develop or operate such a system. | Public assistance programs make millions of dollars in improper payments every year. Some of these improper payments occur because state and local agencies that run the programs lack adequate, timely information to determine recipients' eligibility for assistance. This inability to share information can result in both federal and state tax dollars being needlessly spent on benefits for the same individuals and families in more than one state. In 1997, the Department of Health and Human Services (HHS) began a project to help states share eligibility information with one another. The public assistance reporting information system (PARIS) interstate match helps states share information on public assistance programs, such as Temporary Assistance for Needy Families (TANF) and Food Stamps, to identify individuals or families who may be receiving benefit payments in more than one state simultaneously. Officials in almost all of the 16 states and the District of Columbia that participated in PARIS said that the project has helped identify improper TANF, Medicaid, or Food Stamp payments. Despite its successes, the project has several limitations. First, the opportunity to detect improper duplicate payments is not as great as it could be because only one-third of the states participate. Second, participating states do not have adequate protocols or guidelines to facilitate critical interstate communication. As a result, some states have reported critical problems, such as difficulty determining whether an individual identified in a match is actually receiving benefits in another state. Third, state administrators for the TANF, Medicaid, and Food Stamp programs have not always placed adequate priority on using PARIS matches to identify recipients who are living in other states. As a result, individuals may continue to receive or have benefits paid on their behalf in more than one state even after they were identified through the matching process. Finally, because the PARIS match is only designed to identify people after they are already on the rolls, it does not enable the states to prevent improper payments from being made in the first place. |
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While a large number of tax software companies offer return preparation and electronic filing services, three companies provide the tax software used by the majority of individuals who prepare and file their returns electronically (see app. II). One company’s product—Intuit’s TurboTax— represented over half of the returns filed electronically by individual taxpayers. These and other tax software companies generally offer several versions of retail, online, and downloadable software packages that taxpayers can use to prepare federal and state tax returns. They generally charge less for versions that are designed to handle simple tax returns and charge more for versions that can prepare more complicated returns such as those dealing with business expenses. In 2008, the three companies also employed two basic pricing strategies. One strategy was to charge separate, incremental fees for federal return preparation, state return preparation, and electronic filing. For example, in 2008, one company charged about $40 for federal return preparation, with incremental fees of about $20 for electronic filing. The other pricing strategy used was to bundle several services together—typically return preparation and electronic filing—and charge one price for the bundle. Tax software is one of the three major methods that taxpayers use to prepare their returns. As figure 1 illustrates, over 39 million (or 28 percent) of the approximately 138 million individual income tax returns filed in 2007 were prepared by individuals using tax software. Over 77 million individuals used a paid preparer to prepare returns electronically in 2007, and 71 percent of those returns were also submitted electronically to IRS. The remaining 21 million returns were manually prepared by individuals or their paid preparers. After preparation, taxpayers can either electronically file their return or mail a paper copy to IRS. Figure 1 shows that millions of taxpayers who had a return prepared electronically (either by using tax software or a paid preparer) filed paper copies. Such returns are called “v- coded” because IRS codes such returns with a “v” to process and track them separately from other paper-filed returns. Many of the companies that sell tax software also have partnered with IRS to provide free electronic preparation and filing to eligible taxpayers. Those taxpayers have the option of filing their returns for free using products from the Free File Alliance, LLC (FFA)—a consortium of tax preparation companies that provides online electronic preparation and filing to eligible taxpayers at no charge. Figure 1 includes the approximately 4 million FFA returns filed in 2007 by individuals using commercial software. To help improve paper processing, about half of the state revenue agencies use a bar coding technology to convert data on paper returns to electronic data. Bar coding is less expensive and more accurate than processing paper returns because it eliminates manual transcription but is still more expensive and less efficient than electronic filing. IRS does not use this technology for processing individuals tax returns. Returns filed electronically have significant advantages for IRS and taxpayers compared to paper-filed returns as discussed below and further detailed in appendix III. IRS estimates that processing an electronically filed return costs the agency $0.35 per return while processing a paper return costs $2.87 per return. Using IRS’s current cost estimates based on fiscal year 2005 return data, we estimate IRS would have saved approximately $143 million if the 56.9 million paper returns in 2007 had been filed electronically. Electronically filed returns also have higher accuracy rates than paper- filed returns because tax software eliminates transcription and other errors. IRS processes electronically filed returns in less than half the time it takes to process paper returns, facilitating faster refunds. We have previously reported that electronically filed returns have the potential to improve IRS’s enforcement programs. IRS does not use all tax return information in its automated compliance checking programs because IRS policy is to post the same information from electronic and paper returns, and the cost of transcription prevents IRS from transcribing paper returns in full. IRS officials previously estimated in 2007 that having all tax return information available electronically would result in a $175 million increase in tax revenue annually from at least one of its compliance programs. IRS recently issued the results of the first phase of its Advancing E-file study, which examines tax filing behavior and characteristics and contains potential options to increase electronic filing. We have previously reported that IRS’s ability to achieve efficiencies depends on its continuing ability to increase electronic filing. We recently suggested that Congress mandate that paid tax return preparers use electronic filing and that IRS require software companies to include bar codes on individual paper returns. IRS agreed to study the latter option. IRS has responsibility for enforcing tax laws in the Internal Revenue Code (IRC). In addition, IRC section 6011 provides specific authority for IRS to prescribe forms and regulations for tax returns, including the information required on those returns and whether they must be filed electronically. The IRC imposes civil and criminal penalties on paid tax return preparers, which include tax software companies, for unauthorized disclosure or use of a taxpayer’s personal and tax-related information. In addition to tax law penalties, the providers of services for preparing and filing tax returns are subject to the privacy and safeguarding rules created under the Gramm-Leach-Bliley Act (see app. IV). For the 2009 tax filing season, the two largest tax software companies that previously charged separate electronic filing fees for federal returns in some of their retail and downloadable products have eliminated those electronic filing fees. Moreover, the three largest companies will bundle federal tax preparation with electronic filing for all of their products (see app. II). However, for some products, the companies will still charge separate, incremental fees for other services such as state return preparation, state electronic filing, and return review by a tax professional. According to industry representatives, IRS officials suggested they eliminate separate federal filing fees to encourage electronic filing. However, the effect of these changes on electronic filing will not begin to be known until the end of the present tax filing period and will be difficult to determine. On one hand, taxpayers who buy a tax software package that includes a bundle of services may be encouraged to use software and file electronically because there is no longer a separate charge for doing so. On the other hand, if the cost of such a package is significantly higher, it may discourage taxpayers’ use of tax software since they may not be able to purchase a less expensive package that does not include electronic filing. The two largest tax software companies that eliminated federal electronic filing fees also made some other pricing changes for preparing and electronically filing both federal and state tax returns in 2009 including: online tax packages are generally priced lower than in 2008; online tax packages are generally priced lower than most retail/downloadable packages remained essentially the same in price when compared to 2008. For the third largest tax software company, its package prices for both online and retail/downloadable products remained the same in 2009 as in 2008 because the preparation and electronic filing fees remained the same in both years. See appendix II for more details. Another change in 2009 is that IRS and FFA have agreed to provide a fillable version of federal tax forms. These fillable tax forms, which taxpayers can complete online and file electronically, will provide a basic calculator function but will not provide the question-and-answer format similar to commercial tax software. The forms will be accessible for free to all taxpayers via IRS’s Web site and are in addition to FFA’s current free products for eligible taxpayers described in the background of this report. As part of the upcoming second phase of its Advancing E-file study, IRS plans further surveys to obtain taxpayers’ views on electronic filing. However, it does not plan to include questions, for example, about the effect of 2009 pricing changes on taxpayers’ willingness to file electronically. Currently, IRS has little such information. For example, IRS and the Oversight Board surveys to date have not addressed how a separate charge for electronic filing affects taxpayers’ willingness to file electronically. With the 2009 changes, however, IRS has an opportunity to directly measure the effect of eliminating separate fees to file federal tax returns electronically, making changes to software pricing overall, and making electronic tax forms available so that all taxpayers can complete and file for free online. We recognize that such a direct study would not be simple to conduct because, for example, it may be difficult to isolate the effect of multiple price changes and factors other than price, such as accuracy and security, which also affect taxpayers’ willingness to file electronically. Further, prior year data are limited. However, even limited information about how taxpayers’ electronic filing behavior changes after price changes would give IRS an empirical basis for supporting the continued elimination of separate fees for electronic filing and other pricing changes as well as complementing surveys of taxpayers’ views. Ideally, to study the effect of pricing on electronic filing rates, IRS would need to know the software package and version used by each taxpayer in order to know the approximate price paid. Currently, IRS requires a software identification number on electronically filed returns, which does not identify the specific software package or version used to prepare those returns. IRS does not require any type of software identification number on v-coded returns (returns prepared using software but filed on paper). Having a more complete software identification number would not only allow IRS to better target its research but also its enforcement activities and efforts to increase use of tax software and electronic filing. Officials from one software company told us that such a change could be easily made by their company at a relatively low cost. In its Advancing E-file study, IRS reported that one of the most important factors influencing taxpayers’ use of tax software is its ability to accurately apply tax laws. IRS requires tax software to pass its Participants Acceptance Testing System (PATS), which includes verifying that computations are correct, tax rate schedules are updated, and returns transmitted electronically are compatible with IRS systems. However, PATS does not go further in testing to determine, for example, whether the guidance tax software provides is sufficient in helping taxpayers prepare accurate tax returns. IRS developed a National Account Manager (NAM) position in 2000 to serve as the main communication channel between the tax software industry and IRS. NAMs communicate in regularly scheduled conference calls with tax software companies about issues of mutual interest including tax law changes, updates to IRS forms and publications, and the upcoming tax filing season. Software companies also contact the NAMs when they encounter technical issues such as a disruption to electronic filing. IRS also works with tax software industry groups and advisory councils, such as the Council for Electronic Revenue Communication Advancement, on annual updates to tax laws and procedures (see app. V). IRS monitors acceptance rates for electronically transmitted returns, including the reasons for rejected returns, throughout the tax filing season and provides a “report card” to software companies at the end of each filing season. Rejected returns are sent back to the taxpayer for correction and resubmission. IRS’s monitoring efforts allow the agency and software companies to identify and resolve problems with electronically filed returns. For example, in 2008, IRS asked tax software companies to hold returns with the Alternative Minimum Tax until IRS was able to process them. Through its monitoring efforts, IRS officials identified companies that were transmitting those types of returns which IRS then rejected. IRS sent notices to these companies, which reduced the number of rejected returns. IRS has worked with the tax software industry on an ad hoc basis to clarify the guidance provided by tax software. For example, for 2009: IRS is working with software companies to ensure their packages make users enter a “yes” or “no” response to questions about having a foreign bank account and signature authority. Prior to this change, some companies’ software defaulted to a “no” response. Another example involving commercial software used by paid preparers rather than individual taxpayers shows that IRS can work with the software companies to influence and improve guidance: IRS’s Earned Income Tax Credit (EITC) office worked with a group of tax software developers to ensure software used by paid preparers eliminated default answers where taxpayers’ answers are critical to return EITC accuracy, and incorporated a “note” capability in the tax software enabling the preparer to record additional inquiries and taxpayer responses. IRS officials, however, acknowledged that these efforts were not the result of a comprehensive and systematic approach to improving the guidance provided by software. IRS does not have plans to review tax software to see if the guidance it provides to taxpayers is sufficient in helping them prepare accurate returns, in part because IRS relies on the extensive scenario and other testing done by the industry as discussed in the next section. As a result, IRS does not know if it is missing opportunities to improve tax software guidance to better ensure compliance. As an example of such an opportunity, we recently recommended that IRS expand outreach efforts to external stakeholders, including software providers, as part of an effort to reduce common types of misreporting related to rental real estate. IRS agreed with these and most of the recommendations in that report and outlined the actions it plans to take to address those recommendations. IRS has provided limited oversight of the software industry’s efforts to ensure that taxpayer information is secure. Taxpayers who file their returns on their home computers using online, retail, or downloadable tax software products are sending their returns to authorized electronic filing providers. IRS does not have the capability to receive electronic returns directly from individual taxpayers. Only IRS-authorized electronic filing providers, including Electronic Return Originators (ERO) and software companies, among others, can transmit tax returns electronically to IRS. According to TIGTA, EROs were responsible for the majority of electronically filed tax returns accepted by IRS in 2007. IRS regulates authorized electronic filing providers by conducting suitability checks of applicants during the application screening process, including checks of the applicants’ criminal backgrounds, credit histories, and tax compliance. Once approved, authorized electronic filing providers are subject to IRS monitoring visits, which are conducted to ensure that the providers are meeting requirements such as ensuring security systems are in place to prevent unauthorized access to taxpayer data. However, in 2007, TIGTA identified deficiencies in IRS’s monitoring program. For example, IRS did not suspend electronic filing providers who were in violation of program requirements even though they had been issued notifications of suspension. In response, IRS added a new control procedure, effective January 30, 2008, to better track suspension cases. IRS has also established security and privacy requirements that apply to FFA members. For example, according to IRS officials, FFA members must adhere to the Payment Card Industry (PCI) standards and third-party security and privacy certifications, and use PCI-approved companies to conduct penetration and vulnerability testing. IRS has a Memorandum of Understanding (MOU) with FFA requiring members to provide IRS with documentation demonstrating compliance with security standards. However, IRS does not fully monitor compliance with existing FFA security and privacy requirements. Although IRS receives FFA security reports, it does not actively review or validate those reports unless a problem, such as a security incident, is reported. For 2009, IRS is suggesting that all authorized electronic filing providers that participate in online filing adhere to new security and privacy standards, the majority of which are similar to existing FFA requirements; however, IRS is not requiring compliance with those standards (see app. VI). These standards are optional in 2009 because IRS finalized them late in 2008. IRS has no plans to determine if tax software companies that are authorized electronic filing providers participating in online filing are adhering to advisory security and privacy standards for the 2009 filing season. Because the new standards would apply to a relatively few number of companies and include the three largest, the costs to collect information on adherence to the standards would be low. For the 2010 filing season, IRS may make those standards mandatory. Also, IRS is considering expanding these standards to include software companies that offer retail and downloadable products but has not yet established a time frame for doing so. IRS officials stated they are considering developing a plan to monitor compliance with these security and privacy standards for 2010. Without appropriate monitoring, IRS has limited assurance that the standards have been adequately implemented or software companies are complying with the standards. As a result, IRS does not know whether the confidentiality and integrity of the taxpayers’ data are at an increased risk of being inadequately protected against fraud and identity theft. Tax software companies have been reliable providers of electronic filing services, with one recent exception which did not have a significant effect on tax administration. In 2007, customers of some of Intuit’s products experienced a disruption in their ability to file electronically on tax day. For approximately 13 hours, taxpayers could not reliably file their returns electronically through Intuit to IRS. According to IRS, about 171,000 tax returns were affected. IRS accommodated affected taxpayers by extending the tax filing deadline and not applying late filing penalties. IRS reported that the disruption did not delay processing of tax returns, payments to the government, or refunds to taxpayers because IRS already had a processing backlog of millions of returns at that time. Intuit agreed to pay any other penalties that customers incurred and also refunded any electronic filing fees charged during the disruption. IRS’s MOU with FFA requires the latter’s members to maintain a continual level of service throughout the filing season. For example, members are not permitted to schedule any planned blackouts of service during that time. However, IRS does not monitor compliance with this requirement and does not have a similar requirement for non-FFA tax software companies. Additionally, while IRS’s PATS testing reviews tax software to ensure that returns transmitted electronically are compatible with IRS systems before the start of the filing season, it does not do so throughout the filing season. All industry representatives we spoke with believed that testing throughout the filing season was important because of the potential effect of late tax law changes. Despite devoting some resources to oversight of the tax software industry, IRS has not conducted an assessment to understand whether reliance on commercial tax software poses any significant risks to tax administration. Broadly defined, risk assessment involves (1) identifying future, potentially negative outcomes and (2) estimating the likelihood they will occur. In IRS’s case, those outcomes include the possibility of security breaches, disruptions in electronic filing, and missed opportunities to identify and correct compliance problems. While the likelihood of these outcomes occurring may be low, IRS does not know whether this is the case. OMB’s and our guidance suggest that agencies conduct risk assessments to identify risks that could impede the efficient and effective achievement of their goals and allow managers to identify the most significant areas in which to place or enhance internal controls. Moreover, by increasing awareness of risks, these assessments can generate support for the policies and controls that are adopted in order to help ensure that these policies and controls operate as intended. Further, federal law requires agencies to implement an information security program that includes periodic assessments of risk. According to IRS officials, the agency has not conducted a risk assessment because it does not believe the benefits warrant the cost of such an assessment. IRS and software industry officials we spoke with believe it is in the industry’s financial interest to ensure that taxpayers can rely on tax software. In their annual filing reports, both Intuit and H&R Block identified financial losses and harm to their reputation as potential risks of system failures or interruptions. For example, Intuit reported one of the many risks to its company is that the interruption or failure of its information and communication systems could cause customers to revert to paper filings, resulting in reduced company revenues. In addition, according to IRS officials and tax software industry representatives, the industry has not yet experienced a significant problem with tax software or electronic filing. IRS and tax software industry officials further stated that the industry is better suited to conduct extensive scenario and security testing because of the significant cost of conducting such testing. Software industry officials reported spending tens of millions of dollars each year on testing to ensure accuracy. Further, they reported employing hundreds of tax analysts to review and simplify IRS instructions, publications, and forms; monitor proposed changes to tax legislation; and consult with IRS and state revenue agencies to ensure accurate interpretations of tax laws. Intuit officials reported complying with recognized international security standards. Intuit officials also reported undergoing a biennial third-party security assessment, as well as proactively conducting ongoing security application assessments and vulnerability and penetration testing. Industry representatives noted the current public-private partnership between IRS and the software industry provides reliable coverage for electronic filing through redundancy in the market, unlike other countries that offer only a government-sponsored Internet filing option. While the above may be true and financial and other incentives may exist, IRS’s position is not based on an actual, systemic assessment that identifies potential negative outcomes and the likelihood of their occurrence. Further, there are several reasons to believe that the benefits of assessing the risks associated with reliance on commercial tax software are significant. As already noted, IRS has said that it is in the agency’s best interest to ensure that taxpayers can rely on commercial tax software to make electronic filing accurate, easy, and efficient. Continued growth in electronic filing depends on increasing use by individual taxpayers and maintaining their confidence in the accuracy as well as the security and privacy of their tax information, and the reliability of electronic filing. However, IRS does not know whether there are security and privacy risks because it has not monitored existing requirements. While tax software companies have not reported significant security breaches involving taxpayer data either residing on their databases or during electronic transmission to IRS in recent years, cases of lost or stolen data at other taxing authorities illustrate the potential negative outcomes of such a breach. For example, in 2007, Oregon’s Department of Revenue experienced a breach in which electronic files containing confidential taxpayer information may have been compromised by an ex-employee downloading a contaminated file. While tax administration has not been significantly affected by disruptions to electronic filing, as noted previously, on tax day 2007, about 171,000 Intuit customers experienced a 13-hour disruption. During this time, Intuit customers could not reliably file their returns electronically with Intuit, and ultimately to IRS, but this disruption did not significantly affect tax administration. Additionally, Canada and Great Britain recently experienced disruptions with their electronic filing systems (see text box). If enhancements to tax software could produce even small improvements in voluntary compliance by taxpayers, the additional dollars of tax revenue could be substantial. Tens of billions of the $290 billion dollar net tax gap (after IRS’s collection efforts) are associated with sole proprietors and individual owners of rental real estate. We have made several recent recommendations intended to improve the compliance of these taxpayers by enhancing the clarity of tax software which, as we noted, IRS plans to address in most cases. However, IRS has not conducted research on the correlation between tax software and compliance—such as whether and how tax software packages influence compliance. Such research could be enhanced even more by the use of a single software identification number, which would allow IRS to identify the specific software package used by a taxpayer. Although limited testing of hypothetical scenarios by TIGTA and the National Taxpayer Advocate led them to identify possible software weaknesses that might affect compliance, this testing was based on a nonstatistical sample of scenarios and software packages. Because there are millions of potential scenarios and each one is different, it is not possible to generalize from the nonstatistical samples and reach conclusions about the overall effect of tax software on compliance. Furthermore, hypothetical scenarios do not provide evidence about how taxpayers actually use the software or whether taxpayers are actually complying with tax laws. IRS is already devoting resources to oversight of the tax software industry, as described in the previous section. IRS does conduct some testing, has developed the NAM position to communicate with the software industry, and tracks some performance. Also, according to IRS officials, in 2010 IRS plans to devote additional resources to implement new security and privacy requirements and monitor compliance. While significant problems have not occurred to date, without performing a risk assessment—the first step in risk management and mitigation—IRS does not know the potential magnitude or nature of problems or their likelihood of occurring. As a result, IRS does not have an informed basis for making resource allocation decisions, taking steps to mitigate any significant risks, or avoiding costly risk mitigation in areas where the risks are low. Commercial tax software—which is used by tens of millions of taxpayers—is a critical part of the tax administration system and a potential tool for increasing electronic filing. However, IRS does not identify which software packages taxpayers use or have information on the correlation between particular packages and compliance. Further, IRS does not know whether changes to software pricing would be an effective strategy for increasing electronic filing. Nor does IRS have assurance that tax software companies are adequately protecting and securing taxpayer data, another possible influence on taxpayers’ willingness to file electronically. Despite its role in influencing electronic filing and the accuracy of tax returns, IRS has not conducted a risk assessment of taxpayers’ reliance on tax software. Such an assessment could be done alone or as part of a broader study that would include paid preparers. Without a risk assessment, IRS does not know whether its existing investment in oversight of the tax software industry is too great, about right, or needs to be expanded. To help increase electronic filing and allow IRS to better target its efforts, we recommend that the Commissioner of Internal Revenue direct the appropriate officials to take the following six actions: 1. require tax software companies, as soon as practical, to include a software identification number that specifically identifies the software package used to prepare tax returns, which can be used in IRS research efforts; 2. ensure that, as part of the second phase of IRS’s Advancing E-file Study, surveys ask taxpayers the effect of tax software pricing changes and the opportunity to file for free using online tax forms on IRS’s Web site on their decision to either file or not file tax returns electronically; 3. to the extent possible, study the effect of the 2009 pricing changes and the opportunity to file for free using online tax forms on IRS’s Web site on taxpayers’ use of tax software and electronic filing rates; 4. determine if tax software companies that are authorized to participate in online filing are adhering to advisory security and privacy standards for the 2009 filing season; 5. develop and implement a plan for effectively monitoring compliance with recommended security and privacy standards for the 2010 filing season; and 6. assess the extent to which the reliance on tax software creates significant risks to tax administration, particularly in the areas of tax return accuracy, the security and privacy of taxpayer information, and the reliability of electronic filing. The Deputy Commissioner of Internal Revenue provided written comments in a February 19, 2009 letter in which she agreed with all our recommendations and outlined IRS’s actions to address those recommendations (see app. VII). With respect to requiring tax software companies to identify the software package used, IRS plans to require an identification number on paper tax returns created using software. Related to ensuring that Advancing E-file surveys ask taxpayers about the effect of tax software pricing changes, IRS reported those surveys had already been finalized. In its place, IRS will be analyzing monetary disincentives associated with taxpayers’ choice of filing method and plans to study the effect of the pricing changes on taxpayer electronic filing decisions. With respect to ensuring authorized electronic filing providers adhere to the advisory security and privacy standards for the 2009 filing season, IRS reported it plans to sample and observe online providers’ Web sites to determine compliance. If IRS decides to make the standards mandatory, the agency will develop a monitoring and enforcement plan. Finally, to assess risks related to the reliance on tax software, IRS plans to summarize whether and the extent to which the agency is authorized to be involved in aspects of the software industry, including what additional authority it would need to impose changes and sanctions. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of the report until 30 days after its date. At that time, we will send copies of this report to the Secretary of the Treasury; the Commissioner of Internal Revenue; the Director, Office of Management and Budget; relevant congressional committees; and other interested parties. This report is available at no charge on GAO’s Web site at http://www.gao.gov. For further information regarding this report, please contact James R. White, Director, Strategic Issues, at (202) 512-9110 or [email protected] or Gregory C. Wilshusen, Director, Information Security Issues, at (202) 512- 6244 or [email protected]. Contacts for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this report can be found in appendix VIII. To determine what is known about how pricing strategies affect the use of tax software and electronic filing, we obtained and analyzed the prices for the top three tax software companies for both online and retail or downloaded products for filing seasons 2008 and 2009. These costs did not include any rebates or promotional prices. We limited our data analysis to the top three software companies because they account for 88 percent of all returns filed electronically by individuals and accepted by the Internal Revenue Service (IRS). We also reviewed literature concerning the economics of information goods, including software pricing. Further, we obtained and analyzed findings from IRS’s Taxpayer Satisfaction Studies and reviewed the IRS Oversight Board’s November 2006 Taxpayer Customer Service and Channel Preference Survey to determine why federal taxpayers do not file returns electronically. To determine the extent to which IRS provides oversight of the tax software industry to help ensure tax returns are accurate, we reviewed and summarized IRS’s legal authority to regulate the accuracy and security of commercial tax software. We also obtained and analyzed internal revenue manuals, industry standards, and government guidance and compared them to IRS’s current procedures. We reviewed the Free File Alliance, LLC (FFA) Memorandum of Agreement (MOU) outlining IRS and FFA’s agreements to provide free income tax software to individuals. To determine the extent to which IRS provides oversight of the tax software industry to help ensure that taxpayer information is secure, we interviewed IRS and FFA officials. In addition, we obtained and analyzed IRS’s new electronic filing security and privacy standards, comparing them to industry standards. We also reviewed the FFA MOU to assess the extent to which security and privacy requirements were already in place for FFA members. To determine the extent to which IRS helps ensure electronic filing systems are reliable, we reviewed IRS requirements for electronic return originators, the FFA MOU, and documents and literature describing a significant disruption in electronic filing at Intuit. We also reviewed documents and interviewed Intuit officials to determine the extent of the disruption and corroborated the information they provided during interviews with IRS officials to determine the effect the disruption had on taxpayers and the agency. To determine what is known about the risks of the reliance on commercial tax software used by individuals, we reviewed Office of Management and Budget (OMB) and GAO guidance, including the criteria for assessing risk at an agency as well as industry best practices for risk assessments and internal controls; and interviewed IRS officials to determine what risk assessments IRS had in place. We also reviewed selected tax software companies’ filing statements with the Securities and Exchange Commission to determine if they identified any risks. We also interviewed IRS and software industry officials to determine what steps they took to identify and address risks. We reviewed the Treasury Inspector General for Tax Administration’s (TIGTA) and National Taxpayer Advocate’s (NTA) reports detailing their respective tests of how accurately and consistently tax software applied tax laws. Because the various tax software tests we reviewed were limited to a subset of tax software packages and used a nonstatistical sample of tax scenarios, their results were not generalizable to all types of taxpayers, tax filing situations, tax laws, or the entire tax software industry. We also reviewed literature on the effect of significant electronic filing disruptions in tax software systems in selected other countries. We selected Canada and Great Britain because these were the examples that IRS provided on electronic filing disruptions in other countries. For background purposes, we also used IRS data to compare the cost of processing returns, and obtained and analyzed math error authority data, reject errors, and processing times across the different tax return filing methods. Additionally, for all objectives, we reviewed reports and interviewed officials including those from IRS, NTA, TIGTA, FFA, the Electronic Tax Administration and Advisory Committee, the Federation of Tax Administrators and the IRS Oversight Board. We also interviewed officials from select industry groups such as the Council for Electronic Revenue Communication Advancement, the National Association of Computerized Tax Processors, and selected tax software companies. We visited a major tax software provider’s data center. Our work was done primarily at IRS Headquarters in Washington, D.C. and its division offices in New Carrollton, Maryland, and Atlanta, Georgia. We conducted this performance audit from April 2008 through February 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. While a large number of companies offered tax preparation services in 2008, the top three tax software companies electronically filed 88 percent of returns prepared by individual taxpayers (as opposed to the returns prepared and electronically filed by paid preparers). Each of the companies outside the top three held less than 3 percent of the tax software market as measured by the number of electronically filed returns. However, tax software companies also compete with the paid preparer industry as well as manual preparation. Based on a review of pricing literature for software companies, tax software companies, like other software and information technology companies, have low marginal costs and high fixed costs for product development. In such markets, if the price charged to taxpayers is equal to the marginal cost, companies will not be able to cover their average cost of production and cannot stay in business. Therefore, companies in these markets will attempt to recover more of their fixed costs through various forms of price discrimination. Price discrimination can take the form of developing different versions of the product to match the needs of different types of consumers, who are then charged different prices according to their willingness to pay. The literature also suggests that companies in these markets may offer products that consist of several services bundled together— sometimes charging separate prices for each service or charging a single price for different combinations (bundles) of services. The bundling strategy is thought to potentially increase a company’s revenue by attracting consumers who may value particular elements of the bundled product. Tax software companies bundle some or all of the following services or features: federal tax preparation, state tax preparation, electronic filing for federal and state returns, help services and technical support, return printing services, storage of information from prior returns, links to outside providers of relevant information (W-2s), and built-in accuracy checks. Some tax software companies offer only online services to taxpayers, while others offer the option of downloading the program to a home computer or purchasing software from a retail location. The pricing structure may vary depending on whether a taxpayer prepares a return online or purchases a retail or downloadable program (see tables 1 and 2). In 2008, the largest companies offering online preparation products for federal returns usually bundled electronic filing with federal return preparation. However, if the program was downloaded or purchased at a retail location, electronic filing often involved a separate charge. For the 2009 tax filing season, the two largest tax software companies that previously charged separate electronic filing fees for federal returns for some of their products have eliminated those electronic filing fees. The three largest companies will bundle federal tax preparation with electronic filing for all of their products. For some products, the companies will still charge separate, incremental fees for other services such as preparation and electronic filing for state returns, as well as return review. The two largest tax software companies that eliminated federal electronic filing fees also made some other pricing changes for preparing and electronically filing both a federal and state tax return in 2009 including: online tax packages are generally priced lower than 2008; online tax packages are generally priced lower than most retail/downloadable packages remained essentially the same in price when compared to 2008. For the third largest tax software company, its package prices for both online and retail/downloadable products remained the same in 2009 as in 2008 because the preparation and electronic filing fees remained the same in both years. The effect of these pricing changes on electronic filing will not begin to be known until the end of the present tax filing period and will be difficult to determine. On one hand, taxpayers who buy a tax software package that includes a bundle of services may be encouraged to use software and file electronically because there is no longer a separate charge for doing so. On the other hand, if the cost of such a package is significantly higher, it may discourage taxpayers’ use of tax software since they may not be able to purchase a less expensive package that does not include electronic filing. Taxpayers can experience many advantages and disadvantages based on the various methods for preparing and filing federal tax returns. Taxpayers preparing and filing their returns electronically may receive advantages such as reduced time spent on preparing the return and receiving faster refunds. On the other hand, taxpayers who prepare their returns manually may experience disadvantages such as increased transcription errors and slower refunds. Table 3 shows details of the advantages and disadvantages of the different preparation and filing methods. In the Internal Revenue Service Restructuring and Reform Act of 1998, Congress instructed the agency to establish a goal of having 80 percent of all individual income tax returns filed electronically by 2007. While the Internal Revenue Service (IRS) has no legal authority to generally oversee the operations of tax software companies, IRS does have the authority to prescribe the forms and regulations for the making of returns, including the information contained therein and whether forms must be filed electronically. Accordingly, IRS has an interest in ensuring that tax software providers comply with tax laws and security and privacy laws so that taxpayers have confidence in these services and file their tax returns electronically. Under section 6103 of the Internal Revenue Code (IRC), IRS is responsible for safeguarding taxpayer data while in IRS’s control. Section 6103 nondisclosure requirements only apply to IRS and not to private entities that prepare and send tax data to IRS. However, private entities are subject to safeguarding and privacy rules with regard to taxpayer information and can be penalized for improper use and disclosure. The Gramm-Leach-Bliley (GLB) Act requires financial institutions to protect consumers’ personal financial information held by these institutions—including return preparers, data processors, transmitters, affiliates, service providers, and others who are paid to provide services involving preparation and filing of tax returns. For companies in the tax business, the GLB Act delegated rulemaking and enforcement authority to the Federal Trade Commission (FTC). Complying with the GLB Act generally means complying with FTC’s Financial Privacy and Safeguards Rules. The Financial Privacy Rule requires financial institutions to give their customers privacy notices that explain the financial institution’s information collection and sharing practices; the Safeguards Rule requires financial institutions to have a security plan to protect the confidentiality and integrity of personal consumer information. Additionally, paid tax return preparers are subject to both civil and criminal penalties for unauthorized disclosure or use of a taxpayer’s confidential information. Tax return preparers include persons who develop tax software that is used to prepare or file a tax return, as well as any authorized IRS electronic filing provider. Tax return preparers who knowingly or recklessly disclose or use tax return information for a purpose other than preparing a tax return are guilty of a misdemeanor with a maximum penalty of up to 1 year’s imprisonment or a fine of not more than $1,000, or both. Any unauthorized disclosure or use by a tax return preparer not acting in bad faith still subjects that preparer to a civil penalty of $250 for each disclosure, not to exceed $10,000 for the year. A summary of the federal laws protecting taxpayer information are listed in table 4. In an effort to provide more effective tax administration, Internal Revenue Service (IRS) disseminates information and obtains technical perspectives and advice through industry and advisory councils. As shown in table 5, membership in many of these groups, with whom we consulted, is balanced to include representatives from tax practitioners and preparers, transmitters of electronic returns, tax software developers, large and small businesses, employers and payroll service providers, individual taxpayers, financial industry, academic, trusts and estates, tax exempt organizations, and state and local governments. For 2009, the Internal Revenue Service (IRS) has developed six new optional security and privacy standards which are intended to better protect taxpayer information collected, processed, and stored by online authorized electronic filing transmitters, as shown in table 6. These new standards are based on industry best practices and are intended to supplement the Gramm-Leach-Bliley Act and the implementing rules and regulations promulgated by the Federal Trade Commission. In addition to the contacts named above, Joanna Stamatiades, Assistant Director; Amy Bowser; Debra Conner; Vanessa Dillard; Michele Fejfar; Jyoti Gupta; Jeffrey Knott; Ed Nannenhorn; Madhav Panwar; Joseph Price; and Robyn Trotter made key contributions to this report. | Individual taxpayers used commercial tax software to prepare over 39 million tax returns in 2007, making it critical to the tax administration system. The majority were then filed electronically, resulting in fewer errors and reduced processing costs compared to paper returns. GAO was asked to assess what is known about how pricing of tax software influences electronic filing, the extent to which the Internal Revenue Service (IRS) provides oversight of the software industry, and the risks to tax administration from using tax software. To do so, GAO analyzed software prices, met with IRS and software company officials, examined IRS policies, and reviewed what is known about the accuracy, security, and reliability of tax software. IRS has little information about how the pricing of tax software affects taxpayers' willingness to file tax returns electronically. In 2009, the two largest tax software companies eliminated separate fees to file federal tax returns electronically when using software purchased from retail locations or downloaded from a Web site. As a result, IRS has an opportunity to study whether this and other changes are effective in increasing electronic filing. Additionally, IRS would benefit from being able to identify which software package the taxpayer used to better target research and efforts to increase software use and electronic filing. IRS provides some oversight of the tax software industry but does not fully monitor compliance with established security and privacy standards. Further, IRS has not developed a plan to monitor compliance with new standards, which are optional in 2009 but may be mandatory in 2010. Without appropriate monitoring, IRS has limited assurance that the standards are being implemented or complied with. IRS has not conducted an assessment to determine whether taxpayers' use of tax software poses any risks to tax administration. Risks include that IRS may be missing opportunities to systemically identify areas to improve software guidance and enhance information security. IRS officials said the likely benefits of an assessment would not warrant the costs but have not determined either the benefits or costs of such an assessment. Moreover, IRS has also said that it is in the agency's best interest to ensure that taxpayers can rely on commercial software to make electronic filing accurate, easy, and efficient. Further, if even small improvements in the accuracy of tax returns could be made by clarifying the guidance in tax software, the effect on revenue could be substantial. Without a risk assessment, IRS does not know whether its existing oversight of the tax software industry is sufficient or needs to be expanded. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
The term “ombudsman” originated in Sweden and has generally come to mean an impartial official who receives complaints and questions, collects relevant information through an investigation or inquiry, and works toward the resolution of the particular issues brought to his attention. Ombudsmen may make recommendations for the resolution of an individual complaint or improvements related to more systemic problems. Depending on their jurisdiction, ombudsmen may protect those who work within an organization or those who are affected by the organization’s actions. An ombudsman who handles concerns and inquiries from the public, such as EPA’s national hazardous waste ombudsman, is often referred to as an “external” ombudsman. In contrast, internal or “workplace” ombudsmen provide an alternative to more formal processes to deal with conflicts and other issues that arise in the workplace. While there are no federal requirements or standards specific to the operation of ombudsman offices, the Administrative Conference of the United States recommended in 1990 that the President and the Congress support federal agency initiatives to create and fund an external ombudsman in agencies with significant interaction with the public. In addition, several professional organizations have published or drafted relevant standards of practice for ombudsmen. Among these organizations are the Ombudsman Committee of the ABA, The Ombudsman Association, and the U.S. Ombudsman Association. In July 2000, ABA’s Ombudsman Committee released a draft of its recommended Standards for the Establishment and Operation of Ombudsman Offices, which are intended to expand on a 1969 ABA resolution that identified essential characteristics of ombudsmen. An article published by the U.S. Ombudsman Association, “Essential Characteristics of a Classical Ombudsman,” elaborates on these factors and explains why they are necessary. Similarly, The Ombudsman Association has published a generic position description for ombudsmen, including critical skills and characteristics, and the U.S. Ombudsman Association has drafted a model ombudsman act appropriate for state governments. Both the recommendations of the Administrative Conference of the United States and the standards of practice adopted by ombudsman associations incorporate the core principles of independence, impartiality, and confidentiality. The ABA’s recommended standards define these characteristics as follows: Independence—An ombudsman must be and appear to be free from interference in the legitimate performance of duties and independent from control, limitation, or penalty by an officer of the appointing entity or a person who may be the subject of a complaint or inquiry. Impartiality—An ombudsman must conduct inquiries and investigations in an impartial manner, free from initial bias and conflicts of interest. Confidentiality—An ombudsman must not disclose and must not be required to disclose any information provided in confidence, except to address an imminent risk of serious harm. Records pertaining to a complaint, inquiry, or investigation must be confidential and not subject to disclosure outside the ombudsman’s office. In addition to the core principles, some associations also stress the need for accountability and a credible review process. Accountability is generally defined in terms of the publication of periodic reports that summarize the ombudsman’s findings and activities. Having a credible review process generally entails having the authority and the means, such as access to agency officials and records, to conduct an effective investigation. The role of EPA’s national ombudsman has evolved since it was first established in the 1984 amendments to the Resource Conservation and Recovery Act. In 1991, EPA expanded the ombudsman’s jurisdiction to encompass all of the hazardous waste programs managed by OSWER, with the most significant addition being the Superfund program. EPA appointed Superfund ombudsmen in each of its 10 regional offices in 1996, when the agency adopted a number of administrative reforms in the Superfund program. The nature of the national ombudsman’s work has also changed; although the emphasis was initially on responding to informational inquiries, he has taken on more detailed investigations in recent years. In January 2001, the ombudsman temporarily suspended his ongoing investigations over disagreements with OSWER management about staffing in the ombudsman’s office. However, we did not address the issue in this report because investigation of internal personnel disputes was beyond the scope of our work. Important characteristics of EPA’s national hazardous waste ombudsman differ from the professional standards of practice adopted by various ombudsman associations. While EPA is not required to comply with such standards—and, in some instances, faces legal or practical constraints to doing so—the standards can serve as a guideline for implementing the core principles of an effective ombudsman: independence, impartiality, and confidentiality. Contrary to these standards, EPA’s national ombudsman is not independent of the organizational unit whose decisions he is responsible for investigating. Moreover, this lack of independence raises questions about the ombudsman’s impartiality and hence his ability to conduct a credible investigation. EPA’s national ombudsman also falls short of existing standards in other areas, such as accountability. When we examined the operations of ombudsmen at other federal agencies, we found that these agencies have found ways to increase their ombudsmen’s ability to adhere to professional standards of practice. EPA is considering several changes to the operations of the national ombudsman, but these changes do not address existing limitations on the ombudsman’s independence and, in some instances, they impose additional constraints. Existing professional standards contain a variety of criteria by which an ombudsman’s independence can be assessed, but in most instances, the underlying theme is that an ombudsman should have both actual and apparent independence from persons who may be the subject of a complaint or inquiry. According to ABA guidelines, for example, a key indicator of independence is whether anyone subject to the ombudsman’s jurisdiction can (1) control or limit the ombudsman’s performance of assigned duties, (2) eliminate the office, (3) remove the ombudsman for other than cause, or (4) reduce the office’s budget or resources for retaliatory purposes. Other factors identified in the ABA guidelines on independence include a budget funded at a level sufficient to carry out the ombudsman’s responsibilities; the ability to spend funds independent of any approving authority; and the power to appoint, supervise, and remove staff. The Ombudsman Association’s standards of practice define independence as functioning independent of line management and advocate that the ombudsman report to the highest authority in the organization. As currently constituted, some aspects of EPA’s national hazardous waste ombudsman are not consistent with existing criteria for independence. In terms of organizational structure, the national ombudsman is located within OSWER, the organizational unit whose decisions the ombudsman is responsible for investigating. In addition, the ombudsman reports to and receives performance evaluations from one of OSWER’s managers. Thus, OSWER management is in a position to control or limit the ombudsman’s performance of assigned duties. OSWER managers told us that the organizational structure was established as a matter of convenience and simply reflects the fact that the ombudsman’s jurisdiction encompasses the hazardous waste programs within the office’s purview. The officials also said that at the time the structure was established, the ombudsman’s workload consisted primarily of responding to informational inquiries rather than conducting investigations. Although OSWER managers acknowledge concerns about the appearance of constraints on the ombudsman’s independence, they point out that most decisions about specific hazardous waste sites or facilities are made at the regional office level. The officials believe that OSWER’s top management is sufficiently removed from site-specific decisions to mitigate such concerns. According to the ombudsman, however, decisions on the most significant or costly sites are the most likely to be elevated to OSWER’s management level at EPA headquarters. He also believes that locating the ombudsman’s office outside of OSWER would increase his independence and lessen the likelihood that he would be reporting to someone who was once responsible for making decisions on specific hazardous waste sites or facilities. On a functional basis, OSWER’s control over the ombudsman’s budget and staff resources also affects the ombudsman’s independence. For example, until recently, the ombudsman did not have a separate budget and was on a “pay-as-you-go” system in which prior approval was required for every expenditure. In November 2000, OSWER created a separate line item within the OSWER budget for ombudsman-related expenditures. According to OSWER managers, having a separate line item made sense in light of the ombudsman’s increased workload. In addition, they decided that it is better to give the ombudsman a budget up front and tell him that he has to set priorities and work within the amount provided than to approve funding on a case-by-case basis. They recognized that the latter approach could create the impression that OSWER is hampering the ombudsman’s independence any time a funding request is disapproved because such a decision would limit his involvement in particular cases. From the ombudsman’s perspective, knowing the amount of available funding at the beginning of a fiscal year allows him to better prioritize and manage his activities. However, without supervisory authority, he does not have the same discretion as other OSWER managers over how the budget resources are used. OSWER exercises similar control over the ombudsman’s staff resources. Since the ombudsman is a nonsupervisory position, he does not have authority to hire, fire, or supervise staff. OSWER managers approve all staff detailed or assigned to the ombudsman function and prepare their performance appraisals. Until recently, the ombudsman function was carried out with only one full-time, permanent staff member—the ombudsman himself. To aid the ombudsman as his workload has increased, OSWER has supplied a variety of temporary help including, at various times, a part-time assistant, an individual on a short-term detail, technical consultants, and student interns and retired persons funded through special grant programs. In April 2001, an individual who had been assigned to work with the ombudsman under a 6-month detail was granted permanent status in that position. In addition, according to OSWER officials, a total of 3 full-time-equivalent staff-years have now been budgeted for the ombudsman function, and OSWER management secured an exemption for the ombudsman function from an agency-wide hiring freeze. However, because the ombudsman continues to be a nonsupervisory position, OSWER managers still prepare the performance appraisals for any of the staff assigned to the ombudsman. Another issue relating to independence is the adequacy of the resources available to the ombudsman. Some evidence suggests that the ombudsman’s resources have not kept pace with his increased workload. Information compiled by the ombudsman at our request shows a significant increase in the number of investigations over the past 2 years. On the basis of information extracted from his case files, the ombudsman told us that he initiated 34 investigations since he took office in October 1992, more than half of which were initiated since 1999. OSWER managers point out that the ombudsman was allocated a total of $900,000 for fiscal year 2001, a significant increase over the estimated $500,000 spent on ombudsman-related activities during the previous year.However, when the ombudsman was asked to provide an estimate of his fiscal year 2001 resource needs, he requested a budget of $2 million and seven full-time equivalent staff. Without more information, it is difficult to determine whether the ombudsman’s estimate was realistic or what the appropriate level of resources should be. The ombudsman does not maintain sufficient statistical records on his investigations and other activities to serve as a basis for a reasonable estimate of resource needs. He also does not have written procedures for selecting, prioritizing, and tracking inquiries and cases. He told us that during his first few years as ombudsman, he had an assistant who maintained case logs on inquiries received, and thus could produce summary statistics on his workload. According to the ombudsman, once his assistant retired, he no longer had sufficient staff resources to maintain logs on inquiries received and their resolution, summary information on the results of investigations, or records on the status of ongoing cases, although he does maintain case files on his investigations. While independence is perhaps the most essential characteristic of an effective ombudsman, other aspects are also important. When we compared these aspects of EPA’s national ombudsman with relevant professional standards, we found several differences. One significant difference concerns the ombudsman’s impartiality, which is called into question by the impairments to the ombudsman’s independence. According to the ABA’s recommended standards, “the ombudsman’s structural independence is the foundation upon which the ombudsman’s impartiality is built,” and independence from line management is a key indicator of the ombudsman’s ability to be impartial. However, in the case of EPA’s national ombudsman, line management not only has direct supervisory authority over the ombudsman but also controls his budget and staff resources. Other criteria for evaluating an ombudsman’s impartiality relate to the concept of fairness. For example, according to the article published by the U.S. Ombudsman Association about the essential characteristics of an ombudsman, an ombudsman should provide any agency or person being criticized an opportunity to (1) know the nature of the criticism before it is made public and (2) provide a written response that will be published in whole or in summary in the ombudsman’s final report. However, we found that EPA’s national ombudsman does not have a consistent policy for preparing written reports on his investigations, consulting with agency officials to obtain their comments before his findings are made public, or including written agency comments when reports are published. According to the national ombudsman, inconsistencies in the degree of consultation with the agency are linked to differences in the extent of OSWER management’s interest in reviewing his reports. However, he acknowledged that these differences do not preclude him from soliciting comments. Another difference concerns confidentiality since legal constraints prevent EPA’s national ombudsman from adhering to relevant professional standards in this area. Under ABA’s recommended standards, an ombudsman must not disclose and must not be required to disclose any information provided in confidence, except to address an imminent risk of serious harm. The standards say that records pertaining to a complaint, inquiry, or investigation must be confidential and not subject to disclosure outside the ombudsman’s office. However, as an EPA employee, the national ombudsman is subject to the disclosure requirements of the Freedom of Information Act. The act generally provides that any person has a right of access to federal agency records, except to the extent that such records are protected from disclosure by statutory exemption.Exempted information includes agency internal deliberative process or attorney-client information. According to the ombudsman, the confidentiality issue has not posed a significant problem thus far because he has not been asked to disclose information provided by complainants. However, he believes that his inability to offer confidentiality could be troublesome in the future. Accountability is another area in which EPA’s national ombudsman differs from relevant standards of practice for ombudsmen. The ABA recommends that an ombudsman issue and publish periodic reports summarizing his findings and activities to ensure the office’s accountability to the public. Similarly, recommendations by the Administrative Conference of the United States regarding the establishment of ombudsmen in federal agencies state that ombudsmen should be required to submit periodic reports summarizing their activities, recommendations, and the relevant agency’s responses. EPA’s national ombudsman does not prepare such reports; he told us that EPA has never required an annual report at the national level. The regional ombudsmen are expected to submit annual reports on their activities, but the reports are for internal use only. He also indicated that he does not have the resources to maintain the records necessary to produce such a report. Other federal agencies have provided their ombudsmen with more independence than that available to EPA’s national ombudsman—both structurally and functionally. At least four other federal agencies have an ombudsman function somewhat similar to EPA’s: the Agency for Toxic Substances and Disease Registry, the Federal Deposit Insurance Corporation, the Food and Drug Administration, and the Internal Revenue Service. Of these agencies, three have an independent office of the ombudsman that reports to the highest level in the agency. For example, the ombudsmen from the Food and Drug Administration and the Internal Revenue Service each report to the Office of the Commissioner in their respective agencies. The exception is the ombudsman at the Agency for Toxic Substances and Disease Registry. Although the agency does not have a separate office of the ombudsman—a single individual fulfills its ombudsman function—the ombudsman reports to the Assistant Administrator of the agency. In contrast, EPA’s national ombudsman is located in a program office (OSWER) and reports to the Office’s Deputy Assistant Administrator. OSWER officials pointed out that the ombudsmen in other federal agencies generally have an agency-wide jurisdiction, while EPA’s ombudsman is responsible only for inquiries and investigations relating to the hazardous waste programs managed by OSWER. They believed that it was logical to place the national ombudsman within OSWER because that office would directly benefit from the ombudsman’s activities. However, as noted earlier, the ombudsman believes that locating his function outside of OSWER would offer him greater independence. In addition, structural issues take on greater prominence when the unit to which the ombudsman must report also controls his budget and staff resources. The ombudsmen in three of the agencies we examined—the Federal Deposit Insurance Corporation, the Food and Drug Administration, and the Internal Revenue Service—also have more functional independence than the EPA ombudsman has. For example, they have the authority to hire, supervise, discipline, and terminate staff, consistent with the authority granted to other offices within their agencies. These ombudsmen are able to hire permanent full-time staff and do not have to rely on part- time or detailed employees. In addition, the ombudsmen in these three agencies have control over their budget resources. For example, the ombudsmen have authority to draft and submit budgets to cover their anticipated workloads in the upcoming fiscal year. While they are subject to the same budget constraints as other offices within the agencies, they have the ability to prioritize their workloads and make decisions about where their funds will be spent. In January 2001, OSWER proposed new guidance to explain the roles and responsibilities of the national and regional ombudsmen. The primary objective in issuing the guidance was to improve the effectiveness of the ombudsman program by providing a clear and consistent set of operating policies and expectations. On the subject of the ombudsman’s independence, the guidance is relatively brief. It states: “The Ombudsman will be free from actual or apparent interference in the legitimate performance of his/her duties. The Ombudsman has the autonomy to look into any issue or matter consistent with this guidance.” However, the guidance leaves the current organizational structure in place and, in some respects, imposes additional constraints on the ombudsman’s independence. Maintaining the existing structure raises questions about whether the ombudsman will be subject to interference in the performance of his duties. Many of the comments EPA received on its proposed guidance expressed concerns about structural constraints on the ombudsman’s independence. The general theme of the comments was that the ombudsman must be located outside of the organization that is being investigated to be truly independent. Some commenters suggested that the ombudsman report to the EPA Administrator, and others believed that the function should be entirely independent of the agency. In addition to maintaining the status quo with regard to the organizational structure, EPA’s proposed guidance places some new restrictions on the ombudsman’s independence. Regarding case selection, for example, the guidance states that the regional ombudsmen will generally handle matters that fall within the territorial boundaries of their respective regions. (See appendix II for a map showing the EPA regions and the distribution of national ombudsman investigations.) For cases that concern a “nationally significant” issue, the guidance states that regional ombudsmen will consult with the national ombudsman regarding who is best suited to take the lead, considering time, resources, location, and familiarity with the subject and parties involved. If the national and regional ombudsmen cannot reach agreement on a particular case, the guidance provides that the Assistant Administrator or Deputy Assistant Administrator of OSWER will resolve the dispute. Giving the regional ombudsmen such a prominent role in case selection is problematic considering their part-time involvement in the ombudsman function and, more significantly, the nature of their other responsibilities. EPA’s proposed guidance acknowledges that the national ombudsman is best suited to handle matters that pose potential conflicts of interest for the regional ombudsmen, but it does not recognize the inherent problems created by their dual roles. (Concerns about impairments to the independence of the regional ombudsmen are discussed in more detail later in this report.) Regarding another aspect of case selection, EPA’s proposed guidance includes a general prohibition on investigating matters in litigation, on the ground that such investigations could be construed as creating an alternative forum for arguing the issues. The guidance cites the risks of confusion, inefficiency, and potentially conflicting statements about the agency’s position as reasons that the ombudsman should avoid investigating matters in litigation. According to OSWER officials, their primary concern with the ombudsman’s involvement is the potential for undermining the legal process and building a separate record as a result of his investigation. They acknowledged that most Superfund cases are in litigation at some point, but they said that the matter being litigated usually concerns who should pay for a cleanup, not how the cleanup should be done. The officials believe that the latter issue is more likely to be the subject of an ombudsman investigation. EPA’s national ombudsman told us that he should have the authority to select cases for investigation regardless of whether the matter is in litigation. Most of the comments on EPA’s proposed guidance also stated that the ombudsman should have the discretion to choose which cases to investigate without interference from agency management. For example, the Coalition of Federal Ombudsmen commented that although coordination between top management and the ombudsman is a necessity when matters are in litigation, requiring the concurrence of agency management is “not a workable solution.” Comments from two entities within the ABA agree that the involvement of agency management would be inconsistent with the ombudsman’s independence. However, they also said that the national ombudsman should be able to accept jurisdiction over an issue that is pending in a legal forum only if all parties to the action explicitly consent. In addition to drafting new guidance for the ombudsman program, EPA officials, including those in OSWER, have been considering a variety of organizational options for the ombudsman function. In March 2001, OSWER developed, as one possible option, a proposal for creating a separate office of the ombudsman within OSWER. They indicated that the proposed organizational change stems from a recognition that the role and workload of the national ombudsman have evolved and that some current management practices are cumbersome and inefficient. Under the reorganization, the incumbent ombudsman would serve as director of the office and have more control over his budget and staff resources. Specifically, the ombudsman would have the authority to hire, supervise, and remove staff, consistent with other offices within OSWER. In addition, the director would be responsible for drafting and submitting a budget to cover the ombudsman’s activities. Although this proposal would enhance the functional independence of the ombudsman, the office of the ombudsman would still be located within OSWER. Final decisions about the appropriate staffing levels and resource allocations would still be under the purview of OSWER management. EPA has decided to table its decision on the appropriate placement of the ombudsman function within the agency until agency management has time to consider the results of our report and comments from other stakeholders, including the ombudsman. Within EPA’s 10 regional offices, the ombudsman function is perceived as a collateral duty and is assigned to individuals whose primary role often poses a potential conflict of interest. Most of the regional ombudsmen devote less than 25 percent of their time to the ombudsman role. They spend the majority of their time performing duties that could be the subject of an ombudsman investigation. The regional ombudsmen primarily respond to informational requests, including some referred by the national ombudsman. While the national and regional ombudsmen disagree on the extent to which they coordinate their activities, the regional ombudsmen clearly have little involvement in substantive matters, such as helping to select which cases will be investigated by the national ombudsman or to conduct such investigations. ABA’s recommended standards for ombudsmen call for independence in structure, function, and appearance and, among other criteria, stipulate no assignment of duties other than that of the ombudsman function. Similarly, guidance developed by The Ombudsman Association states that an ombudsman should serve “no additional role within an organization” because holding another position would compromise the ombudsman’s neutrality. However, by virtue of their dual roles, EPA’s regional ombudsmen appear to have less independence than the national ombudsman has. Moreover, they are more likely to encounter a potential conflict of interest, since most decisions on hazardous waste sites and facilities are made at the regional level. The ombudsman function is generally seen as a collateral duty at the regional level, and the manner in which the function is implemented is left to the discretion of the agency’s regional administrators. As a result, the nature of the primary role served by the regional ombudsmen varies from region to region, although 7 of the 10 regional ombudsmen are located within the regional unit that manages the Superfund program. (See table 1.) The amount of time spent on ombudsman duties also varies widely from region to region. During fiscal year 2000, for example, estimates of the percentage of time devoted to ombudsman-related work ranged from about 2 percent to 90 percent. Figure 1 summarizes the estimated time spent on regional ombudsman duties during calendar years 1999 and 2000. When asked how they are able to ensure their independence in light of their dual roles, 7 of the 10 regional ombudsmen either did not perceive their multiple responsibilities as hampering their independence or cited direct access to regional management as a way of dealing with potential conflicts. However, we also asked about the extent to which their supervisors have been involved or have the potential to be involved in decisions or cases subject to investigation by the ombudsmen. Five of the ombudsmen acknowledged that their immediate supervisors could have significant involvement in matters subject to an ombudsman investigation. While the remaining five ombudsmen did not agree, they also reported that their immediate supervisors held positions in which the potential for involvement appears high. OSWER officials recognize that the regional ombudsmen are more constrained than the national ombudsman as a result of their dual responsibilities. However, the officials believe that these individuals provide a valuable service in responding to informational inquiries, a function in which independence is less likely to be an issue. If the regional ombudsmen are to be truly independent, EPA’s national ombudsman believes that they should report to him and should not have other responsibilities that pose a potential conflict. He attributed their relatively light workload and part-time role to public perceptions that the regional ombudsmen are not independent. OSWER officials agreed that such perceptions might be at least partly responsible for the situation. When we looked at how other federal agencies dealt with regional ombudsmen, we found that two of the four agencies we examined—the Federal Deposit Insurance Corporation and the Internal Revenue Service—have ombudsmen in regional offices. The Federal Deposit Insurance Corporation currently has ombudsmen in each of its seven service centers located across the country. Within the Internal Revenue Service, the National Taxpayer Advocate is required to appoint local taxpayer advocates, including at least one in each state. In both agencies, the staff that perform the regional ombudsman function devote 100 percent of their time to that responsibility. The regional staffs are considered part of the national ombudsman’s office and report directly to the national ombudsman. In each case, the national ombudsman has responsibility for the hiring, supervision, and removal of all staff within his office, including regional staff, and the regional operations are included in his office’s budget request. Since the ombudsman function was first created within OSWER, EPA has issued and proposed guidance that calls for coordination between the national and regional ombudsmen. EPA’s Hazardous Waste Ombudsman Handbook, which was published in 1987 and remains in effect, states that close cooperation between the national and regional ombudsmen is important. In February 1998, after some misunderstandings developed between the national and regional ombudsmen regarding their respective roles and responsibilities, OSWER’s Acting Assistant Administrator issued a memo that attempted to clarify the situation. Most significantly, the memo stated that the regional ombudsmen would take the lead on all Superfund-related matters and would refer to the national ombudsman only those cases that the regional ombudsmen believe are “nationally significant”—and only with the concurrence of the Assistant Administrator of OSWER. Although EPA officials generally agree that this policy was never implemented, the regional ombudsmen believed, until at least 1999, that the policy was in effect and that the coordination called for in the policy was supposed to be occurring. The new guidance recently proposed by OSWER is, in part, another effort to delineate the roles and responsibilities of the national and regional ombudsmen, particularly with regard to the selection and referral of cases for investigation. Notwithstanding the guidance, the extent to which the national and regional ombudsmen actually coordinate is unclear and is the subject of disagreement among the parties. According to the national ombudsman, he notifies his regional counterparts of all inquiries he receives and refers many of them to the regions for follow-up. However, he said that he rarely receives any information on how the inquiries were resolved. According to an OSWER official who helps coordinate monthly conference calls among the regional ombudsmen, the reason for the lack of response is that almost all of the referrals involve minor problems that are not worth any additional reporting or time spent on paperwork. Other OSWER officials suggested that these referrals are often passed on to other EPA or state employees and are not handled directly by the ombudsmen. The national ombudsman generally does not consult with the regional ombudsmen on substantive matters, such as deciding which complaints are significant enough to warrant investigations, or request their assistance in conducting investigations. He told us that he notifies the applicable regional ombudsman and regional management when he initiates an investigation and asks for their views on the issues raised in the complaints. In addition, he said that he occasionally requests administrative and/or logistical assistance when visiting one of the regions in the course of conducting an investigation. For example, the regional ombudsmen may obtain copies of documents for the national ombudsman, arrange meetings with regional staff, and help set up public hearings. From the perspective of the regional ombudsmen, the extent of the communication from and coordination by the national ombudsman is not sufficient. According to the minutes of their monthly conference calls and the information we collected, the regional ombudsmen have had limited contact with the national ombudsman and generally are not consulted when investigations are initiated nor are they updated as the investigations proceed. According to an OSWER official who helps coordinate the conference calls, the regional ombudsmen complain that the national ombudsman almost never calls them for any reason and sometimes does not notify them when he is visiting the region. Another area of disagreement is the extent to which the national ombudsman has authority to oversee the activities of the regional ombudsmen. The national ombudsman told us that he does not have supervisory authority and thus, is not responsible for overseeing the regional ombudsman program as envisioned in EPA’s 1987 handbook. He said that under current operating procedures, the regional ombudsmen are under no obligation to refer cases to him and have made no referrals in the last 4 or 5 years. However, OSWER officials suggested that he could provide more direct oversight. They pointed out that many senior-level employees at headquarters have functional responsibility for various activities performed by regional employees even if they do not supervise the employees. To some extent, an ombudsman’s effectiveness is within the ombudsman’s control. For example, the ombudsman strengthens his credibility when all parties perceive his investigations as fair and objective. Yet effectiveness is also a function of an ombudsman’s actual and apparent independence, and this is an area where the ombudsman’s home agency can make a big difference. In the case of the national hazardous waste ombudsman, EPA could help ensure that the ombudsman is perceived as independent by locating the function outside the unit he is responsible for investigating and by giving him control over his budget and staff resources. Although the current organizational structure may have made sense originally, the function has evolved, and the organization should reflect the shift in the ombudsman’s workload from responding to informational inquiries to investigating complaints. Under the current framework, the national ombudsman must compete with other offices within OSWER for scarce budget resources. With senior OSWER officials making the budget allocations, this arrangement may create a perception that EPA is not allocating an adequate share of OSWER’s resources to the ombudsman. Similarly, OSWER management’s authority to hire and fire the ombudsman’s staff clearly poses an institutional barrier to the ombudsman’s independence. A related issue involves the nature of the staff allocated to the ombudsman. Reliance on temporary assistance from interns and employees on short-term details does not provide the necessary experience or continuity to support the ombudsman. OSWER has taken a step in the right direction by allocating 3 full-time-equivalent staff-years to the ombudsman function, but to be truly independent, the ombudsman should have direct control over the staff. For his part, if the national ombudsman is to be given responsibility for managing his resources, he needs to maintain adequate records on his operations to serve as the basis for a reasonable budget request. The ombudsman must also establish the criteria and operating procedures necessary for managing his workload within his budget constraints and select and prioritize his workload so that he can work within those constraints. Having a consistent policy for preparing written reports on investigations and soliciting comments from affected parties would help ensure that the ombudsman is perceived as fair and impartial. In addition, the ombudsman should be accountable for his activities through a publicly available annual report. Regional ombudsmen may provide a valuable service to the public in responding to informational inquiries, but their current lack of independence should preclude their involvement in more significant investigations. Despite their dual roles, in recent years, OSWER has attempted to give the regional ombudsmen a greater say in selecting cases for investigation and deciding which ones should be referred to the national ombudsman. Instead, EPA should reexamine the position of regional ombudsman and, if a regional presence is warranted, ensure that whoever provides such a presence is truly independent. To improve the effectiveness of EPA’s ombudsmen and secure the public trust, we recommend that the Administrator, EPA, take steps to strengthen the independence of the national hazardous waste ombudsman. Specifically, EPA should (1) modify its organizational structure so that the ombudsman is located outside of OSWER and (2) provide the ombudsman with a separate budget and, subject to applicable Civil Service requirements, the authority to hire, fire, and supervise his own staff. To ensure that the ombudsman has adequate resources to fulfill his responsibilities within the context of EPA’s overall mission, EPA should require the ombudsman to (1) develop written criteria for selecting and prioritizing cases for investigation and (2) maintain records on his investigations and other activities sufficient to serve as the basis for a reasonable estimate of resource needs. In the interests of fairness, EPA should require the ombudsman to establish a consistent policy for preparing written reports on his investigations, consulting with agency officials and other affected parties to obtain their comments before his findings are made public, and including written agency comments when reports are published. To ensure that the ombudsman is accountable, EPA should require the ombudsman to file an annual report summarizing his activities and make it available to the public. Finally, we recommend that EPA officials, including the national ombudsman, (1) assess the demand for ombudsman services nationwide to determine where these resources are needed and, (2) in those locations where regional ombudsmen are warranted, ensure that their operations are consistent with the relevant professional standards for independence. EPA provided comments on a draft of this report. Specifically, we received a letter from the Acting Assistant Administrator of OSWER, an enclosure with additional technical comments from OSWER, and an enclosure from the national ombudsman containing general and technical comments. EPA’s comments and our responses are contained in appendix III. Both OSWER and the national ombudsman generally agreed with our conclusions and recommendations. According to OSWER, the agency supports “a strong, independent, and appropriately funded Ombudsman function and committed to full and serious consideration of the audit recommendations.” OSWER plans to assess our recommendations over the next few months, along with input from stakeholders, as the agency determines the most appropriate organizational placement of the ombudsman function. OSWER also noted that our recommendations relating to increased accountability by the national ombudsman were helpful. Similarly, the national ombudsman indicated that he was taking steps to implement several of our recommendations, including developing criteria for selecting and prioritizing cases for investigation, maintaining records to serve as a basis for a reasonable estimate of resource needs, developing a consistent policy for preparing written reports on his investigations, and publishing an annual report on his activities. He also indicated his intent to assess the operations of the regional ombudsmen. We incorporated technical comments from OSWER and the national ombudsman as appropriate. To determine how the national ombudsman’s operations compare with relevant professional standards, we identified four organizations—the Administrative Conference of the United States, the Ombudsman Committee of the ABA, The Ombudsman Association and the U. S. Ombudsman Association—that have published or drafted such standards. Based on our review of the standards and on discussions with EPA’s national ombudsman, OSWER officials, and representatives of professional associations, we evaluated characteristics of EPA’s national ombudsman using the standards as criteria. To learn more about the development and application of ombudsman standards, we contacted representatives from the Coalition of Federal Ombudsmen, the Interagency Alternative Dispute Resolution Working Group, The Ombudsman Association, the University and College Ombuds Association, and the U. S. Ombudsman Association, as well as the current and former chairmen of the ABA’s Ombudsman Committee. Besides conducting interviews with EPA’s national ombudsman and OSWER officials, we reviewed various documents that they provided regarding the implementation of the ombudsman function and proposed changes, including the ombudsman handbook, the proposed new guidance, the proposed change in OSWER’s organizational structure, and budget documents. In addition, we reviewed information that the ombudsman compiled at our request on the investigations that he initiated between October 1992 and December 2000. Recognizing that there are no federal requirements or standards specific to the operation of ombudsman offices at federal agencies, we also looked at how other federal agencies are implementing the ombudsman function. We compiled a list of federal agencies with ombudsmen that handle external inquiries or complaints. None of these ombudsmen was totally comparable to his counterpart at EPA in terms of longevity, jurisdiction or the nature of the investigations conducted. However, we selected four ombudsmen with enough similarity in longevity and workload to provide a reasonable basis for comparison. These ombudsmen were located in the Agency for Toxic Substances and Disease Registry, the Federal Deposit Insurance Corporation, the Food and Drug Administration, and the Internal Revenue Service. We met with the ombudsman at these agencies to obtain information on their operations and on the extent to which they are consistent with relevant professional standards. To obtain information on the relative roles and responsibilities of EPA’s national and regional ombudsmen, we developed a data collection instrument to question the regional ombudsmen on their functions in each of EPA’s 10 regions for calendar years 1999 and 2000. Among other things, we obtained information on their ombudsman-related activities, other roles and responsibilities, and supervisors; the amount of time spent on ombudsman duties; and the extent of interaction and coordination with the national ombudsman. We discussed the operations of the regional ombudsmen with OSWER officials and with the national ombudsman and compared those operations with those of the national ombudsman and the relevant professional standards for independence. We also reviewed minutes of periodic conference calls held by the regional ombudsmen during 1999 and 2000, as well as various documents that they provided on their operations and activities. We conducted our review from November 2000 through July 2001 in accordance with generally accepted government auditing standards. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to the Administrator, EPA, and make copies available to others who request them. If you or your staff have questions about this report, please call me on (202) 512-3841. Key contributors to this assignment were Ellen Crocker, Richard Johnson, Les Mahagan, Cynthia Norris, and Robert Sayers. Yes (Interim) Yes (interim) Yes (interim) The following are GAO’s comments on the letter signed by EPA’s national ombudsman dated July 11, 2001. 1. According to a February 1991 Decision Memorandum from EPA’s Office of Administration and Resources Management, the Office of the Ombudsman was abolished as part of a reorganization of the Immediate Office of the Office of the Assistant Administrator of OSWER. 2. Our report does not suggest that the ombudsman does not obtain agency comments on his findings before they are made public. Rather, we say that the ombudsman does not have a consistent policy for soliciting agency comments and that his decision to seek them is contingent on management’s interest in seeing the report prior to publication and providing comments. We are recommending that the ombudsman adopt a consistent policy to solicit agency comments whenever reports are published; agency officials can choose to provide comments at their discretion. 3. Our recommendation was that EPA officials, including the national ombudsman, assess the demand for ombudsman services nationwide to determine where these resources are needed. | Through the impartial and independent investigation of citizens' complaints, federal ombudsmen provide the public with an informal and accessible avenue of redress. Ombudsmen help federal agencies be more responsive to persons who believe that their concerns have not been dealt with fully or fairly through normal problem-solving channels. A national hazardous waste ombudsman was established at the Environmental Protection Agency (EPA) in 1984. In recent years, that ombudsman has increasingly investigated citizen complaints referred by Members of Congress. As the number and significance of the ombudsman's investigations have increased, so have questions about the adequacy of available resources and whether other impediments exist to fulfilling the ombudsman's responsibilities. This report (1) compares the national ombudsman's operations with professional standards for independence and other factors and (2) determines the relative roles and responsibilities of EPA's national and regional ombudsmen. GAO found that key aspects of EPA's national hazardous waste ombudsman differ from professional standards for ombudsmen who deal with inquiries from the public. For example, an effective ombudsman must have independence from any person who may be the subject of a complaint or inquiry. However, EPA's national ombudsman is in the Office of Solid Waste and Emergency Response (OSWER), the organizational unit whose decisions the ombudsman is responsible for investigating, and his budget and staff resources are controlled by unit managers within OSWER. GAO also found that, compared with EPA's national hazardous waste ombudsman, the regional ombudsmen are less independent and play a reduced role, primarily responding to informational inquiries on a part-time basis. Most of the ombudsmen in EPA's 10 regional offices hold positions within the regional organization that appear to compromise their independence. The regional ombudsmen split their time between performing duties related to the ombudsman function and duties related to the implementation of the hazardous waste programs that they are responsible for investigating. Communication between the national and regional ombudsmen is limited, despite operating guidelines that call for close communication. The national ombudsman periodically refers informational inquiries to the regional ombudsmen but rarely requests their assistance in investigations. |
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This section includes (1) an overview of oil and natural gas, (2) the shale oil and gas development process, (3) the regulatory framework, (4) the location of shale oil and gas in the United States, and (5) information on estimating the size of these resources. Oil and natural gas are found in a variety of geologic formations. Conventional oil and natural gas are found in deep, porous rock or reservoirs and can flow under natural pressure to the surface after drilling. In contrast to the free-flowing resources found in conventional formations, the low permeability of some formations, including shale, means that oil and gas trapped in the formation cannot move easily within the rock. On one extreme—oil shale, for example—the hydrocarbon trapped in the shale will not reach a liquid form without first being heated to very high temperatures—ranging from about 650 to 1,000 degrees Fahrenheit—in a process known as retorting. In contrast, to extract shale oil and gas from the rock, fluids and proppants (usually sand or ceramic beads used to hold fractures open in the formation) are injected under high pressure to create and maintain fractures to increase permeability, thus allowing oil or gas to be extracted. Other formations, such as coalbed methane formations and tight sandstone formations, may also require stimulation to allow oil or gas to be extracted. Most of the energy used in the United States comes from fossil fuels such as oil and natural gas. Oil supplies more than 35 percent of all the energy the country consumes, and almost the entire U.S. transportation fleet— cars, trucks, trains, and airplanes—depends on fuels made from oil. Natural gas is an important energy source to heat buildings, power the industrial sector, and generate electricity. Natural gas provides more than 20 percent of the energy used in the United States, supplying nearly half of all the energy used for cooking, heating, and powering other home appliances, and generating almost one-quarter of U.S. electricity supplies. The process to develop shale oil and gas is similar to the process for conventional onshore oil and gas, but shale formations may rely on the use of horizontal drilling and hydraulic fracturing—which may or may not be used on conventional wells. Horizontal drilling and hydraulic fracturing are not new technologies, as seen in figure 1, but advancements, refinements, and new uses of these technologies have greatly expanded oil and gas operators’ abilities to use these processes to economically develop shale oil and gas resources. For example, the use of multistage hydraulic fracturing within a horizontal well has only been widely used in the last decade. First, operators locate suitable shale oil and gas targets using seismic methods of exploration, negotiate contracts or leases that allow mineral development, identify a specific location for drilling, and obtain necessary permits; then, they undertake a number of activities to develop shale oil and gas. The specific activities and steps taken to extract shale oil and gas vary based on the characteristics of the formation, but the development phase generally involves the following stages: (1) well pad preparation and construction, (2) drilling and well construction, and (3) hydraulic fracturing. The first stage in the development process is to prepare and construct the well pad site. Typically, operators must clear and level surface vegetation to make room for numerous vehicles and heavy equipment—such as the drilling rig—and to build infrastructure—such as roads—needed to access the site.additives, water, and sand needed for hydraulic fracturing to the site— tanks, water pumps, and blender pumps, as well as water and sand storage tanks, monitoring equipment, and additive storage containers . Based on the geological characteristics of the formation and climatic conditions, operators may (1) excavate a pit or impoundment to store freshwater, drilling fluids, or drill cuttings—rock cuttings generated during drilling; (2) use tanks to store materials; or (3) build temporary transfer pipes to transport materials to and from an off-site location. Then operators must transport the equipment that mixes the The next stage in the development process is drilling and well construction. Operators drill a hole (referred to as the wellbore) into the earth through a combination of vertical and horizontal drilling techniques. At several points in the drilling process, the drill string and bit are removed from the wellbore so that casing and cement may be inserted. Casing is a metal pipe that is inserted inside the wellbore to prevent high- pressure fluids outside the formation from entering the well and to prevent drilling mud inside the well from fracturing fragile sections of the wellbore. As drilling progresses with depth, casings that are of a smaller diameter than the hole created by the drill bit are inserted into the wellbore and bonded in place with cement, sealing the wellbore from the surrounding formation. Drilling mud (a lubricant also known as drilling fluid) is pumped through the wellbore at different densities to balance the pressure inside the wellbore and bring rock particles and other matter cut from the formation back to the rig. A blowout preventer is installed over the well as a safety measure to prevent any uncontrolled release of oil or gas and help maintain control over pressures in the well. Drill cuttings, which are made up of ground rock coated with a layer of drilling mud or fluid, are brought to the surface. Mud pits provide a reservoir for mixing and holding the drilling mud. At the completion of drilling, the drilling mud may be recycled for use at another drilling operation. Instruments guide drilling operators to the “kickoff point”—the point that drilling starts to turn at a slight angle and continues turning until it nears the shale formation and extends horizontally. Production casing and cement are then inserted to extend the length of the borehole to maintain wellbore integrity and prevent any communication between the formation fluids and the wellbore. After the casing is set and cemented, the drilling operator may run a cement evaluation log by lowering an electric probe into the well to measure the quality and placement of the cement. The purpose of the cement evaluation log is to confirm that the cement has the proper strength to function as designed—preventing well fluids from migrating outside the casing and infiltrating overlying formations. After vertical drilling is complete, horizontal drilling is conducted by slowly angling the drill bit until it is drilling horizontally. Horizontal stretches of the well typically range from 2,000 to 6,000 feet long but can be as long as 12,000 feet long, in some cases. Throughout the drilling process, operators may vent or flare some natural gas, often intermittently, in response to maintenance needs or equipment failures. This natural gas is either released directly into the atmosphere (vented) or burned (flared). In October 2010, we reported on venting and flaring of natural gas on public lands. We reported that vented and flared gas on public lands represents potential lost royalties for the federal government and contributes to greenhouse gas emissions. Specifically, venting releases methane and volatile organic compounds, and flaring emits carbon dioxide, both greenhouse gases that contribute to global climate change. Methane is a particular concern since it is a more potent greenhouse gas than carbon dioxide. The next stage in the development process is stimulation of the shale formation using hydraulic fracturing. Before operators or service companies perform a hydraulic fracture treatment of a well, a series of tests may be conducted to ensure that the well, wellhead equipment, and fracturing equipment can safely withstand the high pressures associated with the fracturing process. Minimum requirements for equipment pressure testing can be determined by state regulatory agencies for operations on state or private lands. In addition, fracturing is conducted below the surface of the earth, sometimes several thousand feet below, and can only be indirectly observed. Therefore, operators may collect and natural fault subsurface data—such as information on rock stressesstructures—needed to develop models that predict fracture height, length, and orientation prior to drilling a well. The purpose of modeling is to design a fracturing treatment that optimizes the location and size of induced fractures and maximizes oil or gas production. To prepare a well to be hydraulically fractured, a perforating tool may be inserted into the casing and used to create holes in the casing and cement. Through these holes, fracturing fluid—that is injected under high pressures—can flow into the shale (fig. 2 shows a used perforating tool). Fracturing fluids are tailored to site specific conditions, such as shale thickness, stress, compressibility, and rigidity. As such, the chemical additives used in a fracture treatment vary. Operators may use computer models that consider local conditions to design site‐specific hydraulic fluids. The water, chemicals, and proppant used in fracturing fluid are typically stored on-site in separate tanks and blended just before they are injected into the well. Figure 3 provides greater detail about some chemicals commonly used in fracturing. The operator pumps the fracturing fluid into the wellbore at pressures high enough to force the fluid through the perforations into the surrounding formation—which can be shale, coalbeds, or tight sandstone—expanding existing fractures and creating new ones in the process. After the fractures are created, the operator reduces the pressure. The proppant stays in the formation to hold open the fractures and allow the release of oil and gas. Some of the fracturing fluid that was injected into the well will return to the surface (commonly referred to as flowback) along with water that occurs naturally in the oil- or gas-bearing formation—collectively referred to as produced water. The produced water is brought to the surface and collected by the operator, where it can be stored on-site in impoundments, injected into underground wells, transported to a wastewater treatment plant, or reused by the operator in other ways. Given the length of horizontal wells, hydraulic fracturing is often conducted in stages, where each stage focuses on a limited linear section and may be repeated numerous times. Once a well is producing oil or natural gas, equipment and temporary infrastructure associated with drilling and hydraulic fracturing operations is no longer needed and may be removed, leaving only the parts of the infrastructure required to collect and process the oil or gas and ongoing produced water. Operators may begin to reclaim the part of the site that will not be used by restoring the area to predevelopment conditions. Throughout the producing life of an oil or gas well, the operator may find it necessary to periodically restimulate the flow of oil or gas by repeating the hydraulic fracturing process. The frequency of such activity depends on the characteristics of the geologic formation and the economics of the individual well. If the hydraulic fracturing process is repeated, the site and surrounding area will be further affected by the required infrastructure, truck transport, and other activity associated with this process. Shale oil and gas development, like conventional onshore oil and gas production, is governed by a framework of federal, state, and local laws and regulations. Most shale development in the near future is expected to occur on nonfederal lands and, therefore, states will typically take the lead in regulatory activities. However, in some cases, federal agencies oversee shale oil and gas development. For example, BLM oversees shale oil and gas development on federal lands. In large part, the federal laws, regulations, and permit requirements that apply to conventional onshore oil and gas exploration and production activities also apply to shale oil and gas development. Federal. A number of federal agencies administer laws and regulations that apply to various phases of shale oil and gas development. For example, BLM manages federal lands and approximately 700 million acres of federal subsurface minerals, also known as the federal mineral estate. EPA administers and enforces key federal laws, such as the Safe Drinking Water Act, to protect human health and the environment. Other federal land management agencies, such as the U.S. Department of Agriculture’s Forest Service and the Department of the Interior’s Fish and Wildlife Service, also manage federal lands, including shale oil and gas development on those lands. State. State agencies implement and enforce many of the federal environmental regulations and may also have their own set of state laws covering shale oil and gas development. Other. Additional requirements regarding shale oil and gas operations may be imposed by various levels of government for specific locations. Entities such as cities, counties, tribes, and regional water authorities may set additional requirements that affect the location and operation of wells. GAO is conducting a separate and more detailed review of the federal and state laws and regulations that apply to unconventional oil and gas development, including shale oil and gas. Shale oil and gas are found in shale plays—a set of discovered or undiscovered oil and natural gas accumulations or prospects that exhibit similar geological characteristics—on private, state-owned, and federal lands across the United States. Shale plays are located within basins, which are large-scale geological depressions, often hundreds of miles across, that also may contain other oil and gas resources. Figure 4 shows the location of shale plays and basins in the contiguous 48 states. A shale play can be developed for oil, natural gas, or both. In addition, a shale gas play may contain “dry” or “wet” natural gas. Dry natural gas is a mixture of hydrocarbon compounds that exists as a gas both underground in the reservoir and during production under standard temperature and pressure conditions. Wet natural gas contains natural gas liquids, or the portion of the hydrocarbon resource that exists as a gas when in natural underground reservoir conditions but that is liquid at surface conditions. The natural gas liquids are typically propane, butane, and ethane and are separated from the produced gas at the surface in lease separators, field facilities, or gas processing plants. Operators may then sell the natural gas liquids, which may give wet shale gas plays an economic advantage over dry gas plays. Another advantage of liquid petroleum and natural gas liquids is that they can be transported more easily than natural gas. This is because, to bring natural gas to markets and consumers, companies must build an extensive network of gas pipelines. In areas where gas pipelines are not extensive, natural gas produced along with liquids is often vented or flared. Estimating the size of shale oil and gas resources serves a variety of needs for consumers, policymakers, land and resource managers, investors, regulators, industry planners, and others. For example, federal and state governments may use resource estimates to estimate future revenues and establish energy, fiscal, and national security policies. The petroleum industry and the financial community use resource estimates to establish corporate strategies and make investment decisions. A clear understanding of some common terms used to generally describe the size and scope of oil and gas resources is needed to determine the relevance of a given estimate. For an illustration of how such terms describe the size and scope of shale oil and gas, see figure 5. The most inclusive term is in-place resource. The in-place resource represents all oil or natural gas contained in a formation without regard to technical or economic recoverability. In-place resource estimates are sometimes very large numbers, but often only a small proportion of the total amount of oil or natural gas in a formation may ever be recovered. Oil and gas resources that are in-place, but not technically recoverable at this time may, in the future, become technically recoverable. Technically recoverable resources are a subset of in-place resources that include oil or gas, including shale oil and gas that is producible given available technology. Technically recoverable resources include those that are economically producible and those that are not. Estimates of technically recoverable resources are dynamic, changing to reflect the potential of extraction technology and knowledge about the geology and composition of geologic formations. According to the National Petroleum Council, technically recoverable resource estimates usually increase over time because of the availability of more and better data, or knowledge of how to develop a new play type (such as shale formations). Proved reserve estimates are more precise than technically recoverable resources and represent the amount of oil and gas that have been discovered and defined, typically by drilling wells or other exploratory measures, and which can be economically recovered within a relatively short time frame. Proved reserves may be thought of as the “inventory” that operators hold and define the quantity of oil and gas that operators estimate can be recovered under current economic conditions, operating methods, and government regulations. Estimates of proved reserves increase as oil and gas companies make new discoveries and report them to the government; oil and gas companies can increase their reserves as they develop already-discovered fields and improve production technology. Reserves decline as oil and gas reserves are produced and sold. In addition, reserves can change as prices and technologies change. For example, technology improvements that enable operators to extract more oil or gas from existing fields can increase proved reserves. Likewise, higher prices for oil and gas may increase the amount of proved reserves because more resources become financially Conversely, lower prices may diminish the amount of viable to extract.resources likely to be produced, reducing proved reserves. Historical production refers to the total amount of oil and gas that has been produced up to the present. Because these volumes of oil and gas have been measured historically, this is the most precise information available as it represents actual production amounts. Certain federal agencies have statutory responsibility for collecting and publishing authoritative statistical information on various types of energy sources in the United States. EIA collects, analyzes, and disseminates independent and impartial energy information, including data on shale oil and gas resources. Under the Energy Policy and Conservation Act of 2000, as amended, USGS estimates onshore undiscovered technically recoverable oil and gas resources in the United States.conducted a number of national estimates of undiscovered technically recoverable oil and natural gas resources over several decades. USGS geologists and other experts estimate undiscovered oil and gas—that is, oil and gas that has not been proven to be present by oil and gas companies—based on geological survey data and other information about USGS has the location and size of different geological formations across the United States. In addition to EIA and USGS, experts from industry, academia, federal advisory committees, private consulting firms, and professional societies also estimate the size of the resource. Estimates of the size of shale oil and gas resources in the United States have increased over time as has the amount of such resources produced from 2007 through 2011. Specifically, over the last 5 years, estimates of (1) technically recoverable shale oil and gas and (2) proved reserves of shale oil and gas have increased, as technology has advanced and more shale has been drilled. In addition, domestic shale oil and gas production has experienced substantial growth in recent years. EIA, USGS, and the Potential Gas Committee have increased their estimates of the amount of technically recoverable shale oil and gas over the last 5 years, which could mean an increase in the nation’s energy portfolio; however, less is known about the amount of technically recoverable shale oil than shale gas, in part because large-scale production of shale oil has been under way for only the past few years. The estimates are from different organizations and vary somewhat because they were developed at different times and using different data, methods, and assumptions, but estimates from all of these organizations have increased over time, indicating that the nation’s shale oil and gas resources may be substantial. For example, according to estimates and reports we reviewed, assuming current consumption levels without consideration of a specific market price for future gas supplies, the amount of domestic technically recoverable shale gas could provide enough natural gas to supply the nation for the next 14 to 100 years. The increases in estimates can largely be attributed to improved geological information about the resources, greater understanding of production levels, and technological advancements. In the last 2 years, EIA and USGS provided estimates of technically recoverable shale oil.as follows: Each of these estimates increased in recent years In 2012, EIA estimated that the United States possesses 33 billion mostly located in four barrels of technically recoverable shale oil, shale formations—the Bakken in Montana and North Dakota; Eagle Ford in Texas; Niobrara in Colorado, Kansas, Nebraska, and Wyoming; and the Monterey in California. In 2011, USGS estimated that the United States possesses just over 7 billion barrels of technically recoverable oil in shale and tight sandstone formations. The estimate represents a more than threefold increase from the agency’s estimate in 2006. However, there are several shale plays that USGS has not evaluated for shale oil because interest in these plays is relatively new. According to USGS officials, these shale plays have shown potential for production in recent years and may contain additional shale oil resources. Table 1 shows USGS’ 2006 and 2011 estimates and EIA’s 2011 and 2012 estimates. Overall, estimates of the size of technically recoverable shale oil resources in the United States are imperfect and highly dependent on the data, methodologies, model structures, and assumptions used. As these estimates are based on data available at a given point in time, they may change as additional information becomes available. Also these estimates depend on historical production data as a key component for modeling future supply. Because large-scale production of oil in shale formations is a relatively recent activity, their long-term productivity is largely unknown. For example, EIA estimated that the Monterey Shale in California may possess about 15.4 billion barrels of technically recoverable oil. However, without a longer history of production, the estimate has greater uncertainty than estimates based on more historical production data. At this time, USGS has not yet evaluated the Monterey Shale play. The amount of technically recoverable shale gas resources in the United States has been estimated by a number of organizations, including EIA, USGS, and the Potential Gas Committee (see fig. 6). Their estimates were as follows: In 2012, EIA estimated the amount of technically recoverable shale gas in the United States at 482 trillion cubic feet.increase of 280 percent from EIA’s 2008 estimate. In 2011, USGS reported that the total of its estimates for the shale formations the agency evaluated in all previous years shows the amount of technically recoverable shale gas in the United States at about 336 trillion cubic feet. This represents an increase of about 600 percent from the agency’s 2006 estimate. In 2011, the Potential Gas Committee estimated the amount of technically recoverable shale gas in the United States at about 687 trillion cubic feet. This represents an increase of 240 percent from the committee’s 2007 estimate. In addition to the estimates from the three organizations we reviewed, operators and energy forecasting consultants prepare their own estimates of technically recoverable shale gas to plan operations or for future investment. In September 2011, the National Petroleum Council aggregated data on shale gas resources from over 130 industry, government, and academic groups and estimated that approximately 1,000 trillion cubic feet of shale gas is available for production domestically. In addition, private firms that supply information to the oil and gas industry conduct assessments of the total amount of technically recoverable natural gas. For example, ICF International, a consulting firm that provides information to public- and private-sector clients, estimated in March 2012 that the United States possesses about 1,960 trillion cubic feet of technically recoverable shale gas. Based on estimates from EIA, USGS, and the Potential Gas Committee, five shale plays—the Barnett, Haynesville, Fayetteville, Marcellus, and Woodford—are estimated to possess about two-thirds of the total estimated technically recoverable gas in the United States (see table 2). The Sustainable Investments Institute (Si2) is a nonprofit membership organization founded in 2010 to conduct research and publish reports on organized efforts to influence corporate behavior. The Investor Responsibility Research Center Institute is a nonprofit organization established in 2006 that provides information to investors. then level off, continuing to produce gas for decades, according to the Sustainable Investments Institute and the Investor Responsibility Research Center Institute. Estimates of proved reserves of shale oil and gas increased from 2007 to 2009. Operators determine the size of proved reserves based on information collected from drilling, geological and geophysical tests, and historical production trends. These are also the resources operators believe they will develop in the short term—generally within the next 5 years—and assume technological and economic conditions will remain unchanged. Estimates of proved reserves of shale oil. EIA does not report proved reserves of shale oil separately from other oil reserves; however, EIA and others have noted an increase in the proved reserves of oil in the nation, and federal officials attribute the increase, in part, to oil from shale and tight sandstone formations. For example, EIA reported in 2009 that the Bakken Shale in North Dakota and Montana drove increases in oil reserves, noting that North Dakota proved reserves increased over 80 percent from 2008 through 2009. Estimates of proved reserves of shale gas. According to data EIA collects from about 1,200 operators, proved reserves of shale gas have grown from 23 trillion cubic feet in 2007 to 61 trillion cubic feet in 2009, or an More than 75 percent of the proved shale gas increase of 160 percent.reserves are located in three shale plays—the Barnett, Fayetteville, and the Haynesville. From 2007 through 2011, annual production of shale oil and gas has experienced significant growth. Specifically, shale oil production increased more than fivefold, from 39 to about 217 million barrels over this 5-year period, and shale gas production increased approximately fourfold, from 1.6 to about 7.2 trillion cubic feet, over the same period. To put this shale production into context, the annual domestic consumption of oil in 2011 was about 6,875 million barrels of oil, and the annual consumption of natural gas was about 24 trillion cubic feet. The increased shale oil and gas production was driven primarily by technological advances in horizontal drilling and hydraulic fracturing that made more shale oil and gas development economically viable. Annual shale oil production in the United States increased more than fivefold, from about 39 million barrels in 2007 to about 217 million barrels in 2011, according to data from EIA (see fig. 7). This is because new technologies allowed more oil to be produced economically, and because of recent increases in the price for liquid petroleum that have led to increased investment in shale oil development. In total, during this period, about 533 million barrels of shale oil was produced. More than 65 percent of the oil was produced in the Bakken Shale (368 million barrels; see fig. 8). The remainder was produced in the Niobrara (62 million barrels), Eagle Ford (68 million barrels), Monterey (18 million barrels), and the Woodford (9 million barrels). To put this in context, shale oil production from these plays in 2011 constituted about 8 percent of U.S. domestic oil consumption, according to EIA data. Shale gas production in the United States increased more than fourfold, from about 1.6 trillion cubic feet in 2007 to about 7.2 trillion cubic feet in 2011, according to estimated data from EIA (see fig. 9). In total, during this period, about 20 trillion cubic feet of shale gas was produced—representing about 300 days of U.S. consumption, based on 2011 consumption rates. More than 75 percent of the gas was produced in four shale plays—the Barnett, Marcellus, Fayetteville, and Haynesville (see fig.10). From 2007 through 2011, shale gas’ contribution to the nation’s total natural gas supply grew from about 6 percent in 2007 to approximately 25 percent in 2011 and is projected, under certain assumptions, to increase to 49 percent by 2035, according to an EIA report. Overall production of shale gas increased from calendar years 2007 through 2011, but production of natural gas on federal and tribal lands—including shale gas and natural gas from all other sources— decreased by about 17 percent, according to an EIA report. EIA attributes this decrease to several factors, including the location of shale formations—which, according to an EIA official, appear to be predominately on nonfederal lands. The growth in production of shale gas has increased the overall supply of natural gas in the U.S. energy market. Since 2007, increased shale gas production has contributed to lower prices for consumers, according to EIA and others. These lower prices create incentives for wider use of natural gas in other industries. For example, several reports by government, industry, and others have observed that if natural gas prices remain low, natural gas is more likely to be used to power cars and trucks in the future. In addition, electric utilities may build additional natural gas- fired generating plants as older coal plants are retired. At the same time, some groups have expressed concern that greater reliance on natural gas may reduce interest in developing renewable energy. The greater availability of domestic shale gas has also decreased the need for natural gas imports. For example, EIA has noted that volumes of natural gas imported into the United States have fallen in recent years—in 2007, the nation imported 16 percent of the natural gas consumed and in 2010, the nation imported 11 percent—as domestic shale gas production has increased. This trend is also illustrated by an increase in applications for exporting liquefied natural gas to other countries. In its 2012 annual energy outlook, EIA predicted that, under certain scenarios, the United States will become a net exporter of natural gas by about 2022. Developing oil and gas resources—whether conventional or from shale formations—poses inherent environmental and public health risks, but the extent of risks associated with shale oil and gas development is unknown, in part, because the studies we reviewed do not generally take into account potential long-term, cumulative effects. In addition, the severity of adverse effects depend on various location- and process-specific factors, including the location of future shale oil and gas development and the rate at which it occurs, geology, climate, business practices, and regulatory and enforcement activities. Oil and gas development, which includes development from shale formations, poses inherent risks to air quality, water quantity, water quality, and land and wildlife. According to a number of studies and publications we reviewed, shale oil and gas development pose risks to air quality. These risks are generally the result of engine exhaust from increased truck traffic, emissions from diesel-powered pumps used to power equipment, intentional flaring or venting of gas for operational reasons, and unintentional emissions of pollutants from faulty equipment or impoundments. Construction of the well pad, access road, and other drilling facilities requires substantial truck traffic, which degrades air quality. According to a 2008 National Park Service report, an average well, with multistage fracturing, can require 320 to 1,365 truck loads to transport the water, chemicals, sand, and other equipment—including heavy machinery like bulldozers and graders—needed for drilling and fracturing. The increased traffic creates a risk to air quality as engine exhaust that contains air pollutants such as nitrogen oxides and particulate matter that affect public health and the environment are released into the atmosphere. Air quality may also be degraded as fleets of trucks traveling on newly graded or unpaved roads increase the amount of dust released into the air—which can contribute to the formation of regional haze. In addition to the dust, silica sand (see fig. 11)—commonly used as proppant in the hydraulic fracturing process—may pose a risk to human health, if not properly handled. According to a federal researcher from the Department of Health and Human Services, uncontained sand particles and dust pose threats to workers at hydraulic fracturing well sites. The official stated that particles from the sand, if not properly contained by dust control mechanisms, can lodge in the lungs and potentially cause silicosis. The researcher expects to publish the results of research on public health risks from proppant later in 2012. Use of diesel engines to supply power to drilling sites also degrades air quality. Shale oil and gas drilling rigs require substantial power to drill and case wellbores to the depths of shale formations. This power is typically provided by transportable diesel engines, which generate exhaust from the burning of diesel fuel. After the wellbore is drilled to the target formation, additional power is needed to operate the pumps that move large quantities of water, sand, or chemicals into the target formation at high pressure to hydraulically fracture the shale—generating additional exhaust. In addition, other equipment used during operations—including pneumatic valves and dehydrators—contribute to air emissions. For example, natural gas powers switches that turn valves on and off in the production system. Each time a valve turns on or off, it “bleeds” a small amount of gas into the air. Some of these pneumatic valves vent gas continuously. A dehydrator circulates the chemical glycol to absorb moisture in the gas but also absorbs small volumes of gas. The absorbed gas vents to the atmosphere when the water vapor is released from the glycol. Methane and other chemical compounds found in the earth’s atmosphere create a greenhouse effect. Under normal conditions, when sunlight strikes the earth’s surface, some of it is reflected back toward space as infrared radiation or heat. Greenhouse gases such as carbon dioxide and methane impede this reflection by trapping heat in the atmosphere. While these gases occur naturally on earth and are emitted into the atmosphere, the expanded industrialization of the world over the last 150 years has increased the amount of emissions from human activity (known as anthropogenic emissions) beyond the level that the earth’s natural processes can handle. less than 1 percent of natural gas produced in the United States was vented or flared. Storing fracturing fluid and produced water in impoundments may also pose a risk to air quality as evaporation of the fluids have the potential to release contaminants into the atmosphere. According to the New York Department of Environmental Conservation’s 2011 Supplemental Generic Environmental Impact Statement, analysis of air emission rates of some of the compounds used in the fracturing fluids in the Marcellus Shale reveals the potential for emissions of hazardous air pollutants, in particular methanol, from the fluids stored in impoundments. As with conventional oil and gas development, emissions can also occur as faulty equipment or accidents, such as leaks or blowouts, release concentrations of methane and other gases into the atmosphere. For example, corrosion in pipelines or improperly tightened valves or seals can be sources of emissions. In addition, according to EPA officials, storage vessels for crude oil, condensate, or produced water are significant sources of methane, volatile organic compounds and hazardous air pollutant emissions. A number of studies we reviewed evaluated air quality at shale gas development sites. However, these studies are generally anecdotal, short-term, and focused on a particular site or geographic location. For example, in 2010, the Pennsylvania Department of Environmental Protection conducted short-term sampling of ambient air concentrations in north central Pennsylvania. The sampling detected concentrations of natural gas constituents including methane, ethane, propane, and butane in the air near Marcellus Shale drilling operations, but according to this state agency, the concentration levels were not considered significant enough to cause adverse health effects. The studies and publications we reviewed provide information on air quality conditions at a specific site at a specific time but do not provide the information needed to determine the overall cumulative effect that shale oil and gas activities have on air quality.shale oil and gas activities have on air quality will be largely determined by the amount of development and the rate at which it occurs, and the ability to measure this will depend on the availability of accurate information on emission levels. However, the number of wells that will ultimately be drilled cannot be known in advance—in part because the productivity of any particular formation at any given location and depth is not known until drilling occurs. In addition, as we reported in 2010, data on the severity or amount of pollutants released by oil and gas development, including the amount of fugitive emissions, are limited. According to a number of studies and publications we reviewed, shale oil and gas development poses a risk to surface water and groundwater because withdrawing water from streams, lakes, and aquifers for drilling and hydraulic fracturing could adversely affect water sources. use water for drilling, where a mixture of clay and water (drilling mud) is used to carry rock cuttings to the surface, as well as to cool and lubricate the drill bit. Water is also the primary component of fracturing fluid. Table 3 shows the average amount of freshwater used to drill and fracture a shale oil or gas well. According to a 2012 University of Texas study, water for these activities is likely to come from surface water (rivers, lakes, ponds), groundwater aquifers, municipal supplies, reused wastewater from industry or water treatment plants, and recycling water from earlier fracturing operations. As we reported in October 2010, withdrawing water from nearby streams and rivers could decrease flows downstream, making the streams and rivers more susceptible to temperature changes—increases in the summer and decreases in the winter. Elevated temperatures could adversely affect aquatic life because many fish and invertebrates need specific temperatures for reproduction and proper development. Further, decreased flows could damage or destroy riparian vegetation. Similarly, withdrawing water from shallow aquifers—an alternative water source— could temporarily affect groundwater resources. Withdrawals could lower water levels within these shallow aquifers and the nearby streams and springs to which they are connected. Extensive withdrawals could reduce groundwater discharge to connected streams and springs, which in turn could damage or remove riparian vegetation and aquatic life. Withdrawing water from deeper aquifers could have longer-term effects on groundwater and connected streams and springs because replenishing deeper aquifers with precipitation generally takes longer. Further, groundwater withdrawal could affect the amount of water available for other uses, including public and private water supplies. Freshwater is a limited resource in some arid and semiarid regions of the country where an expanding population is placing additional demands on water. The potential demand for water is further complicated by years of drought in some parts of the country and projections of a warming climate. According to a 2011 Massachusetts Institute of Technology study, the amount of water used for shale gas development is small in comparison to other water uses, such as agriculture and other industrial purposes. However, the cumulative effects of using surface water or groundwater at multiple oil and gas development sites can be significant at the local level, particularly in areas experiencing drought conditions. Similar to shale oil and gas development, development of gas from coalbed methane formations poses a risk of aquifer depletion. To develop natural gas from such formations, water from the coal bed is withdrawn to lower the reservoir pressure and allow the methane to desorb from the coal. According to a 2001 USGS report, dewatering coalbed methane formations in the Powder River Basin in Wyoming can lower the groundwater table and reduce water available for other uses, such as livestock and irrigation. The key issue for water quantity is whether the total amount of water consumed for the development of shale oil and gas will result in a significant long-term loss of water resources within a region, according to a 2012 University of Texas study. This is because water used in shale oil and gas development is largely a consumptive use and can be permanently removed from the hydrologic cycle, according to EPA and Interior officials. However, it is difficult to determine the long-term effect on water resources because the scale and location of future shale oil and gas development operations remains largely uncertain. Similarly, the total volume that operators will withdraw from surface water and aquifers for drilling and hydraulic fracturing is not known until operators submit applications to the appropriate regulatory agency. As a result, the cumulative amount of water consumed over the lifetime of the activity— key information needed to assess the effects of water withdrawals— remains largely unknown. According to a number of studies and publications we reviewed, shale oil and gas development pose risks to water quality from contamination of surface water and groundwater as a result of spills and releases of produced water, chemicals, and drill cuttings; erosion from ground disturbances; or underground migration of gases and chemicals. Shale oil and gas development poses a risk to water quality from spills or releases of toxic chemicals and waste that can occur as a result of tank ruptures, blowouts, equipment or impoundment failures, overfills, vandalism, accidents (including vehicle collisions), ground fires, or operational errors. For example, tanks storing toxic chemicals or hoses and pipes used to convey wastes to the tanks could leak, or impoundments containing wastes could overflow as a result of extensive rainfall. According to New York Department of Environmental Conservation’s 2011 Supplemental Generic Environmental Impact Statement, spilled, leaked, or released chemicals or wastes could flow to a surface water body or infiltrate the ground, reaching and contaminating subsurface soils and aquifers. In August 2003, we reported that damage from oil and gas related spills on National Wildlife Refuges varied widely in severity, ranging from infrequent small spills with no known effect on wildlife to large spills causing wildlife death and long-term water and soil contamination. Naturally occurring radioactive materials (NORM) are present at varying degrees in virtually all environmental media, including rocks and soils. According to a DOE report, human exposure to radiation comes from a variety of sources, including naturally occurring radiation from space, medical sources, consumer products, and industrial sources. Normal disturbances of NORM-bearing rock formations by activities such as drilling do not generally pose a threat to workers, the general public or the environment, according to studies and publications we reviewed. concentrations can build up in pipes and tanks, if not properly disposed, and the general public or water could come into contact with them, according to an EPA fact sheet. The chemical additives in fracturing fluid, if not properly handled, also poses a risk to water quality if they come into contact with surface water or groundwater. Some additives used in fracturing fluid are known to be toxic, but data are limited for other additives. For example, according to reports we reviewed, operators may include diesel fuel—a refinery product that consists of several components, possibly including some toxic impurities such as benzene and other aromatics—as a solvent and dispersant in fracturing fluid. While some additives are known to be toxic, less is known about potential adverse effects on human health in the event that a drinking water aquifer was contaminated as a result of a spill or release of fracturing fluid, according to the 2011 New York Department of Environmental Conservation’s Supplemental Generic Environmental Impact Statement. This is largely because the overall risk of human health effects occurring from hydraulic fracturing fluid would depend on whether human exposure occurs, the specific chemical additives being used, and site-specific information about exposure pathways and environmental contaminant levels. The produced water and fracturing fluids returned during the flowback process contain a wide range of contaminants and pose a risk to water quality, if not properly managed. Most of the contaminants occur naturally, but some are added through the process of drilling and hydraulic fracturing. In January 2012, we reported that the range of contaminants found in produced water can include, but is not limited to salts, which include chlorides, bromides, and sulfides of calcium, magnesium, and sodium; metals, which include barium, manganese, iron, and strontium, among oil, grease, and dissolved organics, which include benzene and toluene, among others; production chemicals, which may include friction reducers to help with water flow, biocides to prevent growth of microorganisms, and additives to prevent corrosion, among others. At high levels, exposure to some of the contaminants in produced water could adversely affect human health and the environment. For example, in January 2012, we reported that, according to EPA, a potential human health risk from exposure to high levels of barium is increased blood pressure.elevated levels of salts can inhibit crop growth by hindering a plant’s ability to absorb water from the soil. Additionally, exposure to elevated levels of metals and production chemicals, such as biocides, can contribute to increased mortality among livestock and wildlife. The composition of pit lining depends on regulatory requirements, which vary from state to state. were to be used for temporary storage—to a proper disposal site before the spring thaw. Unlike shale oil and gas formations, water permeates coalbed methane formations, and its pressure traps natural gas within the coal. To produce natural gas from coalbed methane formations, water must be extracted to lower the pressure in the formation so the natural gas can flow out of the coal and to the wellbore. In 2000, USGS reported that water extracted from coalbed methane formations is commonly saline and, if not treated and disposed of properly, could adversely affect streams and threaten fish and aquatic resources. According to several reports, handling and transporting toxic fluids or contaminants poses a risk of environmental contamination for all industries, not just oil and gas development; however, the large volume of fluids and contaminants—fracturing fluid, drill cuttings, and produced water—that is associated with the development of shale oil and gas poses an increased risk for a release to the environment and the potential for greater effects should a release occur in areas that might not otherwise be exposed to these chemicals. Oil and gas development, whether conventional or shale oil and gas, can contribute to erosion, which could carry sediments and pollutants into surface waters. Shale oil and gas development require operators to undertake a number of earth-disturbing activities, such as clearing, grading, and excavating land to create a pad to support the drilling equipment. If necessary, operators may also construct access roads to transport equipment and other materials to the site. As we reported in February 2005, as with other construction activities, if sufficient erosion controls to contain or divert sediment away from surface water are not established then surfaces are exposed to precipitation and runoff could carry sediment and other harmful pollutants into nearby rivers, lakes, and streams. For example, in 2012, the Pennsylvania Department of Environmental Protection concluded that an operator in the Marcellus Shale did not provide sufficient erosion controls when heavy rainfall in the area caused significant erosion and contamination of a nearby stream from large amounts of sediment.sediment clouds water, decreases photosynthetic activity, and destroys organisms and their habitat. As we reported in February 2005, According to a number of studies and publications we reviewed, underground migration of gases and chemicals poses a risk of contamination to water quality. Underground migration can occur as a result of improper casing and cementing of the wellbore as well as the intersection of induced fractures with natural fractures, faults, or improperly plugged dry or abandoned wells. Moreover, there are concerns that induced fractures can grow over time and intersect with drinking water aquifers. Specifically: Improper casing and cementing. A well that is not properly isolated through proper casing and cementing could allow gas or other fluids to contaminate aquifers as a result of inadequate depth of casing, inadequate cement in the annular space around the surface casing, and ineffective cement that cracks or breaks down under the stress of high pressures. For example, according to a 2008 report by the Ohio Department of Natural Resources, a gas well in Bainbridge, Ohio, was not properly isolated because of faulty sealing, allowing natural gas to build up in the space around the production casing and migrate upward over about 30 days into the local aquifer and infiltrating drinking water wells. The risk of contamination from improper casing and cementing is not unique to the development of shale formations. Casing and cementing practices also apply to conventional oil and gas development. However, wells that are hydraulically fractured have some unique aspects. For example, hydraulically fractured wells are commonly exposed to higher pressures than wells that are not hydraulically fractured. In addition, hydraulically fractured wells are exposed to high pressures over a longer period of time as fracturing is conducted in multiple stages, and wells may be refractured multiple times—primarily to extend the economic life of the well when production declines significantly or falls below the estimated reservoir potential. The depth for casing and cementing may be determined by state regulations. Natural fractures, faults, and abandoned wells. If shale oil and gas development activities result in connections being established with natural fractures, faults, or improperly plugged dry or abandoned wells, a pathway for gas or contaminants to migrate underground could be created—posing a risk to water quality. These connections could be established through either induced fractures intersecting directly with natural fractures, faults, or improperly plugged dry or abandoned wells or as a result of improper casing and cementing that allow gas or other contaminants to make such connections. In 2011, the New York State Department of Environmental Conservation reported that operators generally avoid development around known faults because natural faults could allow gas to escape, which reduces the optimal recovery of gas and the economic viability of a well. However, data on subsurface conditions in some areas are limited. Several studies we reviewed report that some states are unaware of the location or condition of many old wells. As a result, operators may not be fully aware of the location of abandoned wells and natural fractures or faults. Fracture growth. A number of such studies and publications we reviewed report that the risk of induced fractures extending out of the target formation into an aquifer—allowing gas or other fluids to contaminate water—may depend, in part, on the depth separating the fractured formation and the aquifer. For example, according to a 2012 Bipartisan Policy Center report, the fracturing process itself is unlikely to directly affect freshwater aquifers because fracturing typically takes place at a depth of 6,000 to 10,000 feet, while drinking water tables are typically less Fractures created during the hydraulic fracturing than 1,000 feet deep.process are generally unable to span the distance between the targeted shale formation and freshwater bearing zones. According to a 2011 industry report, fracture growth is stopped by natural subsurface barriers and the loss of hydraulic fracturing fluid.conforms to a general direction set by the stresses in the rock, following what is called fracture direction or orientation. The fractures are most commonly vertical and may extend laterally several hundred feet away from the well, usually growing upward until they intersect with a rock of different structure, texture, or strength. These are referred to as seals or barriers and stop the fracture’s upward or downward growth. In addition, as the fracturing fluid contacts the formation or invades natural fractures, part of the fluid is lost to the formation. The loss of fluids will eventually stop fracture growth according to this industry report. When a fracture grows, it From 2001 through 2010, an industry consulting firm monitored the upper and lower limits of hydraulically induced fractures relative to the position of drinking water aquifers in the Barnett and Eagle Ford Shale, the Marcellus Shale, and the Woodford Shale. that the results of the monitoring show that even the highest fracture point is several thousand feet below the depth of the deepest drinking water aquifer. For example, for over 200 fractures in the Woodford Shale, the typical distance between the drinking water aquifer and the top of the fracture was 7,500 feet, with the highest fracture recorded at 4,000 feet from the aquifer. In another example, for the 3,000 fractures performed in the Barnett Shale, the typical distance from the drinking water aquifer and the top of the fracture was 4,800 feet, and the fracture with the closest distance to the aquifer was still separated by 2,800 feet of rock. Table 4 shows the relationship between shale formations and the depth of treatable water in five shale gas plays currently being developed. Kevin Fisher, Norm Warpinski, Pinnacle—A Haliburton Service, “Hydraulic Fracture- Height Growth: Real Data” (presented at the Society of Petroleum Engineers Technical Conference and Exhibition, Denver, Colorado, October 2011). Several government, academic, and nonprofit organizations evaluated water quality conditions or groundwater contamination incidents in areas experiencing shale oil and gas development. Among the studies and publications we reviewed that discuss the potential contamination of drinking water from the hydraulic fracturing process in shale formations are the following: In 2011, the Center for Rural Pennsylvania analyzed water samples taken from 48 private water wells located within about 2,500 feet of a shale gas well in the Marcellus Shale. The analysis compared predrilling samples to postdrilling samples to identify any changes to water quality. The analysis showed that there were no statistically significant increases in pollutants prominent in drilling waste fluids— such as total dissolved solids, chloride, sodium, sulfate, barium, and strontium—and no statistically significant increases in methane. The study concluded that gas well drilling had not had a significant effect on the water quality of nearby drinking water wells. In 2011, researchers from Duke University studied shale gas drilling and hydraulic fracturing and the potential effects on shallow groundwater systems near the Marcellus Shale in Pennsylvania and the Utica Shale in New York. Sixty drinking water samples were collected in Pennsylvania and New York from bedrock aquifers that overlie the Marcellus or Utica Shale formations—some from areas with shale gas development and some from areas with no shale gas development. The study found that methane concentrations were detected generally in 51 drinking water wells across the region— regardless of whether shale gas drilling occurred in the area—but that concentrations of methane were substantially higher closer to shale gas wells. However, the researchers reported that a source of the contamination could not be determined. Further, the researchers reported that they found no evidence of fracturing fluid in any of the samples. In 2011, the Ground Water Protection Council evaluated state agency groundwater investigation findings in Texas and categorized the determinations regarding causes of groundwater contamination resulting from the oil and gas industry. During the study period— from 1993 through 2008—multistaged hydraulic fracturing stimulations were performed in over 16,000 horizontal shale gas wells. The evaluation of the state investigations found that there were no incidents of groundwater contamination caused by hydraulic fracturing. In addition, regulatory officials we met with from eight states—Arkansas, Colorado, Louisiana, North Dakota, Ohio, Oklahoma, Pennsylvania, and Texas—told us that, based on state investigations, the hydraulic fracturing process has not been identified as a cause of groundwater contamination within their states. A number of studies discuss the potential contamination of water from the hydraulic fracturing process in shale formations. However, according to several studies we reviewed, there are insufficient data for predevelopment (or baseline) conditions for groundwater. Without data to compare predrilling conditions to postdrilling conditions, it is difficult to determine if adverse effects were the result of oil and gas development, natural occurrences, or other activities. In addition, while researchers have evaluated fracture growth, the widespread development of shale oil and gas is relatively new. As such, little data exist on (1) fracture growth in shale formations following multistage hydraulic fracturing over an extended time period, (2) the frequency with which refracturing of horizontal wells may occur, (3) the effect of refracturing on fracture growth over time, and (4) the likelihood of adverse effects on drinking water aquifers from a large number of hydraulically fractured wells in close proximity to each other. Ongoing studies by federal agencies, industry groups, and academic institutions are evaluating the effects of hydraulic fracturing on water resources so that, over time, better data and information about these effects should become available to policymakers and the public. For example, EPA’s Office of Research and Development initiated a study in January 2010 to examine the potential effects of hydraulic fracturing on drinking water resources. According to agency officials, the agency anticipates issuing a progress report in 2012 and a final report in 2014. EPA is also conducting an investigation to determine the presence of groundwater contamination within a tight sandstone formation being developed for natural gas near Pavillion, Wyoming, and, to the extent possible, identify the source of the contamination. In December 2011, EPA released a draft report outlining findings from the investigation. The report is not finalized, but the agency indicated that it had identified certain constituents in groundwater above the production zone of the Pavillion natural gas wells that are consistent with some of the constituents used in natural gas well operations, including the process of hydraulic fracturing. DOE researchers are also testing the vertical growth of fractures during hydraulic fracturing to determine whether fluids can travel thousands of feet through geologic faults into water aquifers close to the surface. Oil and gas development, whether conventional or shale oil and gas, poses a risk to land resources and wildlife habitat as a result of constructing, operating, and maintaining the infrastructure necessary to develop oil and gas; using toxic chemicals; and injecting waste products underground. According to studies and publications we reviewed, development of oil and gas, whether conventional or shale oil and gas, poses a risk to habitat from construction activities. Specifically, clearing land of vegetation and leveling the site to allow access to the resource, as well as construction of roads, pipelines, storage tanks, and other infrastructure needed to extract and transport the resource can fragment habitats. In August 2003, we reported that oil and gas infrastructure on federal wildlife refuges can reduce the quality of habitat by fragmenting it.Fragmentation increases disturbances from human activities, provides pathways for predators, and helps spread nonnative plant species. In addition, spills of oil, gas, or other toxic chemicals have harmed wildlife and habitat. Oil and gas 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. Long-term effects of oil and gas contamination on wildlife are difficult to determine, but studies suggest that effects of exposure include reduced fertility, kidney and liver damage, immune suppression, and cancer. In August 2003, we reported that even small spills may contaminate soil and sediments if they occur frequently. Further, noise and the presence of new infrastructure associated with shale gas development may also affect wildlife. A study by the Houston Advanced Research Center and the Nature Conservancy investigated the effects of noise associated with gas development on the Attwater’s Prairie Chicken—an endangered species. The study explored how surface disruptions, particularly construction of a rig and noise from diesel generators would affect the animal’s movement and habitat. The results of the study found that the chickens were not adversely affected by the diesel engine generator’s noise but that the presence of the rig caused the animals to temporarily disperse and avoid the area. A number of studies we reviewed identified risks to habitat and wildlife as a result of shale oil and gas activities. However, because shale oil and gas development is relatively new in some areas, the long-term effects— after operators are to have restored portions of the land to predevelopment conditions—have not been evaluated. Without these data, the cumulative effects of shale oil and gas development on habitat and wildlife are largely unknown. According to several studies and publications we reviewed, the hydraulic fracturing process releases energy deep beneath the surface to break rock but the energy released is not large enough to trigger a seismic event that could be felt on the surface. However, a process commonly used by operators to dispose of waste fluids—underground injection—has been associated with earthquakes in some locations. For example, a 2011 Oklahoma Geological Survey study reported that underground injection can induce seismicity. In March 2012, the Ohio Department of Natural Resources reported that “there is a compelling argument” that the injection of produced water into underground injection wells was the cause of the 2011 earthquakes near Youngstown, Ohio. In addition, the National Academy of Sciences released a study in June 2012 that concluded that underground injection of wastes poses some risk for induced seismicity, but that very few events have been documented over the past several decades relative to the large number of disposal wells in operation. The available research does not identify a direct link between hydraulic fracturing and increased seismicity, but there could be an indirect effect to the extent that increased use of hydraulic fracturing produces increased amounts of water that is disposed of through underground injection. In addition, according to the National Academy of Science’s 2012 report, accurately predicting magnitude or occurrence of seismic events is generally not possible, in part, because of a lack of comprehensive data on the complex natural rock systems at energy development sites. The extent and severity of environmental and public health risks identified in the studies and publications we reviewed may vary significantly across shale basins and also within basins because of location- and process- specific factors, including the location and rate of development; geological characteristics, such as permeability, thickness, and porosity of the formations in the basin; climatic conditions; business practices; and regulatory and enforcement activities. Location and rate of development. The location of oil and gas operations and the rate of development can affect the extent and severity of environmental and public health risks. For example, as we reported in October 2010, while much of the natural gas that is vented and flared is considered to be unavoidably lost, certain technologies and practices can be applied throughout the production process to capture some of this gas, according to the oil and gas industry and EPA. The technologies’ technical and economic feasibility varies and sometimes depends on the location of operations. For example, some technologies require a substantial amount of electricity, which may be less feasible for remote production sites that are not on the electrical grid. In addition, the extent and severity of environmental risks may vary based on the location of oil and gas wells. For example, in areas with high population density that are already experiencing challenges adhering to federal air quality limits, increases in ozone levels because of emissions from oil and gas development may compound the problem. Geological characteristics. Geological characteristics can affect the extent and severity of environmental and public health risks associated with shale oil and gas development. For example, geological differences between tight sandstone and shale formations are important because, unlike shale, tight sandstone has enough permeability to transmit groundwater to water wells in the region. In a sense, the tight sandstone formation acts as a reservoir for both natural gas and for groundwater. In contrast, shale formations are typically not permeable enough to transmit water and are not reservoirs for groundwater. According to EPA officials, hydraulic fracturing in a tight sandstone formation that is a reservoir for both natural gas and groundwater poses a greater risk of contamination than the same activity in a deep shale formation. Climatic conditions. Climatic factors, such as annual rainfall and surface temperatures, can also affect the environmental risks for a specific region or area. For example, according to a 2007 study funded by DOE, average rainfall amounts can be directly related to soil erosion. Specifically, areas with higher precipitation levels may be more susceptible to soil compaction and rutting during the well pad construction phase. In another example, risk of adverse effects from exposures to toxic air contaminants can vary substantially between drilling sites, in part, because of the specific mix of emissions and climatic conditions that affect the transport and dispersion of emissions. Specifically, wind speed and direction, temperature, as well as other climatic conditions, can influence exposure levels of toxic air contaminants. For example, according to a 2012 study from the Sustainable Investments Institute and the Investor Responsibility Research Center Institute, the combination of air emissions from gas operations, snow on the ground, bright sunshine, and temperature inversions during winter months have contributed to ozone creation in Sublette County, Wyoming. Business practices. A number of studies we reviewed indicate that some adverse effects from shale oil and gas development can be mitigated through the use of technologies and best practices. For example, according to standards and guidelines issued jointly by the Departments of the Interior and Agriculture, mitigation techniques, such as fencing and covers, should be used around impoundments to prevent livestock or wildlife from accessing fluids stored in the impoundments. example, EPA’s Natural Gas STAR program has identified over 80 technologies and practices that can cost effectively reduce methane emissions, a potent greenhouse gas, during oil and gas development. However, the use of these technologies and business practices are typically voluntary and rely on responsible operators to ensure that necessary actions are taken to prevent environmental contamination. Further, the extent to which operators use these mitigating practices is unknown and could be particularly challenging to identify given the significant increase in recent years in the development of shale oil and gas by a variety of operators, both large and small. United States Department of the Interior and United States Department of Agriculture. Surface Operating Standards and Guidelines for Oil and Gas Exploration and Development. BLM/WO/ST-06/021+3071/REV 07 (Denver, CO: 2007). activities and can therefore affect the risks or level of risks associated with shale oil and gas development. Shale oil and gas development is regulated by multiple levels of government—including federal, state, and local. Many of the laws and regulations applicable to shale oil and gas development were put in place before the increase in operations that has occurred in the last few years, and various levels of government are evaluating and, in some cases, revising laws and regulations to respond to the increase in shale oil and gas development. For example, in April 2012, EPA promulgated New Source Performance Standards for the oil and gas industry that, when fully phased-in by 2015, will require emissions reductions at new or modified oil and gas well sites, including wells using hydraulic fracturing. Specifically, these new standards, in part, focus on reducing the venting of natural gas and volatile organic compounds during the flowback process. In addition, areas without prior experience with oil and gas development are just now developing new regulations. These governments’ effectiveness in implementing and enforcing this framework will affect future activities and the level of associated risk. We provided a draft of this report to the Department of Energy, the Department of the Interior, and the Environmental Protection Agency for review and comment. We received technical comments from Interior’s Assistant Secretary, Policy, Management, and Budget, and from Environmental Protection Agency officials, which we have incorporated as appropriate. In an e-mail received August 27, 2012, the Department of Energy liaison stated the agency had no comments on the report. 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 appropriate congressional committees, the Secretary of Energy, the Secretary of the Interior, the EPA Administrator, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. Our objectives for this review were to determine what is known about (1) the size of shale oil and gas resources in the United States and the amount produced from 2007 through 2011—the years for which data were available—and (2) the environmental and public health risks associated with development of shale oil and gas. To determine what is known about the size of shale oil and gas resources, we collected data from federal agencies, state agencies, private industry, and academic organizations. Specifically, to determine what is known about the size of these resources, we obtained information for technically recoverable and proved reserves estimates for shale oil and gas from the Energy Information Administration (EIA), the U.S. Geological Survey (USGS), and the Potential Gas Committee––a nongovernmental organization composed of academic and industry officials. We interviewed key officials about the assumptions and methodologies used to estimate the resource size. Estimates of proved reserves of shale oil and gas are based on data provided to EIA by operators. In addition to the estimates provided by these three organizations, we also obtained and presented technically recoverable shale oil and gas estimates from two private organizations—IHS Inc., and ICF International—and one national advisory committee representing the views of the oil and gas industry and other stakeholders—the National Petroleum Council. For all estimates we report, we conducted a review of the methodologies used in these estimates for fatal flaws; we did not find any fatal flaws in these methodologies. To determine what is known about the amount of produced shale oil and gas from 2007 through 2011, we obtained data from EIA—the federal agency responsible for estimating and reporting this and other energy information. EIA officials provided us with estimated oil and gas production data, including data estimating shale oil and gas estimates from states and two private firms—HPDI, LLC and Lippman Consulting, Inc. To assess the reliability of these data, we examined EIA’s published methodology for collecting this information and interviewed key EIA officials regarding the agency’s data collection and validation efforts. We also interviewed officials from three state agencies, representatives from five private companies, and researchers from three academic institutions who are familiar with these data and EIA’s methodology and discussed the sources and reliability of the data. We determined that these data were sufficiently reliable for the purposes of this report. To determine what is known about the environmental and public health risks associated with the development of shale oil and gas, we identified and reviewed more than 90 studies and other publications from federal agencies and laboratories, state agencies, local governments, the petroleum industry, academic institutions, environmental and public health groups, and other nongovernmental associations. The studies and publications we reviewed included scientific and industry periodicals, government-sponsored research, reports or other publications from nongovernmental organizations, and presentation materials. We identified these studies by conducting a literature search and by asking for recommendations during our interviews with stakeholders. For a number of studies, we interviewed the author or authors to discuss the study’s findings and limitations, if any. We believe we have identified the key studies through our literature review and interviews, and that the studies included in our review have accurately identified potential risks for shale oil and gas development. However, given our methodology, it is possible that we may not have identified all of the studies with findings relevant to our objectives, and the risks we present may not be the only issues of concern. The widespread use of horizontal drilling and hydraulic fracturing to develop shale oil and gas is relatively new. Studying the effects of an activity and completing a formal peer-review process can take numerous months or years. Because of the relative short time frame for operations and the lengthy time frame for studying effects, we did not limit the review to peer-reviewed publications. The risks identified in the studies and publications we reviewed cannot, at present, be quantified, and the magnitude of potential adverse affects or likelihood of occurrence cannot be determined for several reasons. First, it is difficult to predict how many or where shale oil and gas drilling operations may be constructed. Second, operators’ use of effective best practices to mitigate risk may vary. Third, based on the studies we reviewed, there are relatively few that are based on evaluating predevelopment conditions to postdevelopment conditions—making it difficult to detect or attribute adverse changes to shale oil and gas development. In addition, changes to the federal, state, and local regulatory environment and the effectiveness in implementation and enforcement will affect operators’ future activities. Moreover, risks of adverse events, such as spills or accidents, may vary according to business practices, which in turn, may vary across oil and gas companies making it difficult to distinguish between risks that are inherent to the development of shale oil and gas from risks that are specific to particular business practices. To obtain additional perspectives on issues related to environmental and public health risks, we interviewed a nonprobability sample of stakeholders representing numerous agencies and organizations. (See app. II for a list of agencies and organizations contacted.) We selected these agencies and organizations to be broadly representative of differing perspectives regarding environmental and public health risks. In particular, we obtained views and information from federal officials from the Department of Energy’s National Energy Technical Laboratory, the Department of the Interior’s Bureau of Land Management and Bureau of Indian Affairs, and the Environmental Protection Agency; state regulatory officials from Arkansas, Colorado, Louisiana, North Dakota, Ohio, Oklahoma, Pennsylvania, and Texas; tribal officials from the Osage Nation; shale oil and gas operators; representatives from environmental and public health organizations; and other knowledgeable parties with experience related to shale oil and gas development, such as researchers from the Colorado School of Mines, the University of Texas, Oklahoma University, and Stanford University. The findings from our interviews with stakeholders and officials cannot be generalized to those we did not speak with. We conducted this performance audit from November 2011 to September 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. The USGS estimates potential oil and gas resources in about 60 geological areas (called “provinces”) in the United States. Since 1995, USGS has conducted oil and gas estimates at least once in all of these provinces; about half of these estimates have been updated since the year 2000 (see table 5). USGS estimates for an area are updated once every 5 years or more, depending on factors such as the importance of an area. In addition to the contact named above, Christine Kehr, Assistant Director; Lee Carroll; Nirmal Chaudhary; Cindy Gilbert; Alison O’Neill; Marietta Revesz, Dan C. Royer; Jay Spaan; Kiki Theodoropoulos; and Barbara Timmerman made key contributions to this report. | New applications of horizontal drilling techniques and hydraulic fracturing--in which water, sand, and chemical additives are injected under high pressure to create and maintain fractures in underground formations--allow oil and natural gas from shale formations (known as "shale oil" and "shale gas") to be developed. As exploration and development of shale oil and gas have increased--including in areas of the country without a history of oil and natural gas development--questions have been raised about the estimates of the size of these resources, as well as the processes used to extract them. GAO was asked to determine what is known about the (1) size of shale oil and gas resources and the amount produced from 2007 through 2011 and (2) environmental and public health risks associated with the development of shale oil and gas. GAO reviewed estimates and data from federal and nongovernmental organizations on the size and production of shale oil and gas resources. GAO also interviewed federal and state regulatory officials, representatives from industry and environmental organizations, oil and gas operators, and researchers from academic institutions. GAO is not making any recommendations in this report. We provided a draft of this report to the Department of Energy, the Department of the Interior, and the Environmental Protection Agency for review. The Department of the Interior and the Environmental Protection Agency provided technical comments, which we incorporated as appropriate. The Department of Energy did not provide comments. Estimates of the size of shale oil and gas resources in the United States by the Energy Information Administration (EIA), U.S. Geological Survey (USGS), and the Potential Gas Committee--three organizations that estimate the size of these resources--have increased over the last 5 years, which could mean an increase in the nation's energy portfolio. For example, in 2012, EIA estimated that the amount of technically recoverable shale gas in the United States was 482 trillion cubic feet--an increase of 280 percent from EIA's 2008 estimate. However, according to EIA and USGS officials, estimates of the size of shale oil and gas resources in the United States are highly dependent on the data, methodologies, model structures, and assumptions used to develop them. In addition, less is known about the amount of technically recoverable shale oil than shale gas, in part because large-scale production of shale oil has been under way for only the past few years. Estimates are based on data available at a given point in time and will change as additional information becomes available. In addition, domestic shale oil and gas production has experienced substantial growth; shale oil production increased more than fivefold from 2007 to 2011, and shale gas production increased more than fourfold from 2007 to 2011. Oil and gas development, whether conventional or shale oil and gas, pose inherent environmental and public health risks, but the extent of these risks associated with shale oil and gas development is unknown, in part, because the studies GAO reviewed do not generally take into account the potential long-term, cumulative effects. For example, according to a number of studies and publications GAO reviewed, shale oil and gas development poses risks to air quality, generally as the result of (1) engine exhaust from increased truck traffic, (2) emissions from diesel-powered pumps used to power equipment, (3) gas that is flared (burned) or vented (released directly into the atmosphere) for operational reasons, and (4) unintentional emissions of pollutants from faulty equipment or impoundments--temporary storage areas. Similarly, a number of studies and publications GAO reviewed indicate that shale oil and gas development poses risks to water quality from contamination of surface water and groundwater as a result of erosion from ground disturbances, spills and releases of chemicals and other fluids, or underground migration of gases and chemicals. For example, tanks storing toxic chemicals or hoses and pipes used to convey wastes to the tanks could leak, or impoundments containing wastes could overflow as a result of extensive rainfall. According to the New York Department of Environmental Conservation's 2011 Supplemental Generic Environmental Impact Statement, spilled, leaked, or released chemicals or wastes could flow to a surface water body or infiltrate the ground, reaching and contaminating subsurface soils and aquifers. In addition, shale oil and gas development poses a risk to land resources and wildlife habitat as a result of constructing, operating, and maintaining the infrastructure necessary to develop oil and gas; using toxic chemicals; and injecting fluids underground. However, the extent of these risks is unknown. Further, the extent and severity of environmental and public health risks identified in the studies and publications GAO reviewed may vary significantly across shale basins and also within basins because of location- and process-specific factors, including the location and rate of development; geological characteristics, such as permeability, thickness, and porosity of the formations; climatic conditions; business practices; and regulatory and enforcement activities. |
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Many entities are involved in the production and distribution of television content to households, as shown in figure 1. Local television stations may acquire network content from the national broadcast networks that they are affiliated with, such as CBS; from syndicators for syndicated content, such as game shows and reruns; or from both. Stations also create their own content, including local news. Stations provide content to households directly through over the air transmission, which households can receive free of charge, and through retransmission by MVPDs, such as cable and satellite operators. Content producers, such as Sony and Disney, also distribute content through cable networks, such as ESPN, that are carried by MVPDs. “Over-the-top” providers, such as Netflix, provide content to consumers through Internet connections often provided by MVPDs. According to FCC, local television stations’ affiliation agreements with networks and contracts with syndicators generally grant a station the right to be the exclusive provider of that network’s or syndicator’s content in the station’s local market. Broadcasting industry stakeholders and economic theory note that exclusive territories can provide economic benefits to local television stations, broadcast networks, and viewers. Local television stations benefit from being the exclusive providers in their markets of high-demand network content, such as professional sports and primetime dramas. Being the exclusive provider supports stations’ viewership levels, which strengthens their revenues, allowing them to invest in the production of local content, among other things. For broadcast networks, exclusivity can help increase the value of each local station and create efficiencies in the distribution of network content. Thus, while exclusive territories reduce competition between some stations (e.g., local NBC stations in different geographic markets do not compete), the exclusive territories could provide incentives for stations to invest more heavily in the development of content and thus promote greater competition between stations in the same geographic market (e.g., local ABC and NBC stations in the same market compete), which can benefit viewers. FCC’s exclusivity rules are an administrative mechanism for local television stations to enforce their exclusive rights obtained through contracts with broadcast networks and syndicators. Network non-duplication. This rule protects a local television station’s right to be the exclusive provider of network content in its market. FCC promulgated the rule in 1966 to protect local television stations from competition from cable operators that might retransmit the signals of stations from distant markets. FCC was concerned that the ability of cable operators to import the signals of stations in distant markets into a local market was unfair to local television stations with exclusive contractual rights to air network content in their local market. The rule allows exclusivity within the area of geographic protection agreed to by the network and the station, so long as that region is within a radius of 35 miles—for large markets—or 55 miles—for small markets—from the station (see fig. 2). Syndicated exclusivity. This rule protects a local television station’s right to be the exclusive provider of syndicated content in its market. FCC first promulgated the rule in 1972 to protect local television stations and ensure the continued supply of content. This rule applies within an area of geographic protection agreed to by the syndicator and the station, so long as that region is within a 35-mile radius from the station. The exclusivity rules—when invoked by local television stations—require cable operators to block duplicative content carried on a distant signal imported into the station’s protected area by cable operators. For example, these rules allow WJZ, the CBS-affiliated local television station in Baltimore, to prohibit a cable operator from showing duplicative network content on another market’s CBS station that the cable operator imports into Baltimore. Similarly, the rules allow WJZ to prohibit a cable operator from showing any duplicated syndicated content on any other market’s station the cable operator imports into Baltimore. Local television stations are able to invoke the exclusivity rules regardless of whether their signals are retransmitted by a cable operator or not. For example, even if WJZ is not retransmitted by a particular cable operator in Baltimore, WJZ can invoke its exclusivity rights against that cable operator, requiring it to block duplicative content. FCC has statutory authority to administratively review complaints of violation of these rules (e.g., if a local television station believes a cable operator imported a distant signal into its market even though the station invoked its exclusivity protections) when such complaints are formally brought before the Commission. FCC officials said that the Commission addresses such complaints on a case-by-case basis. The broadcast industry is governed by a number of other rules and statutes that interplay with the exclusivity rules. These rules and laws include the following: Must carry. Must carry refers to the right of a local television station to require that cable operators that serve households in the station’s market retransmit its signal in that local market. The choice to invoke must carry is made every 3 years by stations. Cable operators carrying stations under the must-carry rule may not accept or request any fee in exchange for coverage. Retransmission consent. Retransmission consent refers to permission given by television stations who do not choose must carry to allow a cable or satellite operator to retransmit their signals. Stations invoke either retransmission consent or must carry. Retransmission consent was enacted in 1992; at the time, Congress determined that cable operators obtained great benefit from the broadcast signals that they were able to carry without broadcaster consent, which resulted in an effective subsidy to cable operators. Retransmission rights are negotiated directly between a local television station and cable and satellite operators. By opting for retransmission consent, stations give up the guarantee that cable and satellite operators will carry their signal under must carry in exchange for the right to negotiate compensation for their retransmission. Cable and satellite operators are unable to retransmit the signal of a local television station that has chosen retransmission consent without its permission. If, despite negotiations, a local television station and a cable or satellite operator do not reach agreement, the local television station may prohibit the cable or satellite operator from retransmitting its signal, commonly referred to as a “blackout.” FCC rules require local television stations and cable or satellite operators to negotiate for retransmission consent in “good faith.” FCC’s rules set a number of good faith standards, including a requirement that parties designate an individual with decision-making power to lead negotiations. Compulsory copyright. Must carry and retransmission consent pertain to the retransmission of a local television station’s signal. The content within that signal is protected by copyright. For example, the National Football League (NFL) holds the copyright for its games that are broadcast on CBS, Fox, and NBC. Generally, any potential user (other than the copyright holder) intending to transmit copyright protected content must obtain permission from the copyright holder beforehand. The compulsory copyright licenses, enacted in 1976, allow cable operators to retransmit all content on a local television station without negotiating with the copyright holders. To make use of the compulsory copyright, the cable operator must follow relevant FCC rules and pay royalties to the Copyright Office within the Library of Congress. The Copyright Act establishes the royalties that a cable operator must pay to carry television stations’ signals. A cable operator pays a minimum royalty fee regardless of the number of local or distant television station signals it carries, and the royalties for local signals are less than those for distant signals. Compensation for television content flows through industry participants in a number of ways that are relevant to the exclusivity rules, as seen in figure 3. Households that subscribe to television service with an MVPD pay subscription fees; FCC reported that the average monthly fee for expanded-basic service was $64.41 on January 1, 2013. Those MVPDs, including cable and satellite operators, pay retransmission consent fees to local television stations that opt for retransmission consent; as discussed above, the fees are determined in negotiations between stations and MVPDs. Advertisers purchase time from local television stations, broadcast networks, and MVPDs. Local television stations provide compensation to their affiliated national broadcast networks and to the providers of syndicated content in exchange for the rights to be the exclusive provider of that content in their market. Local television stations also use their advertising and retransmission consent revenues to develop their own content, including local news. In 2014, FCC issued a FNPRM to consider eliminating or modifying the exclusivity rules, in part to determine if the rules are still needed given changes to the video marketplace since the rules were first promulgated. FCC asked for comments on, among other things, the potential effects of eliminating the rules. In response to the FNPRM, FCC received 72 records during the open comment period, including letters from individuals, and comments and reply comments from industry stakeholders. FCC officials said that the Media Bureau is working on a recommendation for the FCC Chairman’s consideration on whether to repeal or modify the exclusivity rules; there is no firm timeframe for when the bureau may make a recommendation. All 13 broadcast industry stakeholders (local television stations, national broadcast networks, and relevant industry associations) we interviewed and whose comments to FCC we reviewed report that the exclusivity rules are needed to help protect stations’ exclusive contractual rights to air network and syndicated content in their markets. Those stakeholders reported that the rules provide an efficient enforcement mechanism to protect the exclusivity that local television stations negotiate for and obtain in agreements with networks and syndicators; in the absence of the rules, enforcement of exclusivity would have to take place in the courts, which would be difficult and inefficient for several reasons. These stakeholders report that if a local television station believes that a cable operator improperly imported duplicative content on a distant signal into its market, the station will be unable to bring legal action to stop the airing of this duplicative content. Specifically, the cable operator may have an agreement with a station in a distant market that allows it to retransmit that station’s signal in other markets. Since the affected local station might not have a contract with either the cable operator that is importing the distant station or the distant station, these stakeholders report that the local station cannot bring legal action. In 2012, for example, cable operator Time Warner Cable (TWC) did not reach a retransmission consent agreement with Hearst broadcast stations in five markets. TWC’s contract with another broadcaster, Nexstar, did not explicitly prohibit retransmission of Nexstar’s signals into distant markets, and TWC imported Nexstar stations into Hearst’s markets. However, according to one broadcast industry stakeholder, because of a lack of contractual relationship between Hearst and TWC regarding the retransmission of Nexstar’s signals, it would have been very difficult for Hearst to take a breach of contract action. Even if a local station could bring legal action, these broadcast industry stakeholders added that enforcing exclusivity through courts would be more time consuming and resource intensive than using FCC administrative review to determine or uphold exclusive rights that parties negotiated in contracts. Furthermore, all 13 broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed report that exclusivity rules are needed to help protect stations’ revenues. These stakeholders report that because the rules protect the contractual exclusivity rights of local television stations, stations can maintain their bargaining position in retransmission consent negotiations with cable operators, allowing them to obtain what they consider to be fair retransmission consent fees based on the value of the content in their signal. If a local station does not grant a cable operator retransmission consent, the cable operator cannot provide any network or syndicated content that the station provides, including high-demand content. By contrast, if cable operators could import duplicative content on a distant signal, even on a temporary basis to avoid not showing national network content during a retransmission consent impasse, these stakeholders report that the bargaining position of local television stations will decline, with a commensurate decline in retransmission consent fees and the value of the local television station, as the station will no longer be the exclusive content provider. In addition, because the rules ensure that local television stations’ audiences are not reduced by the availability of duplicative content on signals from distant markets (for example, all households in a given market who watch popular NBC prime-time dramas will do so on their local NBC affiliate, as households are unable to do so on a NBC station from another market), they report that the rules help protect their audience share. This in turn, allows local television stations to obtain higher advertising revenues than they would if they were not the exclusive provider of network and syndicated content in their market. These broadcasting industry stakeholders also reported that by strengthening local stations’ revenues, the rules help them invest in developing and providing local news, emergency alerts, and community-oriented content, in support of FCC’s localism goals. However, the majority of cable industry stakeholders we interviewed and whose comments to FCC we reviewed reported that many local television stations have reduced their investments in local news in recent years despite the existence of the rules. In addition, we previously found that local television stations are increasingly sharing services, such as equipment and staff, for local news production. For example, stations can have arrangements wherein one station produces another station’s news content and also provides operational, administrative, and programming support. In addition, viewership for local news has declined in recent years—according to the Pew Research Center’s analysis of 2013 Nielsen data, the viewership for early evening newscasts had declined 12 percent since 2007. During this time, Americans have increasingly turned to other devices—such as computers and mobile devices—to access news on the Internet. For example, the Pew Research Center also reported in 2013 that 54 percent of Americans said they access news on mobile devices and 82 percent said they do on a desktop or laptop computer. Eight of 12 cable industry stakeholders we interviewed and whose comments to FCC we reviewed reported that because the rules help local television stations be the exclusive provider of network content in their market, the rules allow local television stations to demand increasingly higher retransmission consent fees from cable operators, which some said can lead to higher fees that households pay for cable television service. Because local television stations are the exclusive providers of network content in their markets (e.g., the NBC affiliate in San Diego is the only provider of popular NBC prime-time dramas in that market), cable operators report that they are forced to pay increasingly higher retransmission consent fees. They report that this occurs because if a local television station cannot reach agreement with the cable operator regarding retransmission consent and does not grant retransmission rights to the cable operator, the cable operator cannot import a signal from a distant market to provide network content and the cable operator’s subscribers lose access to network content. This puts the cable operator at risk for losing subscribers to competitors, such as other cable and satellite operators, who continue to carry the local television station and its network content. While 5 of 12 cable industry stakeholders we interviewed and whose comments to FCC we reviewed said that they prefer to retransmit the local station instead of a distant market station, they feel that the exclusivity rules limit their ability to seek alternatives if they are unable to agree to retransmission consent fees with a local station. Eight cable industry stakeholders reported that as a result, the rules have led to sharp and rapidly increasing retransmission consent fees in recent years—a trend that they expect to continue—which can lead to higher cable fees for households. SNL Kagan, a media research firm, has projected that retransmission consent fees will increase from $4.9 billion in 2014 to more than $9.3 billion in 2020. However, 4 of 13 broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed stated that cable networks—such as ESPN, TBS, and AMC—also have exclusive distribution. For example, a cable operator wishing to carry ESPN can only obtain rights to do so from ESPN. Industry stakeholders we interviewed and whose comments to FCC we reviewed discussed different scenarios under which eliminating the exclusivity rules may lead to varying effects (see fig. 4). In one scenario, eliminating the exclusivity rules may provide cable operators with opportunities to import distant signals into local markets. This could potentially reduce the bargaining position of local television stations in retransmission consent negotiations, which could reduce station revenues with varying effects on the availability of content and households; however, the magnitude of these effects is uncertain. In two other scenarios, eliminating the exclusivity rules may have little effect as local television stations could maintain their position as the exclusive provider of network and syndicated content. As a result, retransmission consent negotiations may be unlikely to change, likely resulting in minimal effects on content and households. Eleven of 13 broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed said that in the absence of the exclusivity rules, some local television station contracts with cable operators may allow for retransmission of their signals to distant markets. This may happen if contracts between local television stations and cable operators do not clearly prohibit retransmission outside of the stations’ local markets, as was the case in Nexstar’s contract with TWC discussed earlier. Two of these stakeholders said this could happen with small broadcasters that might lack the financial resources to cover legal counsel during their negotiations with cable operators. Broadcast networks could provide such assistance. However, officials from all three broadcast networks we interviewed told us that they currently do not oversee their affiliates’ retransmission consent agreements. In comments to FCC, one cable industry association suggested that FCC prohibit network involvement in the retransmission consent negotiations of their affiliates. Depending on how FCC interprets or amends its good-faith rules, broadcast networks may be unable to take a more active role in the retransmission consent negotiations between their affiliates and cable operators. Even if just one local television station allowed a cable operator to retransmit its signal outside its local market, the cable operator could retransmit that signal in any other market that it served; this could potential harm the exclusivity of local television stations affiliated with the same broadcast network in those markets served by the cable operator. The potential ability of a cable operator to import a distant signal, and the potential weakening of exclusivity that could result, may lead to a series of effects on the distribution of content—including local content—and on households and the fees they pay for cable television service (see fig. 5). The majority of both cable and broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed stated that as a result of the potential of a cable operator retransmitting a distant station’s signal into a local market, local television stations may have reduced bargaining position during retransmission consent negotiations with cable operators. As stated earlier, the fact that local television stations are the exclusive provider in their markets of high-demand national content provides them with a strong bargaining position in negotiations with cable operators. However, if during retransmission consent negotiations, a cable operator can provide certain content by retransmitting the signal of a station affiliated with the same broadcast network in another market, the local station’s bargaining position declines because it is no longer the exclusive provider of the national network content available to the cable operator in the station’s market. This reduction in bargaining position may lead to fewer black outs and a reduction in retransmission consent fees. With the exclusivity rules in place, a local television station may be willing to pull its signal from a cable operator (that is, have a blackout) knowing that the cable operator has no alternative for providing high- demand network and syndicated content. However, without the rules, the local television station may be less willing to pull its signal from the cable operator, as the cable operator could provide the same high-demand content to its customers by importing a station from a distant market. For example, if a cable operator in Baltimore could import the Atlanta NBC affiliate into Baltimore when it does not reach a retransmission consent agreement with the Baltimore NBC affiliate, the Baltimore affiliate stands to gain little from pulling its signal, and thus not be retransmitted, since households served by the cable operator in Baltimore could still access NBC network content on the imported Atlanta station. With fewer blackouts, consumers would be less likely to lose access to broadcast network and syndicated content they demand. With reduced bargaining position, local television stations may agree to retransmission consent fees that are lower than they otherwise would be because local television stations want to avoid their signals being replaced by another television station’s signal from a distant market. This may mean that retransmission fees could decrease or increase at slower rate than they would if broadcasters maintained the same bargaining position they have now. For example, the NBC affiliate in Baltimore may be willing to accept lower retransmission consent fees from a cable operator knowing that the cable operator can import NBC content from another market if they did not reach agreement on retransmission consent. In addition, to the extent that a cable operator does import a distant signal into a given market, the local station in that market may lose some viewers who watch duplicative content on the imported station. To the extent this happens, advertisers may spend less on advertising time given the reduction in audience and the advertising revenues of the local television station may decline. The potential reduction of local stations’ retransmission consent and advertising revenues could affect the content stations can produce and distribute to households, including local content, in multiple ways, as described below. However, the nature of these effects is unknown. Local television stations may have fewer resources to pay in compensation to their affiliated broadcast networks. If so, the resulting reduction in revenues for national broadcast networks may reduce their ability to produce, obtain, and distribute high-cost and widely viewed content, such as national sports and primetime dramas. This potential outcome may result in the migration of some content to cable networks to the extent that cable networks outbid broadcast networks for this high-cost content (e.g., if ESPN outbids Fox for NFL coverage or more high-cost dramas are provided by the cable network AMC instead of broadcast networks). If this happens, consumers who rely on free over-the-air television and do not subscribe to cable television service may not be able to view certain content that has traditionally been available on over-the-air television unless they begin to subscribe to a cable operator’s service. Twelve of 13 broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed said that local television stations may have fewer resources to invest in local content. This could reduce the quality or quantity of local content provided to viewing households. Nine of these stakeholders reported that local news is a major cost for local television stations. Local television stations may have fewer resources to pay for syndicated content. If so, syndicators could be less able to produce, obtain, and distribute syndicated content, which could affect the type and quantity of syndicated content that households are able to view. In addition to these potential changes in content, eliminating the exclusivity rules may affect the fees consumers pay for cable television service. However, because multiple factors may influence fees and the extent to which that happens is unknown, we cannot quantify the effect. To the extent that eliminating the exclusivity rules causes retransmission consent fees paid by cable operators to be lower than they otherwise would be, cable operators may pass some of these savings along to consumers in the form of lower subscription fees. However, as we have noted, eliminating the rules could lead to a migration of some highly viewed and high-cost content to cable networks from free over-the-air local television stations. This content migration could also affect fees for cable service; cable networks that obtain such content may experience additional costs for content and thus charge cable operators more to carry their networks. Thus, cable operator cost savings on retransmission consent fees could be offset to some extent by higher cable network fees. Furthermore, migration of such content could cause some households that do not subscribe to cable services to begin doing so, or cause some households to upgrade their service to obtain additional cable networks. This increased demand for cable service could also lead to some upward pressure on cable subscription fees. Eleven of 13 broadcast industry stakeholders we interviewed and whose comments to FCC we reviewed stated that in the absence of the exclusivity rules, the compulsory copyright license for distant signals may allow a cable operator to retransmit a local television stations’ signal into another market as the cable operator does not need to obtain approval from copyright holders. Nine of these 13 stakeholders stated that this compulsory copyright may not have been enacted if the exclusivity rules did not already exist. Six of these 13 stated that, as a result, if FCC eliminates the exclusivity rules, statutory changes would also be needed to eliminate the compulsory copyright license for distant signals. Assuming that retransmission of the content in a televisions station’s broadcast retains copyright protection, if Copyright Law was amended to remove the compulsory copyright for distant signals, a cable operator wishing to retransmit a station’s signal into a distant market would need to clear the copyrights with the copyright holders, such as the NFL, of all content included on the television station’s signal. However, we have previously found that obtaining the copyright holders’ permission for all this content would be challenging. Each television program may have multiple copyright holders, and rebroadcasting an entire day of content may require obtaining permission from hundreds of copyright holders. The transaction costs of doing so make this impractical for cable operators. Furthermore, as broadcast networks are also copyright holders for some content that their affiliated local television stations air, such as the network’s national news, they may be unwilling to grant such copyright licenses to cable operators wishing to retransmit that content on an distant signal, given networks’ interests in preserving their system of affiliate exclusivity, as discussed earlier. In such a scenario, cable operators may be unable to import distant signals and local television stations may not face the threat of duplicative network and syndicated content on a distant signal. Local television stations may retain the same bargaining position that they currently have during retransmission consent negotiations. As a result, there may not be any change in the likelihood of a blackout, retransmission consent fees, the quantity and quality of content, and fees for cable television service. Nine of 12 cable industry stakeholders we interviewed and whose comments to FCC we reviewed suggested that if the exclusivity rules were eliminated, there may be minimal effects as exclusivity would continue to exist in contracts. According to FCC, the affiliation agreements between local television stations and broadcast networks generally define exclusive territories for the affiliate stations and prohibit stations from granting retransmission consent outside their local markets. However, as we discussed earlier, only one local television station granting retransmission consent outside its local market to a cable operator could undermine the exclusivity of all the affiliates of a broadcast network in markets served by that cable operator. Broadcast industry stakeholders report that broadcast networks could take legal action against local television stations that violate terms of the affiliation agreements by granting retransmission consent outside their local market. However, two broadcast networks we interviewed said that they are reluctant to sue their affiliates because they prefer not to take legal action against their business partners; one added that such a suit could take a long time to be resolved. Depending on FCC’s interpretation of or amendment to its good-faith rules, local television stations and broadcast networks may be able to take actions to protect against stations’ granting retransmission consent outside their local markets, thereby protecting stations’ exclusive territories. Assuming FCC’s good faith rules permit such actions, broadcast networks may choose to take a more proactive role in their affiliates’ retransmission consent negotiations with cable operators. As we discuss earlier, networks have an incentive to maintain stations’ exclusive territories and potentially could provide input to stations’ retransmission consent negotiations to help prevent stations’ granting retransmission consent outside their local markets if that input is allowed under FCC’s interpretation of the good-faith rules. For example, if FCC found it permissible, networks potentially could provide suggested contract language that clearly limits retransmission by cable operators to the station’s local market. With contracts clearly protecting the exclusivity of local television stations and preventing cable operators from retransmitting signals to distant markets, cable operators may be unlikely to import distant signals as doing so would be a clear contractual violation of their retransmission consent contract. In this scenario, local television stations may retain their exclusivity and may not have any change to their bargaining position during retransmission consent negotiations. Therefore, stations’ retransmission consent fees and revenue, the quantity and quality of content, and cable subscription fees may not change. FCC’s exclusivity rules are part of a broader broadcasting industry legal and regulatory framework, including must carry, retransmission consent, and compulsory copyrights. The exclusivity rules predate many of these laws and rules, and in some instances, the development of these other laws was premised on the existence of the exclusivity rules. The effects of eliminating the exclusivity rules are uncertain, because the outcome depends on whether related laws and rules are changed and how industry participants respond. For example, if the compulsory copyright license for distant signals were eliminated, as some broadcast industry stakeholders suggest, removing the exclusivity rules may have little effect. In contrast, if FCC were to interpret good faith in its rules to limit the extent to which broadcast networks can influence retransmission consent negotiations between their affiliated stations and cable operators, as one cable industry association suggests, removing the exclusivity rules could lead to a series of events, the outcome of which could be a reduction in the quality or quantity of local content and potential changes in the fees households pay for cable television service. We provided a draft of this report to FCC for review and comment. FCC provided technical comments via email that we incorporated as appropriate. We are sending copies of this report to interested congressional committees and the Chairman of the FCC. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made significant contributions to this report are listed in appendix III. The objectives of this report were to examine (1) industry stakeholder views on the need for and effects of the exclusivity rules and (2) the potential effects that removing the exclusivity rules may have on the production and distribution of content, including local news and community-oriented content. To address both objectives, we reviewed all public comments filed by industry stakeholders with the Federal Communications Commission (FCC) as part of its further notice of proposed rulemaking (FNPRM)— FCC docket 10-71—considering elimination or modification of the network non-duplication and syndicated exclusivity rules (exclusivity rules). We did not review comments filed by individuals and only reviewed those from industry stakeholders, such as local television stations or companies, multichannel video programming distributors (MVPD), including cable and satellite operators, national broadcast networks, industry associations representing such companies, and content copyright holders. In total, we reviewed 31 public comments. Of those 31 comments, 14 were from broadcasting industry stakeholders, 13 were from cable industry stakeholders, 1 was from a satellite industry stakeholder, 1 stakeholder was both a broadcaster and a cable operator, 1 was from a content provider, and 1 was from a related industry association. We reviewed these public comments for stakeholder views on the rules, the current effects of the rules, and the potential effects of eliminating the rules. In addition, we reviewed relevant rules and statutes, such as FCC’s exclusivity rules and relevant rulemaking documents, such as FCC’s FNPRM. We also reviewed affiliation agreements between broadcast networks and local television stations relevant to recent legal action regarding the exclusivity rules. We did not review retransmission consent agreements between local television stations and cable operators, however, as these agreements are not publicly available. We also conducted a literature review for studies related to FCC’s exclusivity rules, including any studies focused on the potential effects of eliminating the rules. To identify existing studies from peer-reviewed journals, we conducted searches of various databases, such as EconLit and ProQuest. We searched these and other databases using search terms including “exclusivity,” “network non-duplication,” and “syndicated exclusivity” and looked for publications in the past 5 years. We reviewed studies that resulted from our search and found that none of them were directly relevant to our work. We reviewed prior GAO reports that cover relevant issues, such as retransmission consent and copyrights. We also conducted semi-structured interviews with the industry stakeholders that filed public comments with FCC as part of its FNPRM considering eliminating or modifying the exclusivity rules. In some cases, multiple stakeholders co-signed and co-filed public comments; in these instances, we interviewed at least one of those stakeholders. While we attempted to interview at least one stakeholder for each of the 31 formal comments filed, four stakeholders did not respond to our requests for interviews. We interviewed 1 content provider, 13 broadcast industry stakeholders, 12 cable industry stakeholders, and 1 satellite industry stakeholder. During these interviews, we asked stakeholders about their views of FCC’s exclusivity rules, the effects of the rules, and the effects of potentially eliminating the rules on retransmission consent fees, broadcaster revenues, and the distribution of content, including locally- oriented content, among other things. In addition, we interviewed selected industry analysts who study the broadcasting and cable industries regarding the rules and the potential effects of eliminating the rules. We selected analysts to interview by identifying ones who analyze and make recommendations on the stocks of publicly traded companies that we interviewed as part of our review and whom we had interviewed as part of prior engagements. We also interviewed FCC officials regarding these rules and FCC’s rulemaking process. For our second objective, in addition to gathering information about industry stakeholder views on the potential effects of eliminating the exclusivity rules, we also analyzed those views in light of general economic principles to understand more fully the potential effects of eliminating the exclusivity rules. Mark L. Goldstein, (202) 512-2834 or [email protected]. In addition to the contact above, Michael Clements, Assistant Director; Amy Abramowitz; Mya Dinh; Gerald Leverich; Josh Ormond; Amy Rosewarne; Matthew Rosenberg; and Elizabeth Wood made key contributions to this report. | Local television stations negotiate with content providers—including national broadcast networks, such as ABC—for the right to be the exclusive provider of content in their markets. FCC's network non-duplication and syndicated exclusivity rules (“exclusivity rules”) help protect these contractual rights. In 2014, FCC issued a further notice of proposed rulemaking (FNPRM) to consider eliminating or modifying the rules in part to determine if the rules are still needed given changes in recent years to the video marketplace. GAO was asked to review the exclusivity rules and the potential effects of eliminating them. This report examines (1) industry stakeholder views on the need for and effects of the exclusivity rules and (2) the potential effects that removing the exclusivity rules may have on the production and distribution of content, including local news and community-oriented content. GAO reviewed all 31 comments filed by industry stakeholders with FCC in response to its FNPRM. GAO also interviewed 27 of those industry stakeholders and FCC officials. GAO also analyzed—in light of general economic principles—stakeholder views on the potential effects of eliminating the rules. FCC reviewed a draft of this report and provided technical comments that GAO incorporated as appropriate. Broadcast industry stakeholders that GAO interviewed (including national broadcast networks, such as ABC, and local television stations) report that the exclusivity rules are needed to protect local television stations' contractual rights to be the exclusive providers of network content, such as primetime dramas, and syndicated content, such as game shows, in their markets. These stakeholders report that by protecting exclusivity, the rules support station revenues, including fees from cable operators paid in return for retransmitting (or providing) the stations to their subscribers (known as retransmission consent fees). Conversely, cable industry stakeholders report that the rules limit options for providing high-demand content, such as professional sports, to their subscribers by requiring them to do so by retransmitting the local stations in the markets they serve. As a result, these stakeholders report that the rules may lead to higher retransmission consent fees, which may increase the fees households pay for cable service. Based on GAO's analysis of industry stakeholder views, expressed in comments to the Federal Communications Commission (FCC) and interviews, eliminating the exclusivity rules may have varying effects. If the rules were eliminated and cable operators can provide television stations from other markets to their subscribers (or “import” a “distant station”), local stations may no longer be the exclusive providers of network and syndicated content in their markets. This situation could reduce stations' bargaining position when negotiating with cable operators for retransmission consent. As a result, stations may agree to lower retransmission consent fees. This potential reduction in revenues could reduce stations' investments in content, including local news and community-oriented content; the fees households pay for cable television service may also be affected. Because multiple factors may influence investment in content and fees, GAO cannot quantify these effects. If the rules were eliminated, other federal and industry actions could limit cable operators' ability to import distant stations. For example, if copyright law was amended in certain ways, cable operators could face challenges importing distant stations. A cable operator could be required to secure approval from all copyright holders (such as the National Football League) whose content appears on a distant station the cable operator wants to import; with possibly hundreds of copyright holders in a day's programming, the transaction costs would make it unlikely that a cable operator would import a distant station. Also, broadcast networks may be able to provide oversight of retransmission consent agreements if FCC rules were to allow it. Cable operators may only import distant stations if retransmission consent agreements with those stations permit it, and stations' agreements with broadcast networks generally prohibit stations from granting such retransmission. If FCC rules allowed it, broadcast networks could provide oversight to help ensure such agreements do not grant retransmission outside the stations' local markets. Under these two scenarios, local stations may remain the exclusive providers of content in their markets, their bargaining position may remain unchanged, and there may be limited effects on content and fees for cable service. |
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Information security is a critical consideration for any organization reliant on IT and especially important for government agencies, where maintaining the public’s trust is essential. The Federal Information Security Management Act of 2002 (FISMA) established a framework designed to ensure the effectiveness of security controls over information resources that support federal operations and assets. According to FISMA, each agency is responsible, among other things, for providing information security protections commensurate with the risk and magnitude of the harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of information collected or maintained by or on behalf of the agency and information systems used or operated by an agency or by a contractor of an agency or other organization on behalf of an agency. Consistent with its statutory responsibilities under FISMA, in February 2010, NIST issued Special Publication (SP) 800-37 on implementing effective risk management processes to (1) build information security capabilities into information systems through the application of management, operational, and technical security controls; (2) maintain awareness of the security state of information systems on an ongoing basis though enhanced monitoring processes; and (3) provide essential information to senior leaders to facilitate system authorization decisions regarding the acceptance of risk to organizational operations and assets, individuals, other organizations, and the nation arising from the operation and use of information systems. According to NIST guidance these risk management processes: promote the concept of near real-time risk management and ongoing information system authorization through the implementation of robust continuous monitoring processes; encourage the use of automation to provide senior leaders the necessary information to make cost-effective, risk-based decisions with regard to the organizational information systems supporting their core missions and business functions; integrate information security into the enterprise architecture and system development life cycle; provide emphasis on the selection, implementation, assessment, and monitoring of security controls, and the authorization of information systems; link risk management processes at the information system level to risk management processes at the organization level through a risk executive (function); and establish responsibility and accountability for security controls deployed within organizational information systems and inherited by those systems (i.e., common controls). Continuous monitoring of security controls employed within or inherited by the system is an important aspect of managing risk to information from the operation and use of information systems. Conducting a thorough point-in-time assessment of the deployed security controls is a necessary but not sufficient practice to demonstrate security due diligence. An effective organizational information security program also includes a rigorous continuous monitoring program integrated into the system development life cycle. The objective of continuous monitoring is to determine if the set of deployed security controls continue to be effective over time in light of the inevitable changes that occur. Such monitoring is intended to assist maintaining an ongoing awareness of information security, vulnerabilities, and threats to support organizational risk management decisions. The monitoring of security controls using automated support tools facilitates near real-time risk management. As described in the draft NIST SP 800-137, the monitoring process consists of the following various steps: defining a strategy; establishing measures and metrics; establishing monitoring and assessment frequencies; implementing the monitoring program; analyzing security-related information and reporting findings; responding with mitigation actions or rejecting, avoiding, transferring, or accepting risk; and reviewing and updating the monitoring strategy and program. In its September 2010 report, Continuous Asset Evaluation, Situational Awareness, and Risk Scoring (CAESARS) Reference Architecture Report, the Department of Homeland Security (DHS) indicates that a key aspect of a continuous monitoring process is analyzing security-related information, defining and calculating risk, and assigning scores. The report notes that risk scoring can provide information at the right level of detail so that managers and system administrators can understand (1) the state of the IT systems for which they are responsible, (2) the specific gaps between actual and desired states of security protections, and (3) the numerical value of every remediation action that can be taken to close the gaps. This information should help enable responsible managers to identify actions that can add value to improving security. The report also notes that risk scoring is not a substitute for other essential operational and management controls, such as incident response, contingency planning, and personnel security. When used in conjunction with other sources of information, such as the Federal Information Processing Standards 199 security categorization and automated asset data repository and configuration management tools, risk scoring can be an important contributor to an overall risk management strategy. NIST is in the process of developing guidance that extends the CAESARS framework provided by DHS. NIST’s extension is to provide information on an enterprise continuous monitoring technical reference architecture to enable organizations to aggregate collected data from security tools, analyze the data, perform scoring, enable user queries, and provide overall situational awareness. NIST has also emphasized the value of planning, scheduling, and conducting assessments of controls as part of a continuous monitoring program in SP 800-37. This program allows an organization to maintain the security authorization of an information system over time in a highly dynamic environment of operation with changing threats, vulnerabilities, technologies, and missions or business processes. Continuous monitoring of security controls using automated support tools facilitates near real-time risk management and promotes organizational situational awareness with regard to the security state of the information system. State’s key missions are to (1) strive to build and maintain strong bilateral and multilateral relationships with other nations and international organizations; (2) protect the nation against the transnational dangers and enduring threats arising from tyranny, poverty, and disease, global terrorism, international crime, and the spread of weapons of mass destruction; and (3) combine diplomatic skills and development assistance to foster a more democratic and prosperous world integrated into the global economy. To accomplish its missions, State operates more than 260 embassies, consulates, and other posts worldwide. In addition, the department operates 6,000 passport facilities nationwide, 17 domestic passport agencies, 2 foreign press centers, 1 reception center, 5 offices that provide logistics support for overseas operations, 20 security offices, and 2 financial service centers. State is organized into nine functional bureaus: the Bureaus of Administration, Consular Affairs, Diplomatic Security, Resource Management, Human Resources, Information Resource Management, and Overseas Buildings Operations; the Office of the Legal Adviser; and the Foreign Service Institute. Among other things, these functional bureaus provide services such as policy guidance, program management, and administrative support. In addition, State has six regional, or geographic bureaus including the Bureau of African Affairs, East Asian and Pacific Affairs, European and Eurasian Affairs, Western Hemisphere Affairs, Near Eastern Affairs, and South Asian Affairs. These bureaus focus on U.S. foreign policy and relations with countries within their geographical areas. State’s IT infrastructure, encompassing its worldwide computer and communications networks and services, plays a critical role in supporting the department’s missions. This includes OpenNet—the department’s global unclassified network that uses Internet protocol to link State’s domestic and local area networks abroad. OpenNet serves both foreign and domestic locations, has tens of thousands of hosts, and about 5,000 routers and switches. The department budget for IT was approximately $1.2 billion for fiscal year 2010. The department’s Foreign Affairs Manual assigns the following roles and responsibilities for IT to the Bureau of Information Resource Management and Bureau of Diplomatic Security: The Bureau of Information Resource Management, headed by the Chief Information Officer (CIO), is to support the effective and efficient creation, collection, processing, transmission, dissemination, storage, and disposition of information required to formulate and execute U.S. foreign policy and manage the department’s daily operations. To meet the challenges of providing information in such an environment, the bureau relies on IT to disseminate this information throughout the foreign affairs community. The Bureau of Diplomatic Security has global responsibilities, with protection of people, information, and property. Overseas, the bureau implements security programs to ensure the safety of those who work in every U.S. diplomatic mission. In the U.S., the bureau protects the Secretary of State, the U.S. Ambassador to the United Nations, and foreign dignitaries who visit the United States. It also investigates passport and visa fraud, conducts personnel security investigations, and issues security clearances. Additional IT-relevant functions it performs are network monitoring and intrusion detection, incident handling and response, and threat analysis. The Foreign Affairs Manual also assigns roles and responsibilities to various department officials for information security. These roles and responsibilities are summarized in the following table. State has developed and implemented a complex, custom-made application called iPost to provide an enhanced monitoring capability for its extensive and worldwide IT infrastructure. The source data for iPost come from a variety of enterprise management and monitoring tools including Active Directory (AD), Systems Management Server (SMS), and diagnostic scanning tools. These tools provide vulnerability data, security compliance data, anti-virus signature file data, and other system and network data to iPost. The data are posted to an iPost database, reformatted and reconciled, and then populated into other iPost databases. Data are associated with a “site” or “operational unit,” and integrated into a single user interface portal (or dashboard) that facilitates monitoring by department users. The primary users of iPost include local and enterprise IT administrators and their management. Designed specifically for State, iPost provides summary and detailed data as well as the capability to generate reports based on these data. Summary information provides an overview of the current status of hosts at a site, including summary statistics and network activity information. Detailed data on hosts within a site are also available through the application navigation. For example, when looking at data about a specific patch, a user can see which hosts need that patch. Users can select a specific host within the scope of their control to view all the current data iPost has for that host, such as all identified vulnerabilities. Examples of key iPost screens and reports for sites are provided in appendix II. State also developed and incorporated a risk scoring program into iPost that is intended to provide a continuous risk monitoring capability over its Windows-based hosts on the OpenNet network at domestic and overseas locations. The program uses data integrated into iPost from several monitoring tools to produce what is intended to be a single holistic view of technical vulnerabilities. The objectives of the program are to measure risk in multiple areas, motivate administrators to reduce risk, measure improvement, and provide a single score for each host, site, and the enterprise. Each host and user account is scored in multiple areas known as scoring components. The scoring program assigns a score to each vulnerability, weakness, or other infrastructure issue identified for the host based on the premise that a higher score means higher risk. Thus, the score for a host is the total of the scores of all its weaknesses. Scores are then aggregated across components to give a total or “raw” risk score for each host, site, region, or the enterprise. Scores are “normalized” so that small and large sites can be equitably compared. Letter grades (“A” through “F”), based on normalized scores, are provided to both administrators and senior management with the intent of encouraging risk reduction. The scoring program also has an “exception” process that aims to accommodate anomaly situations where the risk cannot be reduced by local administrators because of technical or organizational impediments beyond local control. In such cases, the risk score is to be transferred to the site or operational unit that has responsibility for mitigating the weakness and local administrators are left to address only those weaknesses within their control. According to a State official, summary data (scores by site and component) are permanently retained in a database while detailed data were generally retained until replaced by updated data from a recent scan. In instances when a host is missed on a scan, the older detailed data are kept until they are judged to be too old to be useful. After that, the host is scored for nonreporting, and the older data are deleted. The official also noted that under a new policy being implemented, detailed data will be retained for two to three scans so that users at a site can see what changed. State has been recognized as a leader in federal efforts to develop and implement a continuous risk monitoring capability. In its CAESARS reference architecture report, DHS recognized State as a leading federal agency and noted that DHS’s proposed target-state reference architecture for security posture monitoring and risk scoring is based, in part, on the work of State’s security risk scoring program. In addition, in 2009 the National Security Agency presented an organizational achievement award to State’s Site Risk Scoring Program team for significantly contributing to the field of information security and the security of the nation. The iPost risk scoring program identifies and prioritizes several but not all areas affecting information security risk to State’s IT infrastructure. Specifically, the scope of the iPost risk scoring program: addresses Windows hosts but not other IT assets on the OpenNet network, such as routers and switches; covers a set of 10 scoring components that includes several but not all information system controls that are intended to reduce risk; and assigns a score for each identified security weakness, but the extent to which the score reflects risk factors such as the impact and likelihood of threat occurrence that are specific to State’s computing environment could not be demonstrated. As a result, the iPost risk scoring program helps to identify, monitor, and prioritize mitigation of vulnerabilities and weaknesses for the areas it covers, but it does not provide a complete view of the information security risks to the department. The scope of State’s risk scoring program covers hosts that use Windows operating systems, are members of AD, and are attached to the department’s OpenNet network. This includes approximately tens of thousands workstations and servers at foreign and domestic locations. However, the program’s scope does not include other devices attached to the network such as those that use non-Windows operating systems, firewalls, routers, switches, mainframes, databases, and intrusion detection devices. Vulnerabilities in controls for these devices could introduce risk to the Windows hosts and the information the hosts contain or process. State officials indicated that the focus on Windows hosts for risk scoring was due, in part, because of the desire to demonstrate success of the risk scoring program before considering other types of network devices. Windows servers and workstations also comprised a majority of the devices attached to the network and the availability of Microsoft tools such as AD and SMS and other enterprise management tools facilitated the collection of source data from Windows hosts. State officials indicated they were considering expanding the program to include scoring other devices on OpenNet. In applying the risk management framework to federal information systems, agencies select, tailor, and supplement a set of baseline security controls using the procedures and catalogue of security controls identified in NIST SP 800-53, rev. 3. The effective implementation of these controls is intended to cost-effectively mitigate risk while complying with security requirements defined by applicable laws, directives, policies, standards, and regulations. To ensure that the set of deployed security controls continues to be effective over time in light of inevitable changes that occur, NIST SP 800-37 states that agencies should assess and monitor a subset of security controls including technical, management, and operational controls on an ongoing basis during continuous monitoring. Using data integrated into iPost from multiple monitoring tools that identify and assess the status of security-related attributes and control settings, the iPost risk scoring program supports a capability to assess and monitor a subset of the security controls including technical and operational controls on an ongoing basis. The program is built on a set of 10 scoring components, each of which, according to iPost documentation, represents an area of risk for which measurement data were readily available. The program addresses vulnerabilities, security weaknesses, and other control issues affecting risk to the Windows hosts. The 10 scoring components in iPost are described in the following table. Although iPost provides a capability to monitor several types of security controls on an ongoing basis, it did not address other controls intended to reduce risk to Windows hosts, thereby providing an incomplete view of such risk. These controls include physical and environmental protection, contingency planning, and personnel security. Vulnerabilities in these controls could introduce risk to the department’s Windows hosts on OpenNet. State officials recognized that these controls and associated vulnerabilities were not addressed in iPost and stated that when they were first developing iPost, they focused on controls and vulnerabilities that could be monitored with existing automated tools such as a scanning tool, AD, and SMS since these could be implemented immediately. State officials believed this approach allowed them to develop a continuous monitoring application in the time frame they did with the limited resources available. Department officials also advised that the scoring program is intended to be scalable to address additional controls and they may add other control areas in the future. According to NIST SP 800-37, risk is a measure of the extent to which an entity is threatened by a potential circumstance or event, and typically a function of: (1) the adverse impacts that would arise if the circumstance or event occurs and (2) the likelihood of occurrence. In information assurance risk analysis, the likelihood of occurrence is a weighted factor based on a subjective analysis of the probability that a given threat is capable of exploiting a given vulnerability. According to iPost documentation, a key objective of the risk scoring program is to measure risk in multiple areas. State could not demonstrate the extent to which it considered factors relating to threat, impact, and likelihood of occurrence in assigning risk scores for security weaknesses. In developing the scoring methods for the 10 scoring components, the department utilized a working group comprised of staff from the Bureaus of Information Resource Management and Diplomatic Security. While documentation was limited to descriptions of the certain scoring calculations assigned to each component, State officials explained that working groups comprised of staff from the Bureaus of Information Resource Management and Diplomatic Security had discussions to determine a range of scores for each component. State officials explained that the premise for the scoring method was the greater the risk, the higher the score, and therefore, the greater the priority for mitigation. However, minutes of the working groups’ meetings and other documents did not show the extent to which threats, the potential impacts of the threats, and likelihood of occurrence were considered in developing the risk scores and State officials acknowledged these factors were not fully considered. Table 3 provides a description of how State calculates a score for each component. The methodology used to assign scores for the vulnerability component illustrates the limits that risk factors such as the impact and likelihood of threats specific to State’s environment were considered. Each vulnerability is initially assigned a score according to the Common Vulnerability Scoring System (CVSS). According to NIST guidance, agencies can use the CVSS base scores stored in the National Vulnerability Database to quickly determine the severity of identified vulnerabilities. Although not required, agencies can then refine base scores by assigning values to the temporal and environmental metrics in order to provide additional contextual information that more accurately reflects the risk to their unique environment. However, State did not refine the base scores to reflect the unique characteristics of its environment. Instead, it applied a mathematical formula to the base scores to provide greater separation between the scores for higher-risk vulnerabilities and the scores for lower-risk vulnerabilities. As a result, the scores may not fully or accurately reflect the risks to State’s OpenNet network. Although the iPost risk scoring program does not provide a complete view of the information security risks to the department, it helps to identify, monitor, and prioritize mitigation of vulnerabilities and weaknesses associated with Windows hosts on the OpenNet network. State officials surveyed responded that they used iPost to (1) identify, prioritize, and fix security weaknesses and vulnerabilities on Windows devices and (2) implement other security improvements at their sites. For example, at least half of the respondents said that assigning a numeric score to each vulnerability identified and each component was very helpful with prioritizing their efforts to prioritize the mitigation of Windows vulnerabilities. State officials stated that iPost was particularly helpful because prior to iPost, officials did not have access to tools with these capabilities. However, State officials did not use iPost results to update key security documents related to the assessment and authorization of the OpenNet network. State officials reported they used iPost to help them to: (1) identify Windows vulnerabilities on the devices for which they were responsible, (2) prioritize the mitigation of vulnerabilities identified, and (3) fix the vulnerability and confirm mitigation was successfully implemented. Specifically, as part of their duties, State officials indicated they reviewed iPost regularly to see the results of the automated scanning of devices at their sites to see what vulnerabilities had been identified. In particular, 14 of 40 survey respondents stated that they viewed the information in iPost at least once per day, 17 viewed information in iPost at least once a week, 3 viewed information at least once a month, and 4 respondents viewed information less than once per month. In addition, State officials we interviewed indicated they reviewed iPost information on a daily basis, with one official stating it was his first task in the morning. Of the information available in iPost, State officials surveyed noted that some screens and information were particularly useful at their sites. Specifically, the majority of the 40 survey respondents reported that the site summary screen, site score summary screen, level of detailed information on each component, and site reports were very or moderately useful (see fig. 1). These screens show site and host identifying information, statistical data, and graphical representations of the site’s risk scores, host computers, accounts, and identified weaknesses for each of the 10 components. Appendix II shows sample screens containing this information. The majority of State officials surveyed also indicated that iPost was very helpful in identifying Windows vulnerabilities. In particular, the majority of the 40 survey respondents indicated that iPost was very or moderately helpful in identifying vulnerabilities on devices, providing automated scanning of devices onsite for vulnerabilities, and reviewing identified vulnerabilities on devices (see fig. 2). Furthermore, survey respondents and State officials we interviewed also reported being able to identify additional site vulnerabilities at their sites not scored in iPost. For example, one official we spoke to said she would receive incident notices and would use iPost to obtain more information about the incident. Another official noted that iPost helped identify users who were utilizing the most bandwidth on the network. Generally, State officials concluded that iPost was particularly helpful because (1) it provided several officials access to tools with these capabilities they did not have prior to its use and (2) it streamlined the number of software utility and scanning tools officials could use, making the monitoring process more efficient and effective. State officials reported that the iPost features helped them prioritize the mitigation of vulnerabilities at their sites. Most survey respondents indicated that iPost was very or moderately helpful with prioritizing the mitigation of Windows vulnerabilities. For example, more than half of the 40 respondents said that assigning a numeric score to each vulnerability identified and each component was very or moderately helpful in their efforts to prioritize vulnerability mitigation. In addition, over half of the 40 respondents felt that assigning letter grades to sites was very or moderately helpful in prioritization efforts, though 10 respondents felt this was only slightly helpful, and 4 respondents felt this was not helpful at all. Of the features presented in iPost that assist in prioritization, responses were mixed regarding how helpful ranking of sites in comparison to other sites was for prioritizing vulnerability mitigation, with 22 respondents reporting it was very or moderately helpful, 9 slightly helpful, and 7 not at all helpful. Figure 3 provides details of survey responses. State officials we interviewed also indicated that iPost assisted them in prioritizing vulnerability mitigation. In particular, they found that scoring the vulnerabilities helped them to identify which ones were necessary to fix first. In regards to the letter grades and ranking, a State official told us the letter grades were useful because they aided him in deciding whether he should fix vulnerabilities identified in iPost (if he/she had a grade lower than an A) or focus on other activities. The iPost dashboard also provides links to available resources that users can utilize to fix identified vulnerabilities. Table 4 provides an overview of available resource links located in iPost. State officials reported they used available resources linked in iPost to help them fix vulnerabilities at their sites and confirm those fixes were successfully implemented. In particular, the majority of survey respondents reported that the patch management Web site, the SMS post admin tool, and the IT Change Control Board baseline were very or moderately useful in helping them to fix vulnerabilities at their site. Over half of the 40 respondents stated that the Site Risk Scoring Toolkit (26), IT Asset baseline (25), and the Diplomatic Security configuration guides (24) were very or moderately useful in helping them to fix vulnerabilities at their site. However, officials also reported they had never used some of the resources available in iPost (see fig. 4). In addition, State officials mentioned they utilized iPost to confirm that fixes they made to identified vulnerabilities were successfully implemented. In particular, survey respondents reported they either waited for the next automated scan results to be posted in iPost (28 of 31 respondents) or e-mailed headquarters in Washington, D.C., to run another scan to see that the fix was implemented (9 of 31 respondents). Regarding the helpfulness of iPost in verifying vulnerability fixes were successfully implemented, survey respondents found iPost to be very helpful (17 respondents), moderately helpful (12 respondents), slightly helpful (5 respondents) or not at all helpful (2 respondents). State officials surveyed reported that using iPost also influenced them to make other security improvements at their sites. For example, of the 24 respondents who reported updating AD at their site, 17 respondents reported they were influenced by using iPost to do so, and of the 20 respondents that reported changing how patches were rolled out, 16 reported that iPost influenced them in making this change. In addition, several respondents reported making security improvements in configurations of servers, site security policies, security training, and network architecture based in part on their use of iPost (see fig. 5). For example, one survey respondent reported that since the desktops shipped to the site had obsolete software on the standardized baseline image, he/she removed the old software before deploying the workstations at the site. Another survey respondent reported that he/she looked at iPost to see whether deployed patches needed to be pushed out again or if they needed to be installed manually. NIST SP 800-37 states that continuous monitoring results should be considered with respect to necessary updates to an organization’s security plan, security assessment report, and plan of action and milestones, since these documents are used to guide future risk management activities. The information provided by these updates helps to raise awareness of the current security state of the information system and supports the process of ongoing authorization and near real-time risk management. However, State did not incorporate the results of iPost continuous risk monitoring activities into the OpenNet security plan, security assessment report, and plan of action and milestones on an ongoing basis. For example, plans of action and milestones were not created or updated for guiding and monitoring the remediation of vulnerabilities deemed to be exceptions. Thus, key information needed for tracking and resolving exceptions was not readily available. As a result, the department may limit the effectiveness of those documents in guiding future risk management activities. Organizations establish controls to provide reasonable assurance that their data are timely, free from significant error, reliable, and complete for their intended use. According to Standards for Internal Control in the Federal Government, agencies should employ a variety of control activities suited for information systems to ensure the accuracy and completeness of data contained in the system and that the data is available on a timely basis to allow effective monitoring of events and activities, and to allow prompt reaction. These controls can include validating data; reviewing and reconciling output to identify erroneous data; and reporting, investigating, and correcting erroneous data. These controls should be clearly documented and evaluated to ensure they are functioning properly. NIST SP 800-39 also states that the processes, procedures, and mechanisms used to support monitoring activities should be validated, updated, and monitored. According to the Foreign Affairs Manual, stakeholders, system owners, and data stewards must ensure the availability, completeness, and quality of department data. State has developed and implemented several controls that are intended to ensure the timeliness, accuracy, and completeness of iPost data. For example, State has employed the use of automated tools to collect monitoring data that are integrated into iPost. The use of automated tools is generally faster, more efficient, and more cost-effective than manual collection techniques. Automated monitoring is also less prone to human error. State also has used data collection schedules that support the frequent collection of monitoring data. For example, every Windows host at each iPost site is to be scanned for vulnerabilities every 7 days. The frequent collection of data helps to ensure its timeliness. In addition, State has established three scoring components—SMS Reporting, Vulnerability Reporting, and Security Compliance Reporting—in its risk scoring program to address instances when data collection tools do not correctly report the data required to compute a score for a component, such as when a host is not scanned. To illustrate, a host is assigned a score for the Vulnerability Reporting component if it misses two or more consecutive vulnerability scans (that is, the host is not scanned in 15 days). Intended to measure the risk of the unknown according to iPost documentation, this scoring method also serves as a control mechanism for identifying and monitoring hosts from which data were not collected in accordance with departmental criteria. State officials also advised that they had conducted a pilot program for the risk scoring program that enabled site users to (1) review the results of the data collections and associated scoring of the weaknesses and (2) report any inaccuracies they observed. State then identified solutions for the inaccuracies observed. Although the pilot was completed in April 2009, State officials noted they continue to rely on iPost users to report missed scans and inaccurate or incomplete data observed. Notwithstanding these controls, the timeliness, accuracy, and completeness of iPost data were not always assured. For example, several instances where iPost data were not updated as frequently as scheduled, inconsistent, or incomplete are illustrated below. Frequency of updates to iPost data supports federal requirements but vulnerability scanning was not conducted as frequently as State scheduled. FISMA requires that agencies conduct periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, to be performed with a frequency based on risk but no less frequent than annually. According to iPost documentation, each host is to be scanned for vulnerabilities every 7 days. However, a review of scanning data for 15 sites (or 120 weekly scans) during an 8-week period in summer 2010 revealed that only 7 percent of the weekly scans successfully checked all Windows hosts at the site scanned. While 54 percent of the weekly scans successfully checked between 80 percent to 99 percent of the site’s Windows hosts, 28 percent of the scans checked less than 40 percent of a site’s hosts. Ten sites experienced at least one weekly scan cycle during which none of their hosts were scanned for vulnerabilities and a rescheduled scan was also not performed. According to iPost documentation, a host may not have been scanned because the host was powered off when the scan was attempted, the host’s Internet protocol address was not included in the range of the scan, or the scanning tool did not have sufficient permissions to scan the host. Although the frequency of updates to iPost data supports State’s efforts to satisfy FISMA’s requirement for periodic testing and evaluation, the updates to vulnerability information in iPost were not as timely as intended. As a result, iPost users may base risk management decisions on incomplete data. Data from vulnerability scans were sometimes not uploaded to iPost in a timely manner. State officials stated that vulnerability scanning results are typically presented in the iPost staging database at least 1 day following the scan. However, the length of time it took for scan results to be uploaded into iPost was not consistent across all sites and impacted the scoring results for certain sites. The scanning results for the majority of 15 sites reviewed were typically presented in iPost at least 1 day following the scan, although it took up to 3 days for certain foreign and domestic sites. According to State officials, delays with uploading information to iPost for certain geographical areas around the world occurred because of the network’s architecture. As a result, numerous Windows hosts at 6 of the 15 sites reviewed received scores in iPost’s vulnerability reporting component for missing two consecutive vulnerability scans even though the hosts had been scanned. Consequently, iPost users may make risk management decisions based on inaccurate or incomplete data. Data presented in iPost about the number of hosts addressed were sometimes inconsistent. According to State officials, the information in iPost-generated reports should reflect the information displayed on iPost screens; however, information presented about the number of hosts was sometimes inconsistent. For example, the number of hosts that were not scanned for security compliance differed between the iPost reports and the site summary screens for each of the 15 sites reviewed. According to a State official, the summary screen displayed number of hosts that were not scanned over two weekly cycles whereas the iPost reports presented the number of hosts that were not scanned during the current weekly cycle but iPost did not clearly label the data elements accordingly. In addition, several iPost reports generated on the same day at one site showed a different number of hosts for which SMS did not report data. iPost-generated enterprise reports also varied in terms of the total number of hosts being monitored and scored, ranging from approximately 84,000 to 121,000. As a result, iPost users may base risk management decisions on inconsistent or inaccurate data. Several factors contributed to the conditions described above. Technical limitations of the data collection tools contributed to missed scans. For example, the diagnostic scanning tool used by State performed agentless network scans of specific Internet protocol address ranges, so hosts that are powered off during the scan or are not included in the address range during the scan are missed. State officials were aware of the limitations with the scanning tool and indicated they had taken steps to address them. Specifically, State acquired and was implementing a new diagnostic tool based on agent technology to collect vulnerability and security compliance data. Also, iPost did not retain detailed data from multiple cycles of scans of hosts at a site over an extended period since the data was overwritten by new scan results or was deleted. As a result, iPost users could not conduct trend analyses to determine the extent to which scans were successfully completed as scheduled or that data are accurately and consistently presented in iPost screens and reports. State recognized the importance of having detailed historical scan data. As noted earlier, a State official stated that a new policy was being implemented that requires detailed data be retained for two to three scans so that users at a site can see what changed. In addition, State had not adequately documented all of the controls in place for ensuring the timeliness, accuracy, and completeness of data and based on our review, we could not determine if all of the stated controls were in place or working as intended. Further, State had not implemented formal procedures for systematically validating data and reviewing and reconciling output in iPost on an ongoing basis to detect and correct inconsistent and incomplete data, which State officials confirmed were not in place. Developing, documenting, and implementing these procedures and controls, and ensuring that they are working as intended, can provide increased assurance that information displayed in iPost is consistent, accurate, and complete. State’s implementation of iPost has resulted in improvements to the department’s information security by providing extensive and timely information on vulnerabilities and weaknesses on Windows servers and workstations, while also creating an environment where officials are motivated to fix vulnerabilities based on department priorities. However, State has faced, and will continue to face, challenges in implementing iPost. These challenges include overcoming limitations and technical issues with data collection tools, identifying and notifying individuals with responsibility for site-level security, implementing configuration management, and adopting a continuous monitoring strategy for moving forward in incorporating additional functionality into iPost. The implementation of iPost has enhanced information security at the department by offering a custom application with a common methodology for data collection, analysis, and reporting of information that security officers and system administrators can use to find extensive information on the security of Windows hosts that they are responsible for and fix specified vulnerabilities. For example, information in iPost allows users to: obtain a quick visual overview of compliance, vulnerability, patch, antivirus, and other component status for Windows hosts via the site summary report; access information about the status of security controls to determine the extent to which the controls are implemented correctly; and determine which hosts were scanned or not scanned and when this occurred. iPost and the risk scoring program have also facilitated the identification of other potential security problems since users could make connections between pieces of data to find possible trends or patterns. For example, one official responded in the survey that he was able to identify a network performance problem by reviewing data available on the iPost portal and as a result, increase the data transmission rates over the network for his site. In addition, since regional and enterprise managers have access to iPost data for sites for the region or enterprise, they have increased awareness of security issues at specific sites and across the enterprise, allowing department officials a common language with which to discuss vulnerabilities and make decisions regarding their mitigation. Moreover, the inclusion of a scoring approach, with associated ranking of sites and letter grades within iPost, has created a mechanism for the department chief information security officer to use in conveying to system administrators the department’s priorities in addressing the mitigation of identified vulnerabilities or implementation of particular patches, among other things. The scoring method has motivated security officers and system administrators to focus on the vulnerabilities that have been given the highest scores first and mitigate these weaknesses on affected machines. This approach also allows regional and enterprise officials who review the letter grades and rankings to identify sites where improvements need to be made. Having this capability has enabled the department to respond to emerging threats associated with vulnerabilities in commercial products that occurred over the past year. iPost implementation has also enhanced information security at State because having a continuous monitoring program in place provides information on weaknesses affecting Windows devices. In particular, controls on these devices are assessed more often than the testing and evaluations of controls that are performed as part of certification and accreditation of OpenNet every 3 years. By taking steps to implement continuous monitoring through iPost, State has been able to obtain information on vulnerabilities and weaknesses affecting tens of thousands of Windows devices on its OpenNet network every couple of days, weekly, or biweekly. Having this type of capability has enabled department officials to identify vulnerabilities and fix them more rapidly than in years prior to iPost implementation. Limitations in the capabilities of commercially available tools and technical issues with the tools used to collect data on vulnerabilities created challenges for State implementing a continuous monitoring program. State officials stated that when they initially began to conceptualize the application there were no commercial products available with the functionality and capabilities needed, so they developed iPost with the assistance of contractors. There were challenges involved with iPost’s development, including resolving the technical issues with using scanning tools and displaying the results obtained from various data collection tools that had different data file formats. For example, State officials identified the following technical issues with the data collection tools: Certain tools did not always check each control setting as expected, did not always scan hosts when scheduled, or created false positives that had to be analyzed and explained. A vendor did not consistently keep its scanning tool up to date with the common vulnerabilities and exposures from the National Vulnerability Database. Scanning tools of different vendors used different approaches for scoring groups of vulnerabilities, so when the agent software scanner of a new vendor was implemented, State had to curve scores so that the disparities did not penalize the site. Another challenge with running scans is that scanning tools do not have the capability to scan tens of thousands of hosts at one time without significant network performance degradation. Therefore, the department has had to establish scanning schedules so all hosts can be scanned over a period of time. State officials stated they had taken steps to address these challenges by working with a vendor to enhance its data collection tool and selecting an alternate tool when appropriate. In addition, department officials stated they were working with other agencies and a contractor to develop additional capabilities that better meet their needs. Building these relationships could benefit the department as it moves forward in monitoring additional controls and developing additional capabilities in iPost. According to Standards for Internal Control in the Federal Government, authority and responsibility should be clearly assigned throughout the organization and clearly communicated to all employees. Responsibility for decision making is clearly linked to the assignment of authority, and individuals are held accountable accordingly. iPost generally identified the local administrator(s) for each Windows host who would generally have the access permissions necessary to resolve nonexception weaknesses on the host. However, iPost did not identify the individual or contact point at each site or operational unit who had site- level responsibility for reviewing iPost site reports, monitoring the security state of the site’s hosts, and ensuring that the control weaknesses identified on all hosts at the site were resolved. In particular, there was confusion at the department as to who was responsible for operational units when this information was requested, and the information that was subsequently provided was inaccurate for several units. As a result, the department has reduced assurance that responsibility for monitoring the security state of and resolving known weaknesses on a site’s Windows hosts is clearly conveyed. In addition, departmental officials did not always notify senior managers at sites with low security grades of the need to fix security weaknesses. According to State officials, operational units in iPost with grades C- or below for 3 consecutive months are to receive warning letters indicating the need to improve their grades. From April 2009 to March 2010, 62 out of 483 sites received letters noting the need for improvement; however, 6 additional sites should have received letters but did not. In addition, 33 sites that received at least one warning letter should have received one or more additional warnings for months with low grades but did not. As a result, senior managers may not have been fully aware of the security state of Windows hosts at sites they oversee. According to the Foreign Affairs Handbook, the development of new IT services, systems and applications, and feature and maintenance enhancements are to follow the guidance outlined in the Foreign Affairs Manual. The Foreign Affairs Manual states that configuration management plans should be developed for IT projects and identify the system configuration, components, and the change control processes to be put in place. Effective configuration management also includes a disciplined process for testing configuration changes and approving modifications, including the development of test plan standards and documentation and approval of test plans, to make sure the program operates as intended and no unauthorized changes are introduced. State had not fully implemented configuration management for iPost. Although the department had maintained release notes on updates, scoring documents, and presentations on iPost, key information about the program and its capabilities was not fully documented. For example, there were no diagrams of the architecture of iPost or a configuration baseline. In addition, there was no documentation of appropriate authorization and approval of changes included in iPost updates. Furthermore, although State improved its process for testing applications and subsequent versions of iPost from a manual and informal testing process in April 2010, it still lacks a written test plan and acceptance testing process with new releases being approved prior to release. For example, test procedures were not performed or documented to ensure that scripts for applying scoring rules matched the stated scoring methodology and that the scoring scripts were sufficiently tested to ensure that they fulfilled State’s intended use. As the department moves forward with implementation of additional capabilities for iPost, the need for a robust configuration management and testing process increases. Until such a process is fully developed, documented, and maintained, State has reduced assurance that iPost is configured properly and updates or changes to the application and scoring rules are working as intended. According to NIST, as part of a risk management framework for federal information systems, a strategy for the selection of appropriate security controls to monitor and the frequency of monitoring should be developed by the information system owner and approved by the authorizing official and senior information security officer. Priority for selection of controls to monitor should be given to controls that are likely to change over time. In addition, the security status of the system should be reported to the authorizing official and other appropriate organizational officials on an ongoing basis in accordance with the monitoring strategy. The authorizing official should also review the effectiveness of deployed controls on an ongoing basis to determine the current risk to organizational operations and assets. According to the Foreign Affairs Manual, risk management personnel should balance the tangible and intangible cost to the department of applying security safeguards against the value of the information and the associated information system. While State has reported success with implementing iPost to provide ongoing monitoring of certain controls over Windows hosts on OpenNet and reporting the status of these controls across the enterprise to appropriate officials, the department faces an ongoing challenge in continuing this success because it does not have a documented continuous monitoring strategy in place. Although the department began continuous monitoring before applicable detailed federal guidance was available and selected controls to monitor based on the capabilities of existing data collection tools, the department has not re-evaluated the controls monitored to determine whether the associated risk has changed. In addition, although department officials reported they were working to implement additional controls, there was no documentation to indicate whether the department had weighed the associated risk and the tangible and intangible costs associated with implementation when selecting which controls they intended to monitor. Furthermore, the frequency of how often the security status of the Windows hosts should be reported to the authorizing official and other appropriate officials was not documented. Therefore, until the department develops, documents, and implements a continuous monitoring strategy, the department may not have sufficient assurance that it is effectively monitoring the deployed security controls and reporting the security status to designated officials with sufficient frequency. Leading practices for program management, established by the Project Management Institute in The Standard for Program Management, state that the information that program stakeholders need should be made available in a timely manner throughout the life cycle of a program. In addition, Standards for Internal Control in the Federal Government states that information should be communicated to management and others within the agency who need it. Management should also ensure there are adequate means of communicating with external stakeholders that may have a significant impact on the agency achieving its goals. A further ongoing challenge for the department is understanding and managing internal and external stakeholders’ expectations for continuous monitoring activities in terms of what goals and objectives can reasonably be achieved with iPost. These expectations include: Lowering scores in iPost always implies that risks to the individual sites are decreasing. With the current scoring approach used in iPost, lowering a score may imply that the associated risks to the site are being lowered as well, but there may be other reasons for the score being adjusted that are not related to mitigating the risk to particular hosts or sites. In particular, State officials have reported that (1) curving of the scores is performed in order to promote fairness; (2) exceptions are granted which shift the score from one operational unit to another; and (3) moving responsibility for hosts at overseas units to domestic units, which adjusts the scores accordingly. State officials should be careful in conveying to managers who make decisions based on scores and grades that lowering of scores in iPost doesn’t necessarily indicate that risks to the department are decreasing. Having continuous monitoring may replace the need for other assessment and authorization activities. According to NIST, a well designed and managed continuous monitoring program can transform an otherwise static and occasional security control assessment and risk determination process that is part of periodic assessment and authorization into a dynamic process that provides essential, near, real-term security status-related information. However, continuous monitoring does not replace the explicit review and acceptance of risk by an authorizing official on an ongoing basis as part of security authorization and in itself, does not provide a comprehensive, enterprisewide risk management approach. In addition, since continuous monitoring may identify risks associated with control weaknesses on a frequent basis, there may be instances where the problem cannot be fixed immediately, such as cases where State granted exceptions for weaknesses for periods of a year or more. There will need to be a mechanism in place for the designated authority to approve the associated risks from granting these exceptions. As the department moves forward with implementation of additional capabilities, it will be important to recognize the limitations of continuous monitoring when undertaking these efforts. State officials confirmed that managing stakeholder expectations, in particular external stakeholders, had been a challenge. The Chief Information Security Officer (CISO) stated that the department was attempting to address these expectations by clarifying information or giving presentations to external audiences, and specifically communicated that iPost was not intended to entirely replace all certification and accreditation activities. If State continues to provide reliable and accurate information regarding continuous monitoring capabilities to both internal and external stakeholders, then the department should be able to effectively manage stakeholder expectations. State’s implementation of iPost has improved visibility over information security at the department by providing enhanced monitoring of Windows hosts on the OpenNet network with nearer-to-real-time awareness of security vulnerabilities. As part of this effort, State’s development of a risk scoring program has led the way in creating a mechanism that prioritizes the work of system administrators to mitigate vulnerabilities; however, it does not incorporate all aspects of risk. Establishing a process for defining and prioritizing risk through a scoring mechanism is not simple and solutions to these issues have not yet been developed at State. Neverthless, State’s efforts to work on addressing these issues could continue to break new ground in improving the visibility over the state of information security at the department. iPost has helped IT administrators identify, monitor, and mitigate information security weaknesses on Windows hosts. In addition, State officials reported that using iPost had led them to make other security improvements at their sites. However, while iPost provides a useful tool for identifying, monitoring, and reporting on vulnerabilities and weaknesses, State officials have not used iPost results to update key security documents which can limit the effectiveness of those documents in guiding future risk management activities. As part of iPost implementation, State has implemented several controls that are intended to help ensure timeliness, accuracy, and completeness of iPost data; however, vulnerability scans were not always conducted according to State’s schedule, and scanning results were uploaded to iPost in an inconsistent manner. Further, iPost data were not always consistent and complete. The acquisition and implementation of new data collection tools may help State overcome technical limitations of its scanning tool. Establishing robust procedures for validating data and reviewing and reconciling output on an ongoing basis to ensure data consistency, accuracy, and completeness can provide additional assurance to iPost users and managers who make risk management decisions regarding the allocation and prioritization of resources for security mitigation efforts at sites or across the enterprise based on iPost data. iPost provides several benefits in terms of providing more extensive and timely information on vulnerabilities, while also creating an environment where officials are motivated to fix vulnerabilities based on department priorities. Nevertheless, State faces ongoing challenges with continued implementation of iPost. As State implements additional capabilities and functionality in iPost, the need increases for the department to identify and notify individuals responsible for site-level security, develop configuration management and testing documentation, develop a continuous monitoring strategy, and manage and understand internal and external stakeholder expectations in order to ensure the continued success of the initiative for enhancing department information security. To improve implementation of iPost at State, we recommend that the Secretary of State direct the Chief Information Officer to take the following seven actions: Incorporate the results of iPost’s monitoring of controls into key security documents such as the OpenNet security plan, security assessment report, and plan of action and milestones. Document existing controls intended to ensure the timeliness, accuracy, and completeness of iPost data. Develop, document, and implement procedures for validating data and reviewing and reconciling output in iPost to ensure data consistency, accuracy, and completeness. Clearly identify in iPost individuals with site-level responsibility for monitoring the security state and ensuring the resolution of security weaknesses of Windows hosts. Implement procedures to consistently notify senior managers at sites with low security grades of the need for corrective actions, in accordance with department criteria. Develop, document, and maintain an iPost configuration management and test process. Develop, document, and implement a continuous monitoring strategy that addresses risk, to include changing threats, vulnerabilities, technologies, and missions/business processes. In written comments on a draft of this report signed by the Chief Financial Officer for the Department of State, reproduced in appendix III, the department said the report was generally helpful in identifying the challenges State faces in implementing a continuous monitoring program around the world. In addition, State described metrics that it uses for correcting known vulnerabilities and measuring relative risks at sites. The department also concurred with two of our recommendations, partially concurred with two, and did not concur with three. Specifically, State concurred with our recommendations and indicated that it has or will (1) implement procedures to consistently notify senior managers at sites with low security grades of the need for corrective actions, in accordance with department criteria, and (2) develop, document, and implement a continuous monitoring strategy. State partially concurred with our recommendation to develop, document, and implement procedures for validating data and reviewing and reconciling output in iPost to ensure data consistency, accuracy, and completeness. The department stated that it had developed and implemented procedures for validating and testing output in iPost by scanning for vulnerabilities every 7 days and establishing three scoring components to score hosts when data collection tools do not correctly report the data required to compute a score. We agree and acknowledge in our report that the department has established these controls; however, the controls do not always ensure that if data is collected, it is accurate and complete. As mentioned in the report, we identified instances where iPost data was inconsistent, incomplete, or inaccurate, including the scoring of hosts for missed vulnerability scans when a scan had occurred. State officials make decisions about the prioritization of control weakness mitigation activities and allocation of resources based on information in iPost and so the accuracy and completeness of that information is important. Having procedures for validating data and reconciling the output in iPost will help ensure that incomplete or incorrect data is detected and corrected, and documenting these procedures will help ensure that they are consistently implemented. State also partially concurred with our recommendation that the department develop, document, and maintain an iPost configuration management and test process. The department questioned the need to have a diagram of the architecture of iPost and a written test plan and acceptance testing process, and stated that our report noted State had improved its process for testing versions of iPost. We have modified the report to provide additional context for the statement regarding State’s testing process in order to clarify any misunderstanding. In addition, as mentioned in the report, we identified areas where testing procedures were not performed or documented, including ensuring the scripts for applying the scoring rules matched the stated scoring methodology. In addition to lacking basic diagrams showing iPost interactions, we also determined that the department lacked a configuration baseline and documented approval process for iPost changes. Having a robust configuration management and testing process helps to provide reasonable assurance that iPost is configured properly, that updates or changes to the application are working as intended, and that no authorized changes are introduced, all of which helps to ensure the security and effectiveness of the continuous monitoring application. State did not concur with our recommendation for incorporating the results of iPost’s monitoring of controls into key security documents such as the OpenNet security plan, security assessment report, and plan of action and milestones. State did not provide a rationale for its nonconcurrence with our recommendation, and instead focused on providing additional information about the department’s use of metrics related to assigning risk values. As NIST guidance indicates, incorporating results from continuous monitoring activities into these key documents supports the process of ongoing authorization and near real- time risk management. In addition, as mentioned in the report, State has granted exceptions for weaknesses in iPost for periods of a year or more but has not created or updated plans of action and milestones to guide and monitor the remediation of these exceptions. Continuous monitoring does not replace the explicit review and acceptance of risk by an authorizing official on an ongoing basis as part of security authorization. The results of iPost’s monitoring of controls, including the ongoing monitoring and remediation of the exceptions, needs to be documented in order to identify the resources and timeframes necessary for correcting the weaknesses. In addition, the designated authority will need to review these results to ensure OpenNet is operating at an acceptable level of risk. In addition, the department did not concur with our recommendation to document existing controls intended to ensure the timeliness, accuracy, and completeness of iPost data because it stated that it regularly evaluates iPost data in these areas and stated that further documentation was of questionable value. However, as mentioned in our report, we identified incomplete, inconsistent, or inaccurate data in iPost during our review and could not determine if all of the controls the department told us they implemented were actually in place or working as intended. Documenting the controls helps to provide assurance that all appropriate controls have been considered and can be used as a point of reference to periodically assess whether they are working as intended. The department also did not concur with our recommendation to clearly identify in iPost individuals with site-level responsibility for monitoring the security state and ensuring the resolution of security weaknesses of Windows hosts. The department noted that it failed to understand the necessity for individually naming those staff with site-level responsibility in iPost since we had surveyed State officials regarding their use of iPost. As we noted in the report, the department relies on users to report when inaccurate and incomplete iPost data and scoring is identified, so that it may be investigated and corrected as appropriate—even though there is no list in iPost showing who is responsible for a particular operational unit. As we discovered when we surveyed State officials, there was confusion at the department as to who was responsible for operational units and information provided to us on who was responsible was incorrect for several units. To clarify this issue, we have incorporated additional context in the report on identifying individuals with responsibility for site- level security. Lastly, the department did not concur with our findings that the iPost risk scoring program does not provide a complete view of the information security risks to the department. Although the department’s response generally did not address the findings made in the report, the department did state that progress in addressing control weaknesses in iPost had led to an 89 percent reduction in measured cyber security risk and that it was impossible and impracticable to cover all areas of information security and security controls in NIST 800-53 as part of a continuous monitoring program. However, we did not state that all areas of information security and all controls in NIST 800-53 should be monitored as part of such a program. Rather, we stated that because iPost monitors only Windows devices and not other devices on OpenNet, addresses a select set of controls, and because State officials could not demonstrate the extent to which all components that are needed to measure risk— threats, the potential impacts of the threats, and the likelihood of occurrence—were considered when developing the scoring, that iPost does not provide a complete view of the information security risks to the department. Furthermore, as we mentioned in the report, the department should exercise care in implying that the lowering of scores in iPost means that risks to individual sites are decreasing as there may be other reasons for the score being adjusted that are not related to the mitigation of risk to particular hosts or sites, such as curving of scores or shifting of scores from one operational unit to another. While such activities may promote fairness, the lowering of scores may not necessarily indicate that risks to the department are decreasing. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of State and interested congressional committees. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-6244 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. The objectives of our review were to determine (1) the extent to which the Department of State (State) has identified and prioritized risk to the department in its risk scoring program; (2) how agency officials use iPost information to implement security improvements; (3) the controls for ensuring the timeliness, accuracy, and completeness of iPost information; and (4) the benefits and challenges associated with implementing iPost. To address our objectives, we conducted our review in Washington, D.C., where we obtained and analyzed program documentation, reports, and other artifacts specific to iPost, the scoring program and components, and data collections tools; and interviewed State officials. To address the first objective, we analyzed guidance from the National Institute of Standards and Technology (NIST) on risk management and vulnerability scoring and compared it to iPost risk scoring documentation to determine whether the department’s criteria and methodology were consistent with federal guidance. Where documentation on the department’s process for defining and prioritizing risk did not exist, we obtained information from agency officials in these areas where possible. We also interviewed agency officials from NIST to obtain information on the Common Vulnerability Scoring System and how agencies can use the scoring to more accurately reflect risk to agency environments. To address the second objective, we conducted interviews with State’s Chief Information Officer, Deputy Chief Information Officer for Operations, Chief Information Security Officer, selected Executive Directors, Regional Computer Security Officers, and Information Systems Officers or Information Systems Security Officers to obtain information on how these officials used iPost, in particular what information or summary reports they used from iPost to make decisions about security improvements and what types of security improvements were made. We analyzed the information provided by the officials to determine patterns regarding what information were used from iPost and what types of improvements were made. For the third objective, we analyzed department requirements for frequency of updates, accuracy, and completeness of iPost data to determine what controls should be in place. We obtained documentation and artifacts on department controls, or other mechanisms or procedures for each of the scoring components covered in iPost related to frequency, accuracy, and completeness of data and compared these to department requirements. Where the department lacked requirements in these areas, we analyzed our guidance on internal controls and assessment of controls for data reliability to determine what criteria should be in place to provide sufficient assurance of accurate, complete, and timely data. In areas where documentation on the department’s controls did not exist, we obtained information from department officials where possible. We also selected 15 units from the list of operational units to perform analyses to determine the frequency, accuracy, and completeness of data in iPost. Operational units were selected based on location (domestic or overseas), the number of hosts at the site, and bureau to ensure representation from among geographic and functional bureaus within the department. Frequency data obtained from iPost was tabulated to determine the number of hosts scanned and the dates scanned, and then the data was compared to the scanning schedule to determine the frequency in which scans occurred at the site for the time period of July 19, 2010, through September 8, 2010. For accuracy and completeness, we compared detailed screens on information related to vulnerability and security compliance components for each of the above 15 sites with generated reports obtained from iPost. We also obtained raw scan data from State’s scanning tool for three financial center sites and compared that to iPost to check frequency and accuracy, however, an analysis of the data obtained determined it was unusable due to inconsistencies with how the data were reformatted when viewed. In addition, for completeness, we obtained detailed screen information on the configuration settings scanned as part of the security compliance component from one site and compared the scanned settings evaluated to the list of required settings in a Diplomatic Security mandatory security setting document for Windows XP. To address the fourth objective, we analyzed federal guidance on what activities should be taken as part of implementation of continuous monitoring, as well as department policies and guidance related to information technology management and projects and compared it to department activities undertaken for iPost implementation. We also obtained descriptions of benefits and challenges from the Chief Information Officer, Deputy Chief Information Officer for Operations, Chief Information Security Officer, selected Executive Directors, Regional Computer Security Officers, and Information Systems Officer or Information Systems Security Officers. We analyzed the information obtained from the department, federal guidance, and the results of our findings for the other objectives to identify patterns related to the benefits and challenges of implementation. For our second, third, and fourth objectives, we also obtained information through a survey of individuals at domestic and overseas sites to understand iPost current capabilities as of August of 2010. We surveyed individuals at 73 of the 491 operational units in iPost. We selected survey sites by reviewing the list of operational units in iPost and chose domestic sites from among each of the functional bureaus, and overseas sites from among each of the geographic bureaus to make sure there was coverage for each bureau and region in the sample. Sites within each functional and geographic bureau were selected based on the number of hosts at the site and the current letter grade received in order to include sites with varying numbers of hosts and grade scores. We developed a survey instrument to gather information from domestic and overseas department officials on how they used iPost at their location, whether they had experienced problems with using data collection tools, and what benefits and challenges they had experienced with implementation between August 1, 2009, and August 30, 2010. Our final sample included 73 sites (36 overseas and 37 domestic). The sample of sites we surveyed was not a representative sample and the results from our survey cannot be generalized to apply to any other sites outside those sampled. However, the interviews and survey information provided illustrative examples of the perspectives of various individuals about iPost’s current and future capabilities. We identified a specific respondent at each site by either reviewing the contact list on State’s Web site or asking State officials. This person was the Information Management Officer, Information System Officer, System Administrator, or Information System Security Officer, or the acting or assistant official in one of these positions at a given site. To minimize errors that might occur from respondents interpreting our questions differently from our intended purpose, we pretested the questionnaire by phone with State officials who were in positions similar to the respondents who would complete our actual survey during four separate sessions. During these pretests, we asked the officials to complete the questionnaire as we listened to the process. We then interviewed the respondents to check whether (1) the questions were clear and unambiguous, (2) the terms used were precise, (3) the questionnaire was unbiased, and (4) the questionnaire did not place an undue burden on the officials completing it. We also submitted the questionnaire for review by a GAO survey methodology expert. We modified the questions based on feedback from the pretests and review, as appropriate. Overall, of the 73 sampled sites, 40 returned completed questionnaires and 2 of the nonresponding sites were ineligible because they had been consolidated into other sites, leading to a final response rate of 57.1 percent; however, not all respondents provided answers to every question. Two of the sites answered about their own site and other sites under their supervision; each of these was treated as a single data point (i.e., site) in statistical analyses. We reviewed all questionnaire responses, and followed up by phone and e-mail to clarify the responses as appropriate. The practical difficulties of conducting any survey may introduce nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents, or the types of respondents who do not respond to a question can introduce errors into the survey results. We included steps in both the data collection and data analysis stages to minimize such nonsampling errors. We examined the survey results and performed computer analyses to identify inconsistencies and other indications of error, and addressed such issues as necessary. An independent analyst checked the accuracy of all computer analyses to minimize the likelihood of errors in data processing. In addition, GAO analysts answered respondent questions and resolved difficulties respondents had answering our questions. We analyzed responses to closed-ended questions by counting the response for all sites and for overseas and domestic sites separately. For questions that asked respondents to provide a narrative answer, we compiled the open answers in one document that was analyzed and used as examples in the report. We conducted this performance audit from March 2010 to 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. A selection of key iPost screens and reports for sites are described below. The screen provides summary information on the site including: site’s grade; host summary statistics by category which provides a graphical representation of the number of hosts that are compliant or not compliant; Active Directory (AD) account information for users and computers; and network activity at the site (see fig. 6). The site risk score summary screen provides a summary of the site’s risk score summary, including the site’s grade, average risk score, and total risk score. A summary table shows the total risk score broken down by category. A graphical presentation of the risk score by component highlights components with high risk scores (see fig. 7). Detailed component screens provide breakdowns of the scoring results for each host. For example, the detailed security compliance screen (see fig. 8) identifies each host, the type of host, the date of the last security compliance scan, and the total risk score assigned the host. Users can select the details option to see more specific information on the security settings that failed compliance and the associated score that was assigned. The risk score advisory report provides a summary of all the scoring issues for the site and summary advice on how to improve the site’s score. Summary information includes the site’s grade, average risk score, and total risk score. A graphical presentation of the risk score by component highlights components with high risk scores (see fig. 9). In addition to the individual named above, Ed Alexander and William Wadsworth (Assistant Directors), Carl Barden, Neil Doherty, Rebecca Eyler, Justin Fisher, Valerie Hopkins, Tammi Kalugdan, Linda Kochersberger, Karl Seifert, Michael Silver, Eugene Stevens, and Henry Sutanto made key contributions to this report. | The Department of State (State) has implemented a custom application called iPost and a risk scoring program that is intended to provide continuous monitoring capabilities of information security risk to elements of its information technology (IT) infrastructure. Continuous monitoring can facilitate nearer real-time risk management and represents a significant change in the way information security activities have been conducted in the past. GAO was asked to determine (1) the extent to which State has identified and prioritized risk to the department in its risk scoring program; (2) how agency officials use iPost information to implement security improvements; (3) the controls for ensuring the timeliness, accuracy, and completeness of iPost information; and (4) the benefits and challenges associated with implementing iPost. To do this, GAO analyzed program documentation and compared it to relevant standards, interviewed and surveyed department officials, and performed analyses on iPost data. State has developed and implemented a risk scoring program that identifies and prioritizes several but not all areas affecting information security risk. Specifically, the scope of iPost's risk scoring program (1) addresses Windows hosts but not other IT assets on its major unclassified network; (2) covers a set of 10 scoring components that includes many, but not all, information system controls that are intended to reduce risk; and (3) assigns a score for each identified security weakness, although State could not demonstrate the extent to which scores are based on risk factors such as threat, impact, or likelihood of occurrence that are specific to its computing environment. As a result, the iPost risk scoring program helps to identify, monitor, and prioritize the mitigation of vulnerabilities and weaknesses for the areas it covers, but it does not provide a complete view of the information security risks to the department. State officials reported they used iPost to (1) identify, prioritize, and fix Windows vulnerabilities that were reported in iPost and (2) to implement other security improvements at their sites. For example, more than half of the 40 survey respondents said that assigning a numeric score to each vulnerability identified and each component was very or moderately helpful in their efforts to prioritize vulnerability mitigation. State has implemented several controls aimed at ensuring the timeliness, accuracy, and completeness of iPost information. For example, State employed the use of automated tools and collection schedules that support the frequent collection of monitoring data, which helps to ensure the timeliness of iPost data. State also relies on users to report when inaccurate and incomplete iPost data and scoring are identified, so they may be investigated and corrected as appropriate. Notwithstanding these controls, the timeliness, accuracy, and completeness of iPost data were not always assured. For example, several instances existed where iPost data were not updated as frequently as scheduled, inconsistent, or incomplete. As a result, State may not have reasonable assurance that data within iPost are accurate and complete with which to make risk management decisions. iPost provides many benefits but also poses challenges for the department. iPost has resulted in improvements to the department's information security by providing more extensive and timely information on vulnerabilities, while also creating an environment where officials are motivated to fix vulnerabilities based on department priorities. However, State has faced, and will continue to face, challenges with the implementation of iPost. These include (1) overcoming limitations and technical issues with data collection tools, (2) identifying and notifying individuals with responsibility for site-level security, (3) implementing configuration management for iPost, (4) adopting a strategy for continuous monitoring of controls, and (5) managing stakeholder expectations for continuous monitoring activities. GAO recommends the Secretary of State direct the Chief Information Officer to take a number of actions aimed at improving implementation of iPost. State agreed with two of GAO's recommendations, partially agreed with two, and disagreed with three. GAO continues to believe that its recommendations are valid and appropriate. |
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For 16 years, DOD’s supply chain management processes, previously identified as DOD inventory management, have been on our list of high- risk areas needing urgent attention because of long-standing systemic weaknesses that we have identified in our reports. We initiated our high- risk program in 1990 to report on government operations that we identified as being at high risk for fraud, waste, abuse, and mismanagement. The program serves to identify and help resolve serious weaknesses in areas that involve substantial resources and provide critical services to the public. The department’s inventory management of supplies in support of forces was one of the initial 14 operational areas identified as high risk in 1990 because, over the previous 20 years, we had issued more than 100 reports dealing with specific aspects and problems in DOD’s inventory management. These problems included excess inventory levels, inadequate controls over items, and cost overruns. As a result of this work, we had suggested that DOD take some critical steps to correct the problems identified. Since then, our work has shown that the problems adversely affecting supply support to the warfighter—such as requirements forecasts, use of the industrial base, funding, distribution, and asset visibility—were not confined to the inventory management system, but also involved the entire supply chain. In 2005, we modified the title for this high-risk area from “DOD Inventory Management” to “DOD Supply Chain Management.” In the 2005 update, we noted that during Operation Iraqi Freedom, some of the supply chain problems included backlogs of hundreds of pallets and containers at distribution points, millions of dollars spent in late fees to lease or replace storage containers because of distribution backlogs and losses, and shortages of such items as tires and radio batteries. Removal of the high-risk designation is considered when legislative and agency actions, including those in response to our recommendations, result in significant and sustainable progress toward resolving a high-risk problem. Key determinants include a demonstrated strong commitment to and top leadership support for addressing problems, the capacity to do so, a corrective action plan that provides for substantially completing corrective measures in the near term, a program to monitor and independently validate the effectiveness of corrective measures, and demonstrated progress in implementing corrective measures. Last year, with the encouragement of OMB, DOD developed a plan for improving supply chain management that could reduce its vulnerability to fraud, waste, abuse, and mismanagement and place it on the path toward removal from our list of high-risk areas. This plan, initially released in July 2005, contains 10 initiatives proposed as solutions to address the root causes of problems DOD identified in the areas of forecasting requirements, asset visibility, and materiel distribution. By committing to improve these three key areas, DOD has focused its efforts on the areas we frequently identified as impeding effective supply chain management. For each of the initiatives, the plan contains implementation milestones that are tracked and updated monthly. Since October 2005, DOD has continued to make progress implementing the initiatives in its supply chain management improvement plan, but it will be several years before the plan can be fully implemented. Progress has been made in implementing several of the initiatives, including its Joint Regional Inventory Materiel Management, Readiness Based Sparing, and the Defense Transportation Coordination Initiative. For example: Within the last few months, through its Joint Regional Inventory Materiel Management initiative, DOD has begun to streamline the storage and distribution of defense inventory items on a regional basis, in order to eliminate duplicate materiel handling and inventory layers. Last year, DOD completed a pilot for this initiative in the San Diego region and, in January 2006, began a similar transition for inventory items in Oahu, Hawaii. Readiness Based Sparing, an inventory requirements methodology that the department expects to enable higher levels of readiness at equivalent or reduced inventory costs using commercial off-the- shelf software, began pilot programs in each service in April 2006. Finally, in May 2006, the U.S. Transportation Command held the presolicitation conference for its Defense Transportation Coordination Initiative, a long-term partnership with a transportation management services company that is expected to improve the predictability, reliability, and efficiency of DOD freight shipping within the continental United States. DOD has sought to demonstrate significant improvement in supply chain management within 2 years of the plan’s inception in 2005; however, the department may have difficulty meeting its July 2007 goal. Some of the initiatives are still being developed or piloted and have not yet reached the implementation stage, others are in the early stages of implementation, and some are not scheduled for completion until 2008 or later. For example, according to the DOD supply chain management improvement plan, the contract for the Defense Transportation Coordination Initiative is scheduled to be awarded during the first quarter of fiscal year 2007, followed by a 3-year implementation period. The War Reserve Materiel Improvements initiative, which aims to more accurately forecast war reserve requirements by using capability-based planning and incorporating lessons learned in Operation Iraqi Freedom, is not scheduled to begin implementing an improved requirements forecasting process for consumable items as a routine operation until October 2008. The Item Unique Identification initiative, which involves marking personal property items with a set of globally unique data elements to help DOD track items during their life cycles, will not be completed until December 2010 under the current schedule. While DOD has generally stayed on track, DOD has reported some slippage in meeting scheduled milestones for certain initiatives. For example, a slippage of 9 months occurred in the Commodity Management initiative because additional time was required to develop a departmentwide approach. This initiative addresses the process of developing a systematic procurement approach to the department's needs for a group of items. Additionally, the Defense Transportation Coordination Initiative experienced a slippage in holding the presolicitation conference because defining requirements took longer than anticipated. Given the long-standing nature of the problems being addressed, the complexities of the initiatives, and the involvement of multiple organizations within DOD, we would expect to see further milestone slippage in the future. In our October testimony, we also identified challenges to implementation such as maintaining long-term commitment for the initiatives and ensuring sufficient resources are obtained from the organizations involved. Although the endorsement of DOD’s plan by the Under Secretary of Defense for Acquisition, Technology, and Logistics is evidence of a strong commitment to improve DOD’s supply chain management, DOD will have to sustain this commitment as it goes forward in implementing this multiyear plan while also engaged in departmentwide business transformation efforts. Furthermore, the plan was developed at the Office of the Under Secretary of Defense level, whereas most of the people and resources needed to implement the plan are under the direction of the military services, DLA, and other organizations such as U.S. Transportation Command. Therefore, it is important for the department to obtain the necessary resource commitments from these organizations to ensure the initiatives in the plan are properly supported. While DOD has incorporated several broad performance measures in its supply chain management improvement plan, the department continues to lack outcome-focused performance measures for many of the initiatives. Therefore, it is difficult to track and demonstrate DOD’s progress toward improving its performance in the three focus areas of requirements forecasting, asset visibility, and materiel distribution. Performance measures track an agency’s progress made towards goals, provide information on which to base organizational and management decisions, and are important management tools for all levels of an agency, including the program or project level. Outcome-focused performance measures show results or outcomes related to an initiative or program in terms of its effectiveness, efficiency, impact, or all of these. To track progress towards goals, effective performance measures should have a clearly apparent or commonly accepted relationship to the intended performance, or should be reasonable predictors of desired outcomes; are not unduly influenced by factors outside a program’s control, measure multiple priorities, such as quality, timeliness, outcomes, and cost; sufficiently cover key aspects of performance; and adequately capture important distinctions between programs. Performance measures enable the agency to assess accomplishments, strike a balance among competing interests, make decisions to improve program performance, realign processes, and assign accountability. While it may take years before the results of programs become apparent, intermediate measures can be used to provide information on interim results and show progress towards intended results. In addition, when program results could be influenced by external factors, intermediate measures can be used to identify the programs’ discrete contribution to the specific result. For example, DOD could show near-term progress by adding intermediate measures for the DOD supply chain management improvement plan, such as outcome-focused performance measures for the initiatives or for the three focus areas. DOD’s supply chain management improvement plan includes four high- level performance measures that are being tracked across the department, but these measures do not necessarily reflect the performance of the initiatives or explicitly relate to the three focus areas. DOD’s supply chain materiel management regulation requires that functional supply chain metrics support at least one enterprise-level metric. In addition, while not required by the regulation, the performance measures DOD has included in the plan are not explicitly linked to the three focus areas, and it has not included overall cost metrics that might show efficiencies gained through supply chain improvement efforts. The four measures are as follows: Backorders—number of orders held in an unfilled status pending receipt of additional parts or equipment through procurement or repair. Customer wait time—number of days between the issuance of a customer order and satisfaction of that order. On-time orders—percentage of orders that are on time according to DOD’s established delivery standards. Logistics response time—number of days to fulfill an order placed on the wholesale level of supply from the date a requisition is generated until the materiel is received by the retail supply activity. The plan also identifies fiscal year 2004 metric baselines for each of the services, DLA, and DOD overall, and specifies annual performance targets for these metrics for use in measuring progress. For example, one performance target for fiscal year 2005 was to reduce backorders by 10 percent from the fiscal year 2004 level. Table 1 shows each performance measure with the associated fiscal year 2005 performance targets and actuals and whether the target was met. As table 1 shows, DOD generally did not meet its fiscal year 2005 performance targets. However, the impact to the supply chain as a result of implementing the initiatives contained in the plan will not likely be reflected in these high-level performance metrics until the initiatives are broadly implemented across the department. In addition, the high-level metrics reflect the performance of the supply chain departmentwide and are affected by other variables; therefore, it will be difficult to determine if improvements in the high-level performance metrics are due to the initiatives in the plan or other variables. For example, implementing Radio Frequency Identification—technology consisting of active or passive electronic tags that are attached to equipment and supplies being shipped from one location to another and enable shipment tracking—at a few sites at a time has only a very small impact on customer wait time. However, variables such at natural disasters, wartime surges in requirements, or disruption in the distribution process could affect that metric. DOD’s plan lacks outcome-focused performance metrics for many of the specific initiatives. We noted this deficiency in our prior testimony, and since last October, DOD has not added outcome-focused performance metrics. DOD also continues to lack cost metrics that might show efficiencies gained through supply chain improvement efforts, either at the initiative level or overall. In total, DOD’s plan continues to identify a need to develop outcome-focused performance metrics for 6 initiatives, and 9 of the 10 initiatives lack cost metrics. For example, DOD’s plan shows that it expects to have radio frequency identification technology implemented at 100 percent of its U.S. and overseas distribution centers by September 2007, but noted that it has not yet identified additional metrics that could be used to show the impact of implementation on expected outcomes, such as receiving and shipping timeliness, asset visibility, or supply consumption data. Two other examples of initiatives lacking outcome- focused performance measures are War Reserve Materiel, discussed earlier, and Joint Theater Logistics, which is an effort to improve the ability of a joint force commander to execute logistics authorities and processes within a theater of operations. Although the plan contains some performance metrics, many have not been fully defined or are intended to show the status of a project. Measures showing project status are useful and may be most appropriate for initiatives in their early stages of development, but such measures will not show the impact of initiatives on the supply chain during or after implementation. DOD officials noted that many of the initiatives in the supply chain management improvement plan are in the early stages of implementation and that they are working to develop performance measures for them. For example, an official involved with the Joint Theater Logistics initiative stated that the processes necessary for each joint capability needed to be defined before performance metrics could be developed. The recently issued contract solicitation for the Defense Transportation Coordination Initiative contains a number of performance measures, such as on-time pickup and delivery, damage-free shipments, and system availability, although these measures are not yet included in DOD’s supply chain management improvement plan. Additionally, we observed that DOD’s plan does not identify departmentwide performance measures in the focus areas of requirements forecasting, asset visibility, and materiel distribution. Therefore, it currently lacks a means to track and assess progress in these areas. Although DOD has made efforts to develop supply chain management performance measures for implementation across the department, DOD has encountered challenges in obtaining standardized, reliable data from noninteroperable systems. The four high-level performance measures in DOD’s plan were defined and developed by DOD’s supply chain metrics working group. This group includes representatives from the services, DLA, and the U.S. Transportation Command, and meets monthly under the direction of the Office of the Under Secretary of Defense. For example, the working group developed a common definition for customer wait time which was included in DOD guidance. The DOD Inspector General has a review underway to validate the accuracy of customer wait time data and expects to issue a report on its results later this summer. One of the challenges the working group faces in developing supply chain performance measures is the ability to pull standardized, reliable data from noninteroperable information systems. For example, the Army currently does not have an integrated method to determine receipt processing for Supply Support Activities, which could affect asset visibility and distribution concerns. Some of the necessary data reside in the Global Transportation Network while other data reside in the Standard Army Retail Supply System. These two databases must be manually reviewed and merged in order to obtain the information for accurate receipt processing performance measures. DOD recognizes that achieving success in supply chain management is dependent on developing interoperable systems that can share critical supply chain data. The Business Management Modernization Program, one of the initiatives in DOD’s supply chain improvement plan that has been absorbed into the Business Transformation Agency, is considered to be a critical enabler that will provide the information technology underpinning for improving supply chain management. As part of this initiative, DOD issued an overarching business enterprise architecture and an enterprise transition plan for implementing the architecture. We previously reported that Version 3.1 of the business enterprise architecture reflects steps taken by DOD to address some of the missing elements, inconsistencies, and usability issues related to legislative requirements and relevant architecture guidance, but additional steps are needed. For example, we said that the architecture does not yet include a systems standards profile to facilitate data sharing among departmentwide business systems and promote interoperability with departmentwide information technology infrastructure systems. Furthermore, we also stated that the military services’ and defense agencies’ architectures are not yet adequately aligned with the departmental architecture. DOD has multiple plans aimed at improving aspects of logistics, including supply chain management, but it is unclear how all these plans are aligned with one another. In addition to the supply chain management improvement plan, current DOD plans that address aspects of supply chain management include DOD’s Logistics Transformation Strategy, Focused Logistics Roadmap, and Enterprise Transition Plan; and DLA’s Transformation Roadmap. In December 2004, DOD issued its Logistics Transformation Strategy. The strategy was developed to reconcile three logistics concepts—force- centric logistics enterprise, sense and respond logistics, and focused logistics—into a coherent transformation strategy. The force-centric logistics enterprise is OSD’s midterm concept (2005-2010) for enhancing support to the warfighter and encompasses six initiatives, one of which includes “end-to-end distribution.” Sense and respond logistics is a future logistics concept developed by the department’s Office of Force Transformation that envisions a networked logistics system that would provide joint strategic and tactical operations with predictive, precise, and agile support. Focused logistics, a concept for force transformation developed by the Joint Chiefs of Staff, identifies seven key joint logistics capability areas such as Joint Deployment/Rapid Distribution. In September 2005, DOD issued its Focused Logistics Roadmap, also referred to as the “As Is” roadmap. It documents logistics-enabling programs and initiatives directed toward achieving focused logistics capabilities. It is intended to provide a baseline of programs and initiatives for future capability analysis and investment. Seven of the 10 initiatives in the DOD supply chain management improvement plan and some of the systems included in the initiative to modernize the department’s business systems—under the Business Transformation Agency—are discussed in the Focused Logistics Roadmap. In September 2005, DOD’s Enterprise Transition Plan was issued as part of the Business Management Modernization Program. The Enterprise Transition Plan is the department’s plan for transforming its business operations. One of the six DOD-wide priorities contained in the Enterprise Transition plan is Materiel Visibility, which is focused on improving supply chain performance. The Materiel Visibility priority is defined as the ability to locate and account for materiel assets throughout their life cycle and provide transaction visibility across logistics systems in support of the joint warfighting mission. Two of the key programs targeting visibility improvement are Radio Frequency Identification and Item Unique Identification, which also appear in the supply chain management improvement plan. The Defense Logistics Agency’s Fiscal Year 2006 Transformation Roadmap contains 13 key initiatives underway to execute DLA’s role in DOD’s overarching transformation strategy. The majority of the initiatives are those that affect supply chain management, and several are found in DOD’s supply chain management improvement plan. For example, the Integrated Data Environment, Business Systems Modernization, and Reutilization Modernization Program initiatives found in DLA’s Transformation Roadmap are also in the department’s supply chain management improvement plan under the initiative to modernize the department’s business systems. These plans were developed at different points of time, for different purposes, and in different formats. Therefore, it is difficult to determine how all the ongoing efforts link together to sufficiently cover requirements forecasting, asset visibility, and materiel distribution and whether they will result in significant progress toward resolving this high-risk area. Moreover, DOD’s supply chain management improvement plan does not account for initiatives outside OSD’s direct oversight that may have an impact on supply chain management. The initiatives chosen for the plan were joint initiatives under the oversight of OSD in the three focus areas of requirements forecasting, asset visibility, and materiel distribution. However, the U. S. Transportation Command, DLA, and the military services have ongoing and planned supply chain improvement efforts in those areas that are not included in the plan. For example, the U.S. Transportation Command’s Joint Task Force – Port Opening initiative seeks to improve materiel distribution by rapidly extending the distribution network into a theater of operations. Furthermore, DLA is implementing a National Inventory Management Strategy, which is an effort to merge distinct wholesale and retail inventories into a national inventory, provide more integrated management, tailor inventory to services’ requirements, and reduce redundant inventory levels. Another example is the Army’s efforts to field two new communications and tracking systems, the Very Small Aperture Terminal and the Mobile Tracking System, to better connect logisticians on the battlefield and enable them to effectively submit and monitor their supply requisitions. DOD officials told us they would be willing to consider adding initiatives that impact the three focus areas. Until DOD clearly aligns the supply chain management improvement plan with other department plans and ongoing initiatives, supply chain stakeholders will not have a comprehensive picture of DOD’s ongoing efforts to resolve problems in the supply chain. Although we are encouraged by DOD’s planning efforts, DOD lacks a comprehensive, integrated, and enterprisewide strategy to guide logistics programs and initiatives. In the past, we have emphasized the need for an overarching logistics strategy that will guide the department’s logistics planning efforts. Without an overarching logistics strategy, the department will be unable to most economically and efficiently support the needs of the warfighter. To address this concern and guide future logistics programs and initiatives, DOD is in the process of developing a new strategic plan—the “To Be” roadmap. This plan is intended to portray where the department is headed in the logistics area, how it will get there, and monitor progress toward achieving its objectives, as well as institutionalize a continuous assessment process that links ongoing capability development, program reviews, and budgeting. According to DOD officials, the initiatives in the supply chain management improvement plan will be incorporated into the “To Be” logistics roadmap. The roadmap is being developed by a working group representing the four services, DLA, the U.S. Transportation Command, the U.S. Joint Forces Command, the Joint Staff, the Business Transformation Agency, and the Office of the Secretary of Defense. The working group reports to a Joint Logistics Group comprised of one-star generals and their equivalents representing these same organizations. Additionally, the Joint Logistics Board, Defense Logistics Board, and the Defense Logistics Executive (the Under Secretary of Defense for Acquisition, Technology, and Logistics) would provide continuous feedback and recommendations for changes to the roadmap. Regarding performance measures, the roadmap would link objective, quantifiable, and measurable performance targets to outcomes and logistics capabilities. The first edition of the “To Be” roadmap is scheduled for completion in February 2007, in conjunction with the submission of the President’s Budget for Fiscal Year 2008. Updates to the roadmap will follow on an annual basis. Efforts to develop the “To Be” roadmap show promise. However, until it is completed, we will not be able to assess how the roadmap addresses the challenges and risks DOD faces in its supply chain improvement efforts. DOD faces significant challenges in improving supply chain management over the coming years. As it develops its “To Be” roadmap for logistics, DOD would likely benefit from including outcome-focused performance measures demonstrating near-term progress in the three focus areas of requirements forecasting, asset visibility, and materiel distribution. With outcome-focused performance measures, DOD will be able to show results in these areas that have been long identified as systemic weaknesses in the supply chain. While we recognize the challenge to developing outcome- focused performance measures at the department level, DOD could show near-term progress with intermediate measures. These measures could include outcome-focused measures for each of the initiatives or for the three focus areas. To be most effective, the roadmap also would reflect the results of analysis of capability gaps between its “As Is” and “To Be” roadmaps, as well as indicate how the department intends to make this transition. DOD would also benefit by showing the alignment among the roadmap, the supply chain management improvement plan, and other DOD strategic plans that address aspects of supply chain management. Clearer alignment of the supply chain management improvement plan with other department plans and ongoing initiatives could provide greater visibility and awareness of actions DOD is taking to resolve problems in the supply chain. In the long term, however, a plan alone will not resolve the problems that we have identified in supply chain management. Actions must result in significant progress toward resolving a high-risk problem before we will remove the high-risk designation. Mr. Chairman and Members of the Subcommittee, this concludes my prepared remarks. I would be happy to answer any questions you or other Members of the Subcommittee may have. For further information regarding this testimony, please contact me at 202- 512-8365 or [email protected]. Individuals making contributions to this testimony include Tom Gosling, Assistant Director; Michael Avenick; Susan Ditto; Marie Mak; Thomas Murphy; Janine Prybyla; and Matthew Spiers. Technology consisting of active or passive electronic tags that are attached to equipment and supplies that are shipped from one location to another and enable shipment tracking. Marking of personal property items with a machine- readable Unique Item Identifier, or set of globally unique data elements, to help DOD value and track items throughout their life cycle. Streamlining of the storage and distribution of materiel within a given geographic area in order to eliminate duplicate materiel handling and inventory layers. An inventory requirements methodology that produces an inventory investment solution that enables higher levels of readiness at an equal or lower cost. An improved war reserve requirements forecasting process. Process of developing a systematic procurement approach to the entire usage cycle of a group of items. Improving the ability of a joint force commander to execute logistics authorities and processes within a theater of operations. Provides Combatant Commands with a joint theater logistics capability (supply, transportation, and distribution) for command and control of forces and materiel moving into and out of the theater. Long-term partnership with a coordinator of transportation management services to improve the reliability, predictability, and efficiency of DOD materiel moving within the continental United States by all modes. Departmentwide initiative to advance business transformation efforts, particularly with regard to business systems modernization. X 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 Department of Defense (DOD) maintains a military force with unparalleled logistics capabilities, but it continues to confront decades-old supply chain management problems. The supply chain can be the critical link in determining whether our frontline military forces win or lose on the battlefield, and the investment of resources in the supply chain is substantial. Because of weaknesses in DOD's supply chain management, this program has been on GAO's list of high-risk areas needing urgent attention and transformation since 1990. Last year, DOD developed a plan to resolve its long-term supply chain problems in three focus areas: requirements forecasting, asset visibility, and materiel distribution. In October 2005, GAO testified that the plan was a good first step. GAO was asked to provide its views on DOD's progress toward (1) implementing the supply chain management improvement plan and (2) incorporating performance measures for tracking and demonstrating improvement, as well as to comment on the alignment of DOD's supply chain management improvement plan with other department logistics plans. This testimony is based on prior GAO reports and ongoing work in this area. It contains GAO's views on opportunities to improve DOD's ability to achieve and demonstrate progress in supply chain management. Since October 2005, DOD has continued to make progress implementing the 10 initiatives in its supply chain management improvement plan, but it will take several years to fully implement these initiatives. DOD's stated goal for implementing its plan is to demonstrate significant improvement in supply chain management within 2 years of the plan's inception in 2005, but the time frames for substantially implementing some initiatives are currently 2008 or later. While DOD has generally stayed on track, it has reported some slippage in the implementation of certain initiatives. Factors such as the long-standing nature of the problems, the complexities of the initiatives, and the involvement of multiple organizations within DOD could cause the implementation dates of some initiatives to slip farther. DOD has incorporated several broad performance measures in its supply chain management improvement plan, but it continues to lack outcome-focused performance measures for many of the initiatives. Therefore, it is difficult to track and demonstrate progress toward improving the three focus areas of requirements forecasting, asset visibility, and materiel distribution. Although DOD's plan includes four high-level performance measures that are being tracked across the department, these measures do not necessarily reflect the performance of the initiatives and do not relate explicitly to the three focus areas. Further, DOD's plan does not include cost metrics that might show efficiencies gained through supply chain improvement efforts. In their effort to develop performance measures for use across the department, DOD officials have encountered challenges such as a lack of standardized, reliable data. Nevertheless, DOD could show near-term progress by adding intermediate measures. These measures could include outcome-focused measures for each of the initiatives or for the three focus areas. DOD has multiple plans aimed at improving aspects of logistics, including supply chain management, but it is unclear how these plans are aligned with one another. The plans were developed at different points of time, for different purposes, and in different formats, so it is difficult to determine how all the ongoing efforts link together to sufficiently cover requirements forecasting, asset visibility, and materiel distribution and whether they will result in significant progress toward resolving this high-risk area. Also, DOD's supply chain management improvement plan does not account for initiatives outside the direct oversight of the Office of the Secretary of Defense, and DOD lacks a comprehensive strategy to guide logistics programs and initiatives. DOD is in the process of developing a new plan, referred to as the "To Be" roadmap, for future logistics programs and initiatives. The roadmap is intended to portray where the department is headed in the logistics area, how it will get there, and what progress is being made toward achieving its objectives, as well as to link ongoing capability development, program reviews, and budgeting. However, until it is completed, GAO will not be able to assess how the roadmap addresses the challenges and risks DOD faces in its supply chain improvement efforts. |
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HUD implemented the MTW demonstration program in 1999. As of June 2013, 35 public housing agencies (PHA) were participating through the end of their fiscal year 2018. To put in place the innovations intended under the program’s authorizing legislation, agencies may request waivers of certain provisions in the United States Housing Act of 1937, as amended. For example, housing agencies may combine the funding they are awarded annually from different programs—such as public housing capital funds, public housing operating funds, and voucher funds—into a single, authoritywide funding source. In addition to addressing the program’s three statutory purposes—reduce costs and achieve greater cost-effectiveness in federal housing expenditures, give families with children incentives to obtain employment and become self-sufficient, and increase housing choices for low-income families—MTW agencies must meet five requirements. The agencies must (1) serve substantially the same total number of eligible low-income families that they would have served had funding amounts not been combined; (2) maintain a mix of families (by family size) comparable to those they would have served without the demonstration; (3) ensure that at least 75 percent of households served are very low-income;establish a reasonable rent policy to encourage employment and self- sufficiency; and (5) assure that the housing provided meets HUD’s housing quality standards. (4) A standard agreement (between HUD and each MTW agency) governs the conditions of participation in the program. The agreement includes an attachment that sets out reporting requirements, as well as the information that MTW agencies must include in annual reports. For example, these reports must include detailed information on the impact of each activity. MTW agencies also must self-certify that they are in compliance with three of the five statutory requirements: assisting substantially the same total number of eligible low-income families that they would have served had funding amounts not been combined; maintaining a mix (by family size) comparable to those they would have served had funding amounts not been combined under the demonstration; and ensuring that at least 75 percent of households served are very low-income. In our 2012 report, we identified a number of weaknesses related to MTW data, performance indicators, and identification of lessons learned—all of which resulted in a limited ability to determine program outcomes as they related to statutory purposes. Although MTW agencies reported annually on their activities, which included efforts to reduce administrative costs and encourage residents to work, the usefulness of this information was limited because it was not consistently outcome-oriented. For example, for similar activities designed to promote family self-sufficiency, one MTW agency reported only the number of participants, which is generally considered an output, and another did not provide any performance information. In contrast, a third agency reported on the average income of program graduates, which we consider an outcome. To be consistent with GPRAMA, HUD’s guidance on reporting performance information should indicate the importance of outcome-oriented information.specific guidance on the reporting of performance information—for Without more example, to report quantifiable and outcome-oriented information—HUD could not be assured of collecting information that reflected the outcomes of individual activities. As we reported in 2012, HUD had not identified the performance data needed to assess the results of similar MTW activities or of the program as a whole. Obtaining performance information from demonstration programs is critical—because the purpose of a demonstration is to test which approach obtains positive results. Although HUD started collecting additional data from MTW agencies (including household size, income, and educational attainment) in its MTW database, it had not analyzed the data. And since 2009, HUD had required agencies to provide information on the impact of activities, including benchmarks and metrics, in their annual MTW reports. While these reports were informative, they did not lend themselves to quantitative analysis because the reporting requirements did not call for standardized data, such as the number of residents who found employment. Whether these data would be sufficient to assess similar activities and the program as a whole was not clear, and as of April 2012 HUD had not identified the data it would need for such an assessment. HUD also had not established performance indicators for MTW. According to GPRAMA, federal agencies should establish efficiency, output, and outcome indicators for each program activity as appropriate. Federal internal control standards also require the establishment of performance indicators. As we noted in 2012, specific performance indicators for the MTW program could be based on the three statutory purposes of the program. For example, agencies could report on the savings achieved (reducing costs). However, without performance indicators HUD could not demonstrate the results of the program. The shortage of standard performance data and performance indicators had hindered comprehensive evaluation efforts, which are key to determining the success of any demonstration program. We recommended in 2012 that HUD (1) improve its guidance to MTW agencies on providing performance information in their annual reports by requiring that such information be quantifiable and outcome-oriented, (2) develop and implement a plan for quantitatively assessing the effectiveness of similar activities and for the program, and (3) establish performance indicators for the program. HUD partially agreed with these recommendations. Since our report, HUD has revised the performance reporting requirements for MTW agencies. The Office of Management and Budget (OMB) approved these revisions on May 31, 2013. The new requirements state that MTW agencies are to report standard metrics and report outcome information on the effects of MTW policy changes on residents. HUD also provided a standard format to allow analysis and aggregation across agencies for similar activities. We are currently assessing the extent to which these new requirements address our recommendations. Furthermore, as we indicated in our 2012 report, while HUD had identified some lessons learned on an ad hoc basis, it did not have a systematic process in place for identifying such lessons. As previously noted, obtaining impact information from demonstration programs is critical. Since 2000, HUD had identified some activities that could be replicated by other housing agencies. For example, a HUD-sponsored contractor developed five case studies to describe issues and challenges involved in implementing MTW. However, these and subsequent efforts had shortcomings. In most cases, the choice of lessons learned was based on the opinions of HUD or contracted staff and largely involved anecdotal (or qualitative) data rather than quantitative data. Because HUD had not developed criteria and a systematic process for identifying lessons learned, we reported in 2012 that it was limited in its ability to promote useful practices for broader implementation. Thus, we recommended that HUD create a process to systematically identify lessons learned. HUD agreed and in response, stated that once its revised reporting requirements were implemented, the resulting data would inform an effort to establish lessons learned. Consistent with this, HUD noted that one purpose of the revised reporting requirements that OMB approved in May 2013 was to identify promising practices learned through the MTW demonstration. HUD had policies and procedures in place to monitor MTW agencies but could have done more to ensure that MTW agencies demonstrated compliance with statutory requirements and to identify possible risks relating to each agency’s activities. For example, as noted in our 2012 report, HUD had not issued guidance to MTW agencies clarifying key program terms, including definitions of the purposes and statutory requirements of the MTW program. Federal internal control standards require the establishment of clear, consistent goals and objectives. Agencies also must link each of their activities to one of the three program purposes cited in the MTW authorizing legislation. However, at that time HUD had not clearly defined what some of the statutory language meant, such as “increasing housing choices for low-income families.” HUD officials acknowledged that the guidance could be strengthened. At the time, they told us that they planned to update the guidance to more completely collect information related to the program’s statutory purposes and requirements. As discussed later, HUD has since updated its guidance. Additionally, we reported in 2012 that HUD had only recently assessed agencies’ compliance with two (self-certified) requirements—to serve substantially the same total number of eligible low-income families that they would have served had funding amounts not been combined and ensure that at least 75 percent of households served were very low- income. Also, HUD had not assessed compliance with the third (also self- certified) requirement—to maintain a comparable mix of families. Federal internal control standards require control activities to be in place to address program risks. formulate an approach for assessing compliance with program requirements. Without a process for systematically assessing compliance with statutory requirements, HUD lacked assurance that agencies were complying with them. GAO/AIMD-00-21.3.1. program offices to perform an annual risk assessment of their programs or administrative functions using a HUD risk-assessment worksheet. By not performing annual risk assessments or tailoring its monitoring efforts to reflect the perceived risk of each MTW agency, HUD lacked assurance that it had properly identified and addressed risks that may prevent agencies from addressing program purposes and meeting statutory requirements. HUD also lacked assurance that it had been using its limited monitoring resources efficiently. Finally, we reported that HUD did not have policies or procedures in place to verify the accuracy of key information that agencies self-report, such as the number of program participants and the average income of residents “graduating” from MTW programs. Internal control standards and guidance emphasize the need for federal agencies to have control activities in place to help ensure that program participants report information accurately. reported performance information during their reviews of annual reports or annual site visits. GAO guidance on data reliability recommends tracing a sample of data records to source documents to determine whether the data accurately and completely reflect the source documents.performance information, it lacked assurance that this information was accurate. To the extent that HUD relied on this information to assess program compliance with statutory purposes and requirements, its analyses were limited. GAO/AIMD-00-21.3.1 and GAO-01-1008G. information that MTW agencies self-report. HUD partially agreed with our recommendations, citing potential difficulties in verifying MTW performance data. HUD also described steps it was taking to improve its guidance to MTW agencies and implement risk-based monitoring procedures. In May 2013, OMB approved revised reporting guidance to MTW agencies. The guidance requires agencies to report information related to the program’s statutory purposes and requirements. For example, it includes a template for data on compliance with the requirement to maintain a comparable mix of families. Additionally, according to a HUD official, the recently approved reporting requirements will result in more standardized data that HUD can verify either through audits or during site visits. As noted above, we are assessing this guidance. Legislation has been proposed to expand the number of PHAs that can participate in the MTW program, and a 2010 HUD report recommended expanding the program to up to twice its size. We reported in 2012 that HUD and some stakeholders believed that expansion could provide information on the effect of the MTW program and allow more PHAs to test innovative ideas, but questions remained about the lack of performance information on current MTW activities. Since our report was issued, four additional agencies were admitted into the program. HUD required these agencies to implement and study rent reform activities through partnerships with local universities and a research organization. HUD, Moving to Work (2010). had occurred in some of the communities affected by the MTW program and indicated that expansion could enable more PHAs to address local needs and therefore benefit additional communities. Similarly, officials from MTW agencies that we contacted stated that expansion of the program would provide a broader testing ground for new approaches and best practices. Finally, information from a private research organization, affordable housing advocates, and MTW agencies suggested that allowing additional PHAs to participate in the program could result in additional opportunities to test innovative ideas and tailor housing programs and activities to local conditions. In 2004, the Urban Institute reported that the local flexibility and independence permitted under MTW appeared to allow strong, creative PHAs to experiment with innovative solutions to local challenges. We have reported separately on cost savings that could be realized from allowing additional housing authorities to implement some of the reforms MTW agencies have tested. Some proponents of expansion that we interviewed also noted that expanding the MTW program could provide more PHAs with the ability to use funding from different sources more flexibly than possible without MTW status. As we have seen, MTW agencies may request waivers of certain provisions of the 1937 Housing Act in order to combine annual funding from separate sources into a single authoritywide funding source. HUD field office staff with responsibility for monitoring MTW agencies observed that the single-fund flexibility was beneficial because it enabled participating agencies to develop supportive service programs, such as job training or educational programs, which help move families toward self sufficiency. Further, officials from the MTW agencies we interviewed agreed that this flexibility was beneficial. For example, officials from one MTW agency stated it had been able to use the single fund to organize itself as a business organization, develop a strategic plan based on the housing needs of low-income families in the community, leverage public funds and public and private partnerships, and develop mixed-income communities. However, a lack of performance information (which creates a limited basis for judging what lessons could be taken from the program to date), limited HUD oversight, and concerns about the program’s impact on residents raised questions about expanding the MTW program. In its 2010 report to Congress, HUD acknowledged that the conclusive impacts of many MTW activities, particularly as they relate to residents, were not yet known. For example, the report noted that the rent reforms implemented under MTW varied greatly and were not implemented using a controlled experimental methodology. As a result, it was not clear which aspects of rent reforms should be recommended for all PHAs. The report also noted the limitations relating to evaluating the outcomes of MTW—limitations that stemmed from the weak initial reporting requirements and lack of a research design. The report concluded that, given these limitations, expansion should occur only if newly admitted PHAs structured their programs for high-quality evaluations that permitted lessons learned to be generalized for other PHAs. Similarly, representatives of affordable housing advocates and legal aid organizations that we interviewed stated that because lessons had not been learned from MTW, there was no basis for expanding the program. Abravanel and others, An Assessment of HUD’s Moving to Work Demonstration (2004). agencies were added under the current program design, HUD might need additional resources. Researchers and representatives of several affordable housing advocates and legal aid agencies with whom we met also suggested that an expanded program could negatively affect residents. For example, two research organizations had stated that some voucher policies could reduce portability—that is, residents’ ability to use their rental vouchers outside the area that the voucher-issuing PHA served. One of these organizations stated that differences in the way voucher programs were implemented across MTW agencies could reduce residents’ ability to use vouchers outside of the area where they received assistance. Officials from the other organization noted that some MTW agencies prohibited vouchers from being used outside of the originating jurisdictions, thereby limiting housing choices. According to HUD officials, MTW agencies with policies that limit portability could make exceptions. For example, these agencies had made exceptions for residents seeking employment opportunities. Until more complete information on the program’s effectiveness and the extent to which agencies adhered to program requirements is available, it will be difficult for Congress to know whether an expanded MTW would benefit additional agencies and the residents they serve. Mr. Chairman, Ranking Member Capuano, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you may have at this time. For further information about this testimony, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Paige Smith, Assistant Director; Emily Chalmers; John McGrail; Lisa Moore; Daniel Newman; Lauren Nunnally; Barbara Roesmann; and Andrew Stavisky. 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. | Implemented in 1999, HUDs MTW demonstration program gives participating PHAs the flexibility to create innovative housing strategies. MTW agencies must create activities linked to three statutory purposesreducing costs, providing incentives for self-sufficiency, and increasing housing choicesand meet five statutory requirements. Congress has been considering expanding MTW. This testimony discusses (1) the programs progress in addressing the three purposes, (2) HUDs monitoring efforts, and (3) potential benefits of and concerns about expansion. This testimony draws from a prior report on the MTW program ( GAO-12-490 ). For that report, GAO analyzed the most current annual reports for 30 MTW agencies; compared HUDs monitoring efforts with internal control standards; and interviewed agency officials, researchers, and industry officials. For this testimony, GAO also reviewed actions HUD has taken in response to the reports recommendations. Opportunities existed to improve how the Department of Housing and Urban Development (HUD) evaluated the Moving to Work (MTW) program, which is intended to give participating public housing agencies (PHA) flexibility to design and test innovative strategies for providing housing assistance. GAO reported in April 2012 that HUD had not (1) developed guidance specifying that performance information collected from MTW agencies be outcome-oriented, (2) identified the performance data needed to assess results, or (3) established performance indicators for the program. The shortage of such standard performance data and indicators had hindered comprehensive evaluation efforts; such evaluations are key to determining the success of any demonstration program. In addition, HUD had not developed a systematic process for identifying lessons learned from the program, which limited HUD's ability to promote useful practices for broader implementation. Since the GAO report, HUD has revised reporting requirements for MTW agencies. These requirements were approved by the Office of Management and Budget in May 2013. GAO is reviewing this new guidance. In 2012, GAO also reported that HUD had not taken key monitoring steps set out in internal control standards, such as issuing guidance that defines program terms or assessing compliance with all the program's statutory requirements. As a result, HUD lacked assurance that MTW agencies were complying with statutory requirements. Additionally, HUD had not done an annual assessment of program risks, although it had a requirement to do so, and had not developed risk-based monitoring procedures. Without taking these steps, HUD lacked assurance that it had identified all risks to the program. Finally, HUD did not have policies or procedures in place to verify the accuracy of key information that MTW agencies self-report. For example, HUD staff did not verify self-reported performance information during their reviews of annual reports or annual site visits. Without verifying at least a sample of information, HUD could not be sure that self-reported information was accurate. According to HUD, the recently approved reporting requirements will result in more standardized data that HUD can verify either through audits or during site visits. Finally, GAO noted in 2012 that expanding the MTW program might offer benefits but also raised questions. According to HUD, affordable housing advocates, and MTW agencies, expanding MTW to additional PHAs would allow agencies to develop more activities tailored to local conditions and produce more lessons learned. However, data limitations and monitoring weaknesses raised questions about expansion. HUD had reported in 2010 that expansion should occur only if newly admitted PHAs structured their programs to permit high-quality evaluations and ensure that lessons learned could be generalized. Since the GAO report was issued, four additional agencies were admitted into the program. HUD required these agencies to implement and study rent reform activities through partnerships with local universities and a research organization. Until more complete information on the program's effectiveness and the extent to which agencies adhered to program requirements is available, it will be difficult for Congress to know whether an expanded MTW would benefit additional agencies and the residents they serve. GAO recommended that HUD improve MTW information and monitoring. HUD partially agreed with these recommendations and has since issued new guidance to MTW agencies. |
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In the post–Cold War era, the proliferation of chemical and biological weapon technologies in developing countries presents DOD with a national security challenge. The 1997, 2001, and 2006 Quadrennial Defense Reviews as well as other DOD publications have emphasized the need to address the increasing threat posed by the proliferation of weapons of mass destruction, including chemical and biological weapons. The 2006 Quadrennial Defense Review specifically states that DOD’s vision is to organize, train, equip, and resource the future force to deal with all aspects of the threat posed by weapons of mass destruction. It notes that DOD has doubled its investment in chemical and biological defenses since 2001, and is increasing funding for its Chemical Biological Defense Program across the Future Years Defense Program by $2.1 billion (approximately 20 percent). However, experiences during the Persian Gulf War and the preparations for Operation Iraqi Freedom exposed weaknesses in the preparedness of U.S. forces to defend against a chemical or biological attack. In addition, we and DOD’s Inspector General have published reports addressing continued problems in aspects of DOD’s chemical and biological defense preparedness. Finally, at present there remain disagreements within DOD regarding the nature and extent of the chemical and biological threat and the degree to which major weapon systems should be survivable against such threats and capable of operating in a contaminated environment (see app. II). This lack of agreement could adversely affect DOD’s ability to develop and carry out a coherent plan to defend against chemical and biological threats. Until 2003, DOD’s acquisition procedures (unless waived) required that weapon systems survivability be addressed in accordance with assessed threat levels, including chemical and biological, anticipated in the weapon system’s projected operating environment. These procedures defined survivability as the capability of a weapon system and crew to avoid or withstand a man-made hostile environment without suffering an abortive impairment of its ability to accomplish its designated mission. The Army, Navy, and Air Force issued supplemental acquisition policies that established service-specific procedures to address the chemical and biological contamination survivability of their weapon systems. In 2003, DOD replaced its acquisition procedures with a Defense Acquisition Guidebook, which, together with the controlling DOD directive and instruction, no longer specifically requires that weapon system survivability against chemical and biological threats be addressed during the system design and development phase. According to a DOD official, this action was part of a DOD effort to simplify its weapon system acquisition process. The only current DOD acquisition requirement specifically related to chemical and biological threats is that weapon system program offices address protection for crew members (as opposed to the weapon system itself) against the effects of a chemical or biological threat. As part of weapon system design and development efforts, DOD uses scientific and technical information from research and testing activities to better understand various chemical and biological agents and their impact on military operations, including the survivability of weapon systems. DTIC maintains a centralized database containing a broad range of scientific and technical information intended to maximize the return on investment in research, evaluation, and studies. In addition to its centralized database, DTIC uses the Chemical and Biological Information Analysis Center (CBIAC), a contractor-operated information analysis center, to maintain additional databases and provide information specific to chemical and biological issues. DOD indicated in its August 2005 interim report that it intends to build on the existing databases maintained by CBIAC and to develop a centralized database by the end of fiscal year 2007 that contains comprehensive information on the effects of chemical and biological agents and decontaminants on weapon systems. In executing its role as a coordinating point for DOD scientific and technical information databases and systems, DTIC makes information available throughout DOD. Figure 1 illustrates the intended flow of information among testing facilities, program offices, and DTIC. DOD and the military services do not consistently address weapon system chemical and biological survivability during the acquisition process. In the absence of clear DOD guidance and effective controls, responsibility for decisions regarding weapon system chemical and biological survivability has devolved largely to the individual military services and weapon system program offices. The program offices we visited do not consistently document their chemical and biological survivability decisions, nor is there an established, clear, and effective DOD-level process for the oversight of these decisions. Although emphasis is placed on chemical and biological threats in DOD's strategic guidance, DOD and military service policies do not establish a clear process for considering and testing weapon system chemical and biological survivability. While DOD acquisition policies require that survivability of personnel after exposure to chemical and biological agents be addressed by all weapon system programs, they do not specifically require the consideration of weapon system survivability. There also are no DOD policies regarding the quantity and type of weapon system survivability testing that should be conducted. In addition, joint staff policies do not address or provide specific instruction as to how chemical and biological survivability should be considered during the acquisition process, or how this consideration should be monitored, reviewed, and documented. Each of the existing service acquisition policies is therefore unique and differs in the extent and amount of detail it requires for considering weapon system chemical and biological survivability. DOD acquisition officials told us that each weapon system service sponsor has the ability to decide whether and to what extent to incorporate survivability testing. Of the military services, the Army has the most detailed policy for addressing this. However, while emphasizing the need to monitor and review chemical and biological survivability issues in general, Army policies allow service sponsors and program offices to individually decide how and to what extent to consider weapon system survivability during the acquisition process. The Air Force and Navy have less detailed policies and also leave decision making to the weapon system sponsor and program office. Navy officials told us that, in their opinion, having less rigid requirements was advantageous because it reduces system development time and costs. The extent to which services consider weapon system survivability during the acquisition process is further influenced by differences in how each service perceives the chemical and biological threat and plans to conduct operations in a contaminated environment. The Army focuses on tactical and theater chemical and biological threats against exposed ground combat personnel and equipment. In comparison, the Air Force concept of operations in a contaminated environment is mainly a strategy of avoidance and protection, while the Navy view is that a chemical or biological attack on surface ships is a less likely threat. In the absence of DOD-wide policies and processes, DOD officials stated that the responsibility for determining the extent of chemical and biological survivability consideration or testing has fallen largely on the individual weapon system program offices, in consultation with each service sponsor. However, program offices also lack specific guidance and a clear process governing the extent to which chemical and biological survivability should be considered or tested. In our review of nine weapon system programs, we found that the program offices exercised broad discretion over whether or to what extent to evaluate the need for and benefit of conducting chemical and biological survivability testing. Although all nine of these program offices had conducted or were considering some kind of testing, we found that the extent and nature of this testing varied widely, even for similar types of systems. For example, the two sea-based weapon system program offices we reviewed considered chemical and biological testing differently, even though both systems are intended for similar operating environments. The program offices for the three land systems we reviewed also conducted very different tests from one another, although these systems also are intended for the same operating environment. Many factors affected the program offices' determination about the extent to test a weapon system's chemical and biological survivability, including the type of system (air, land, or sea), required system capabilities, system concept of operation, perceived chemical and biological threat, and other factors relating to the status of system cost, schedule, and performance. A more detailed discussion of the testing conducted for the nine weapon system programs we reviewed can be found in appendix II. The nine weapon system program offices we reviewed did not consistently document their decisions regarding how they considered or tested chemical and biological survivability. Although they could provide documentation regarding what survivability testing was conducted, they did not have a consistent method to track what was considered or was not included, because there is no DOD, joint, or service requirement for program offices to document these decisions. DOD officials stated that there is currently no DOD-level process for documenting how weapon system program offices determined whether to consider or test chemical and biological survivability. There is no effective DOD-level oversight of how chemical and biological survivability is considered by weapon system program offices. In 1993, Congress directed the Secretary of Defense to designate an office as the single DOD focal point for chemical and biological defense matters. DOD subsequently identified the Assistant to the Secretary of Defense for Nuclear and Chemical and Biological Defense Programs as the single DOD focal point for chemical and biological defense matters. However, the military services and various offices within DOD never adopted a consistent method for incorporating chemical and biological survivability and related testing into major weapon system development acquisition, including oversight responsibilities. Between 1994 and 2004, GAO and DOD Inspector General reports identified multiple management and oversight process problems regarding the incorporation of chemical and biological survivability into weapon system development. Various military service acquisition offices and DOD agencies, such as the U.S. Army Nuclear Chemical Agency, and the office of the Assistant to the Secretary of Defense for Nuclear and Chemical and Biological Defense, held differing views as to where this responsibility resided and how chemical and biological survivability should be incorporated into weapon system development. These differing views have hindered the development of an oversight process and prevented effective monitoring of weapon system program office decisions regarding chemical and biological survivability. Although the Office of the Assistant Secretary of Defense for Nuclear and Chemical and Biological Defense Programs directed the development and issuance of DOD's August 2005 interim report, DOD continues to lack a clear and effective department-level process for overseeing the inclusion of chemical and biological survivability in weapon system development. In addition, according to DOD officials, no single joint organization, such as the Joint Requirements Oversight Council or the Joint Requirements Office, specifically monitors or tracks whether weapon system chemical and biological survivability is considered in the weapon system acquisition process. There also is no specific chemical and biological survivability Functional Capabilities Board to review program office survivability decisions. DOD officials stated that these joint oversight organizations do not have a role in overseeing weapon system chemical and biological survivability and that consideration of survivability requirements during the acquisition process is therefore service-specific. Furthermore, because chemical and biological survivability is not usually a key performance parameter for a weapon system, it is often traded off to satisfy other pressing requirements dealing with the weapon system cost, schedule, or performance. DOD officials we spoke with acknowledged that program cost and schedule concerns could reduce the amount of chemical and biological weapon system survivability testing conducted. While the Milestone Decision Authority focuses on requirements associated with key performance parameters, none of the nine weapon systems we reviewed included chemical and biological survivability as a key performance factor. Only specific chemical and biological equipment-such as detection, protection, and decontamination equipment-have identified chemical and biological survivability as a key performance parameter. DOD, through DTIC, maintains a centralized database for science and technology information that could facilitate program offices' consideration of weapon system chemical and biological survivability, but the comprehensiveness of the survivability information in this database is unknown. We found it unlikely that this database is comprehensive for three reasons: (1) DOD policy is unclear as to whether chemical and biological information is covered by the policy, (2) no process has been established governing how information should be submitted to DTIC, and (3) no office or organization is responsible for overseeing that information is submitted to DTIC. It is unclear whether chemical and biological survivability information is covered by the broad DOD policy directing that scientific and technical information be submitted to DTIC. This policy requires that DTIC be provided with copies of DOD-sponsored scientific and technical information, but does not specifically address whether chemical and biological survivability information is included. Some DOD officials involved in chemical and biological survivability research and/or testing told us that they believed they were not required to submit the results of their work to DTIC. Further, there is no established process for submitting chemical and biological information to DTIC. As a result, individual personnel and organizations submit information to DTIC through ad hoc actions, and some DOD officials expressed concern that not all information is submitted to DTIC as required. Finally, no office or organization in DOD has been clearly designated as responsible for exercising oversight to ensure that chemical and biological research and testing results are submitted to DTIC. The DOD instruction addressing management of the collection of scientific and technical information assigns responsibility for submitting research and testing results to the DOD activities involved, but this instruction does not specifically indicate whether the activity sponsoring or approving the work or, alternatively, the organization performing it is responsible for its submission to DTIC. Officials at the DOD research and testing facilities we visited told us they routinely submitted the results of their work to DTIC, and we observed that DTIC and CBIAC were storing large amounts of this information. The two major DOD chemical and biological research and testing facilities we visited had an oversight process in place for ensuring that all research and testing projects submitted the required information to DTIC. However, responsibility for submitting this information was either left to individual research or testing staff, or was presumed to have been submitted to DTIC by the program offices requesting the work. DTIC officials stated that DTIC was not responsible for ensuring that DOD research and testing facilities submitted all research and testing results, and that DTIC had neither the authority nor the desire to do this. We could not identify any military service or program office level oversight for ensuring that research and testing results were submitted to DTIC, and some of the program offices we visited said the submission of research and test results to DTIC was not their responsibility. The absence of an internal control for ensuring that research and test results are submitted to DTIC and entered in DTIC's database could result in unnecessary expenditures on duplicative work. For example, if research or testing is performed regarding an aspect of survivability, but its results not entered in the DTIC database, officials in another program office interested in the same research or testing might fail to recognize it had already been performed and cause this work to be done again. The issues identified in previous DODIG and GAO reports regarding weapon system incorporation of chemical and biological survivability during the system acquisition process remain largely unresolved. Without DOD establishing consistent policy requiring that chemical and biological survivability be considered during weapon system acquisition and establishing a clear process for doing so, the incorporation of chemical and biological survivability into major weapons system acquisition is likely to remain varied and inconsistent. Consequently, military planners and commanders are likely to face varying weapon system performance, availability, and interoperability issues. This, in turn, could complicate the planning and execution of operations and increase the risk of mission failure, because systems that are not chemically or biologically survivable but become exposed to chemical or biological agents may not be available to a combatant commander for reuse in critical missions, such as deploying or supplying troops. Furthermore, without consistent documentation of program offices' rationales for trade-off decisions in their consideration of weapon system chemical and biological survivability, DOD's ability to identify and analyze associated risks could be hindered. Finally, the absence of a clearly defined DOD-level process for overseeing military service and program office actions limits DOD's ability to ensure that appropriate weapon system survivability decisions are being made. Without clarifying existing policies regarding which research and testing information should be submitted, the process to be used for submitting it, and which DOD offices or organizations are responsible for overseeing its submission, DTIC will likely be unable to ensure the maintenance of a centralized database containing comprehensive chemical and biological research and testing information. This could limit DOD's ability to efficiently and economically assess the effects of chemical and biological agent contamination on weapon system components and materials, and could result in duplicative research and testing, thus causing unnecessary design and development costs. To better ensure the incorporation of chemical and biological survivability into weapon systems, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to take the following six actions: Either modify current DOD policy or develop guidance to ensure that chemical and biological survivability is consistently addressed in the weapon system acquisition process. This policy or guidance should establish a clear process for program offices to follow regarding the extent to which chemical and biological system survivability should be considered and tested; require consistent, DOD-wide documentation of decisions regarding how weapon system chemical and biological survivability is considered and tested; and establish an oversight process within DOD and the services for monitoring weapon system program office decisions; modify current DOD policy to ensure that DOD's database of chemical and biological scientific and technical information is comprehensive. This modified policy should state which chemical and biological survivability information belongs in the body of scientific and technical information that is required to be submitted to DTIC; clarify responsibilities and establish a specific process for the submission of chemical and biological scientific and technical information to DTIC; and designate which DOD office or organization is responsible for exercising oversight to ensure that this information is submitted to DTIC. In commenting on a draft of this report, DOD concurred with all recommendations. Regarding our recommendations for either modifying current DOD policy or developing guidance to ensure that chemical and biological survivability is consistently addressed in the weapon system acquisition process, DOD plans to issue a Chemical Biological Contamination Survivability Policy by May 2006 and subsequently draft a DOD Directive addressing Chemical, Biological, Radiological, and Nuclear Survivability. With regard to our recommendations for modifying current DOD policy to ensure that DOD's database of chemical and biological scientific and technical information is comprehensive, DOD initiated the development of a chemical and biological material effects database by forming and hosting an executive steering committee that met for the first time in March 2006. DOD plans to establish and institute this database at the Chemical and Biological Defense Information and Analysis Center (CBIAC) managed by the Defense Technical Information Center (DTIC). The Assistant to the Secretary of Defense for Nuclear and Chemical and Biological Defense Programs is overseeing the development of this database, which DOD expects to be ready by the end of Fiscal Year 2007. DOD's comments are reprinted in appendix III. DOD also provided technical comments, which we have incorporated as appropriate. We are sending copies of this report to the Secretaries of Defense, the Air Force, the Army, the Navy, and the Commandant of the Marine Corps; and the Director, Office of Management and Budget. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions regarding this report, please contact me at (202) 512-5431 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To assess the extent to which DOD addresses weapon system chemical and biological survivability during the acquisition process, we reviewed DOD, joint staff, and service policies, guidance, and procedures and interviewed officials throughout DOD. We also conducted a non probability sample of nine major weapon systems. We selected programs for this non probability sample based on several factors, including (1) high dollar value, (2) whether the weapon system was a joint program, and (3) risk of exposure to chemical and biological weapons. The methodology used to select our sample helped achieve a sample of weapon systems that was both diverse and relevant to chemical and biological survivability. For example, the sample includes weapon systems from all military services and all types of systems-land, sea, and air. The sample also includes both legacy systems and those currently in development. To understand how DOD's acquisition, testing, and data submission and storage policies affect weapon systems program offices' practices, we spoke with officials and examined documentation from the nine weapon system program offices we reviewed. The list of selected weapons systems is provided below: DD(X) Destroyer Stryker Infantry Carrier V-22 Osprey Vertical Lift Aircraft To determine the extent to which DOD maintains a comprehensive database for facilitating the inclusion of chemical and biological survivability in weapons system design and development, we reviewed DOD and service policies, guidance, and procedures. We compared these policies, guidance, and procedures to the objectives and fundamental concepts of internal controls defined in Standards for Internal Control in the Federal Government. We also conducted interviews with database officials and members of the chemical and biological testing community and reviewed documents at the following locations in consultation with DOD officials and identified as crucial to this subject area in previous GAO reports: Air Force Research Laboratory, Dayton, Ohio Army Research Laboratory, Survivability and Lethality Analysis Directorate, Aberdeen, Maryland Chemical and Biological Information Analysis Center, Edgewood, Defense Technical Information Center, Fort Belvoir, Virginia West Desert Test Center, Dugway Proving Ground, Utah Defense Threat Reduction Agency, Alexandria, Virginia We conducted our review from February 2005 through January 2006 in accordance with generally accepted government auditing standards. pon tem condcted teting t either the copon, component, or tem level. Wepon tem in deign phase. Specific procedre for the conider- tion of chemicnd ilogicsurvivability not developed. Concept of opertion preclde thi vehicle from operting in chemicl or iologicl contminted environment. We found that the extent and nature of chemical and biological survivability testing varied widely in all nine weapon systems we reviewed, even for similar types of systems. Both sea-based weapon systems we reviewed exhibited varying consideration of chemical and biological testing. For example, the Navy's Littoral Combat Ship (LCS) program office considered chemical and biological survivability testing low-risk due to the perceived operating environment and concept of operations for this weapon system. Officials stated that the key survivability approach will be to reduce susceptibility to contamination through detection and avoidance. In contrast, the Navy's next generation destroyer DD(X) was designed with a higher chemical and biological system protection level, and consequently the program office conducted limited coupon testing of specific materials found in the ship's superstructure. In its technical comments on this report, DOD stated that this occurred because the DD(X) concept of operations does not preclude exposure to chemical and biological attacks, while the LCS concept of operations does preclude exposure to chemical and biological agents. These systems thus utilized different concepts of operations although both are intended to operate in a littoral environment. DOD and program officials stated that land systems would be those most likely to include chemical and biological survivability testing because of the increased likelihood of encountering contamination on the modern battlefield. However, these programs also conducted tests very different from each other although they are intended for the same operating environment. The Marine Corps' Expeditionary Fighting Vehicle program office conducted four chemical and biological materials tests that looked at the effects of decontaminants on a variety of materials and included extensive tests using Chemical Agent Resistant Coating on the exterior and interior of the vehicle. In comparison, program officials from the Army's new wheeled personnel carrier, Stryker, used a different approach, focusing on applying a chemical agent simulant to a complete Stryker vehicle and then conducting decontamination procedures. However, in this case a different testing approach for a similar system may have been appropriate because the Stryker is not constructed with new materials and all existing materials used in constructing the Stryker meet military specification requirements for chemical and biological survivability. The Army's Future Combat System is currently reassessing chemical and biological survivability in its design and development. This program is still in development and has not reached the point where definitive decisions on chemical and biological survivability are applicable. The Army sponsor and the program office have been coordinating with the Joint Requirements Oversight Council, U.S. Army Nuclear and Chemical Agency, and the Army Training and Doctrine Command in creating chemical and biological survivability requirements. Of the four aircraft weapon system programs we sampled, three conducted similar levels of chemical and biological testing. Of the three current systems, the Air Force's F/A-22 Raptor and Joint Strike Fighter program offices conducted testing as extensive as that conducted by the Navy for the V-22 Osprey, although these two systems were assessed as much less likely to encounter chemical and biological contamination as the V-22 Osprey. The V-22 Osprey program office performed vulnerability assessments, survivability assessments, and some material coupon tests. Both the Air Force Joint Strike Fighter and F/A-22 Raptor program offices conducted complementary material and component contamination and decontamination compatibility tests. To identify material survivability issues, the F/A-22 Raptor program office contracted with a defense contractor to perform a literature search in advance of any testing. The Joint Strike Fighter program office effectively employed the results of this F/A-22 Raptor testing performed by using the survivability manual developed for the F/A-22 Raptor rather than developing its own. This manual was effectively used as a reference to meet both program's chemical and biological survivability and decontamination thresholds following exposure to chemical and biological weapons and decontamination procedures. The legacy aircraft system we reviewed, the C-17, conducted little chemical and biological testing because much of its testing and development occurred during a different threat environment. Program officials stated that decontamination procedures for the C-17 were developed in the 1980s and that the chemical and biological survivability requirements were drastically scaled down after the end of the Cold War. Many factors affected the program office's determination about the extent to test a weapon system's chemical and biological survivability. These factors included the type of system (i.e., air, land, or sea), required system capabilities, system concept of operation, the perceived chemical and biological threat, and other factors related to the status of system cost, schedule, and performance. Senior DOD officials stated that each service sponsor has the ability to choose whether to accept the risks related to cost and schedule to incorporate testing of chemical and biological survivability. DOD officials stated that in general land systems are perceived as the most likely to encounter chemical and biological contamination and that the perceived threat for sea and air systems has traditionally been considered lower than the perceived threat for land systems. This perception was based on old Cold War concepts and has since changed. DOD officials told us that asymmetric threats are a greater concern today and that system developers must weigh the threat context as they are developing systems and deciding what types of survivability to test based on perceived risk. Program offices we visited stated that the high financial cost of both live and simulated chemical and biological agent testing was a factor that influences decisions about testing weapon system chemical and biological survivability. For example, officials at the Expeditionary Fighting Vehicle program office estimated that coupon testing with live agents could cost approximately $30,000 to $50,000, and full system, live agent field testing of equipment at a facility such as the West Desert Test Center at Dugway Proving Grounds would cost approximately $1 million. In addition, the C-17 program office stated that live agent testing cost approximately $1 million. Interviews with various DOD research facilities where testing is conducted supported these amounts. F/A-22 program officials also stated that although they conducted coupon and component tests, they would not encourage a full system chemical and biological survivability test because such a test would be too expensive and would destroy the aircraft being tested. In addition to the contact named above, William Cawood, Assistant Director; Renee S. Brown, Jane Ervin, Catherine Humphries, David Mayfield, Renee McElveen, Anupama Patil, Matthew Sakrekoff, Rebecca Shea, and Cheryl Weissman also made key contributions to this report. | The possibility that an adversary may use chemical or biological weapons against U.S. forces makes it important for a weapon system to be able to survive such attacks. In the National Defense Authorization Act for Fiscal Year 2005, Congress mandated that the Department of Defense submit a plan to address weapon system chemical and biological survivability by February 28, 2005. This plan was to include developing a centralized database with information about the effects of chemical and biological agents on materials used in weapon systems. DOD did not submit its plan as mandated. GAO was asked to evaluate (1) the extent to which DOD addresses weapon system chemical and biological survivability during the acquisition process, and (2) DOD's internal controls for maintaining a comprehensive database that includes chemical and biological survivability research and test data for weapon system design and development. The extent to which chemical and biological survivability is considered in the weapon system acquisition process is mixed and varied. Although DOD strategic guidance and policy has emphasized the growing threat of an adversary's use of chemical and biological weapons for over a decade, DOD, joint, and military service weapon system acquisition policies are inconsistent and do not establish a clear process for considering and testing system chemical and biological survivability. To assess the extent DOD addresses chemical and biological survivability during the acquisition process, GAO conducted a non probability sample of nine major weapon systems based on high dollar value, whether the system was a joint program, and risk of exposure to chemical and biological weapons. Because DOD and joint acquisition policies do not require that survivability be specifically addressed, the military services have developed their own varying and unique policies. Thus, for the nine weapon systems GAO reviewed, the program offices involved made individual survivability decisions, resulting in inconsistent survivability consideration and testing. In the absence of DOD requirements, program offices also inconsistently document their decisions regarding how they consider and test chemical and biological survivability. Furthermore, DOD policies do not establish a clear process for responsibility, authority, and oversight for monitoring program office decisions regarding chemical and biological survivability. Without establishing consistent policies requiring that chemical and biological survivability be considered during weapon system acquisition, and a clear process for doing so, military planners and commanders are likely to face varying weapon system performance, availability, and interoperability issues. These could negatively affect system availability in a contaminated environment and limit DOD's ability to identify risk and ensure that appropriate decisions are made. DOD, through its Defense Technical Information Center (DTIC), maintains a centralized database for science and technology information that could facilitate program offices' consideration of weapon system chemical and biological survivability, but the comprehensiveness of this database is unknown due to inadequate internal controls. It is unlikely that the DTIC database contains fully comprehensive information about this for three reasons. First, it is unclear whether this information is covered by the broad DOD policy directing that scientific and technical information be submitted to DTIC. Second, there is no established process for submitting scientific and technical information to DTIC. As a result, it is submitted to DTIC through the ad hoc actions of individual personnel and organizations, and some DOD officials expressed concern that not all information is being submitted to DTIC. Third, no office or organization in DOD has been given clear oversight responsibility to ensure that information is submitted to DTIC. The lack of a database with comprehensive information about weapon system chemical and biological survivability creates the risk of unnecessary expenditures on duplicative testing. |
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The National Response Framework discusses several elements of effective response and response planning. The term response, as used in the National Response Framework, includes the immediate actions to save lives, protect property and the environment, and meet basic human needs. Response also includes the execution of emergency plans and actions to support short-term recovery. An effective, unified national response—including the response to any large-scale incident—requires layered, mutually supporting capabilities—governmental and nongovernmental. Indispensable to effective response is an effective unified command, which requires a clear understanding of the roles and responsibilities of each participating organization. The National Response Framework employs the following criteria to measure key aspects of response planning: Acceptability. A plan is acceptable if it can meet the requirements of anticipated scenarios, can be implemented within the costs and time frames that senior officials and the public can support, and is consistent with applicable laws. Adequacy. A plan is adequate if it complies with applicable planning guidance, planning assumptions are valid and relevant, and the concept of operations identifies and addresses critical tasks specific to the plan’s objectives. Completeness. A plan is complete if it incorporates major actions, objectives, and tasks to be accomplished. The complete plan addresses the personnel and resources required and sound concepts for how those will be deployed, employed, sustained, and demobilized. It also addresses timelines and criteria for measuring success in achieving objectives and the desired end state. Including all those who could be affected in the planning process can help ensure that a plan is complete. Consistency and standardization of products. Standardized planning processes and products foster consistency, interoperability, and collaboration, therefore, emergency operations plans for disaster response should be consistent with all other related planning documents. Feasibility. A plan is considered feasible if the critical tasks can be accomplished with the resources available internally or through mutual aid, immediate need for additional resources from other sources (in the case of a local plan, from state or federal partners) are identified in detail and coordinated in advance, and procedures are in place to integrate and employ resources effectively from all potential providers. Flexibility. Flexibility and adaptability are promoted by decentralized decisionmaking and by accommodating all hazards ranging from smaller-scale incidents to wider national contingencies. Interoperability and collaboration. A plan is interoperable and collaborative if it identifies other stakeholders in the planning process with similar and complementary plans and objectives, and supports regular collaboration focused on integrating with those stakeholders’ plans to optimize achievement of individual and collective goals and objectives in an incident. Under the Post-Katrina Emergency Management Reform Act, FEMA has responsibility for leading the nation in developing a national preparedness system. FEMA has developed standards—the Comprehensive Preparedness Guide 101—that call for validation, review, and testing of emergency operations plans (EOP),. According to the Comprehensive Preparedness Guide 101, plans should be reviewed for conformity to applicable regulatory requirements and the standards of federal or state agencies (as appropriate) and for their usefulness in practice. Exercises offer the best way, short of emergencies, to determine if an EOP is understood and “works.” Further, conducting a “tabletop” exercise involving the key representatives of each tasked organization can serve as a practical and useful means to help validate the plan. FEMA’s guidance also suggests that officials use functional and full-scale emergency management exercises to evaluate EOPs. Plan reviews by stakeholders also allow responsible agencies to suggest improvements in an EOP based on their accumulated experience. We also identified the need for validated operational planning in the aftermath of Hurricane Katrina, noting that to be effective, national response policies must be supported by robust operational plans. In September 2006, we recommended, among other things, that DHS take the lead in monitoring federal agencies’ efforts to meet their responsibilities under the National Response Plan (now the National Response Framework) and the National Preparedness Goal (now the National Preparedness Guidelines), including the development, testing, and exercising of agency operational plans to implement their responsibilities. DHS concurred with our recommendation. The Post-Katrina Emergency Management Reform Act transferred preparedness responsibilities to FEMA, and we recommended in April 2009 that FEMA should improve its approach to developing policies and plans that define roles and responsibilities and planning processes by developing a program management plan, in coordination with DHS and other federal entities, to ensure the completion of the key national preparedness policies and plans called for in legislation, presidential directives, and existing policy and doctrine; to define roles and responsibilities and planning processes; as well as to fully integrate such policies and plans into other elements of the national preparedness system. FEMA concurred with our recommendation and is currently working to address this recommendation. Other national standards reflect these practices as well. For example, according to Emergency Management Accreditation Program (EMAP) standards, the development, coordination and implementation of operational plans and procedures are fundamental to effective disaster response and recovery. EOPs should identify and assign specific areas of responsibility for performing essential functions in response to an emergency or disaster. Areas of responsibility to be addressed in EOPs include such things as evacuation, mass care, sheltering, needs and damage assessment, mutual aid, and military support. EMAP standards call for a program of regularly scheduled drills, exercises, and appropriate follow-through activities—designed for assessment and evaluation of emergency plans and capabilities—as a critical component of a state, territorial, tribal or local emergency management program. The documented exercise program should regularly test the skills, abilities, and experience of emergency personnel as well as the plans, policies, procedures, equipment, and facilities of the jurisdiction. The exercise program should be tailored to the range of hazards that confronts the jurisdiction. We reported in April 2009 that FEMA lacked a comprehensive approach to managing the development of emergency preparedness policies and plans. Specifically, we reported that FEMA had completed many policy and planning documents, but a number of others were not yet completed. For example, while DHS, FEMA, and other federal entities with a role in national preparedness have taken action to develop and complete some plans that detail and operationalize roles and responsibilities for federal and nonfederal entities, these entities had not completed 68 percent of the plans required by existing legislation, presidential directives, and policy documents as of April 2009. Specifically, of the 72 plans we identified, 20 had been completed (28 percent), 3 had been partially completed (that is, an interim or draft plan has been produced—4 percent), and 49 (68 percent) had not been completed. Among the plans that have been completed, FEMA published the Pre-Scripted Mission Assignment Catalog in 2008, which defines roles and responsibilities for 236 mission assignment activities to be performed by federal government entities, at the direction of FEMA, to aid state and local jurisdictions during a response to a major disaster or an emergency. Among the 49 plans that had not been completed were the National Response Framework incident annexes for terrorism and cyberincidents as well as the National Response Framework’s incident annex supplements for catastrophic disasters and mass evacuations. In addition, operational plans for responding to the consolidated national planning scenarios, as called for in Homeland Security Presidential Directive 8, Annex 1, remained outstanding. In February 2010, DHS’s Office of Inspector General reviewed the status of these planning efforts and reported that the full set of plans for any single scenario had not yet been completed partly because of the time required to develop and implement the Integrated Planning System. The Integrated Planning System, required by Annex 1 to Homeland Security Presidential Directive 8 (December 2007), is intended to be a st comprehensive approach to national planning. The Directive calls for the Secretary of Homeland Security to lead the effort to develop, in coordination with the heads of federal agencies with a role in homeland security, the Integrated Planning System followed by a series of related andard and planning documents for each national planning scenario. The Homeland Security Council compressed the 15 National Planning Scenarios into 8 key scenario sets in October 2007 to integrate planning for like events and to conduct crosscutting capability development. The redacted version of the Inspector General’s report noted that DHS had completed integrated operations planning for 1 of the 8 consolidated national planning scenarios—the terrorist use of explosives scenario. FEMA officials reported earlier this month that the agency’s efforts to complete national preparedness planning will be significantly impacted by the administration's pending revision to Homeland Security Presidential Directive-8. Once the new directive is issued, agency officials plan to conduct a comprehensive review and update to FEMA’s approach to national preparedness planning. In addition to FEMA’s planning efforts, FEMA has assessed the status of catastrophic planning in all 50 States and the 75 largest urban areas as part of its Nationwide Plan Review. The 2010 Nationwide Plan Review was based on the 2006 Nationwide Plan Review, which responded to the need both by Congress and the President to ascertain the status of the nation’s emergency preparedness planning in the aftermath of Hurricane Katrina. The 2010 Nationwide Plan Review compares the results of the 2006 review of states and urban areas' plans, functional appendices and hazard-specific annexes, on the basis of: Consistency with Comprehensive Preparedness Guide 101, Date of last plan update, Date of last exercise, and A self-evaluation of the jurisdiction’s confidence in each planning document’s adequacy, feasibility and completeness to manage a catastrophic event. FEMA reported in July 2010 that more than 75 percent of states and more than 80 percent of urban areas report confidence that their overall basic emergency operations plans are well-suited to meet the challenges presented during a large-scale or catastrophic event. Oil spills are a special case with regard to response. For most major disasters, such as floods or earthquakes, a major disaster declaration activates federal response activities under the provisions of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. However, for oil spills, federal agencies may have direct authority to respond under specific statutes. Response to an oil spill is generally carried out in accordance with the National Oil and Hazardous Substances Pollution Contingency Plan. The National Response Framework has 15 functional annexes, such as search and rescue, which provide the structure for coordinating federal interagency support for a federal response to an incident. Emergency Support Function #10, the Oil and Hazardous Materials Response Annex, governs oil spills. As described in Emergency Support Function #10, in general, the Environmental Protection Agency is the lead for incidents in the inland zone, and the U.S. Coast Guard, within DHS, is the lead for incidents in the coastal zone. The difference in responding to oil spills and the shared responsibility across multiple federal agencies underscores the importance of including clear roles, responsibilities, and legal authorities in developing operational response plans. In conclusion, Mr. Chairman, emergency preparedness is a never-ending effort as threats evolve and the capabilities needed to respond to those threats changes as well. Realistic, validated, and tested operational response plans are key to the effective response to a major disaster of whatever type. Conducting exercises of these plans as realistically as possible is a key component of response preparedness because exercises help to identify what “works” (validates and tests) and what does not. This concludes my statement. I will be pleased to respond to any questions you or other members of the committee may have. For further information on this statement, please contact William O. Jenkins, Jr. at (202) 512-8757 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement were Stephen Caldwell, Director, Chris Keisling, Assistant Director, John Vocino, Analyst-In-Charge, Linda Miller, Communications Analyst. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Among the lessons learned from the aftermath of Hurricane Katrina was that effective disaster response requires planning followed by the execution of training and exercises to validate those plans. The Federal Emergency Management Agency (FEMA) is responsible for disaster response planning. This testimony focuses on (1) criteria for effective disaster response planning established in FEMA's National Response Framework, (2) additional guidance for disaster planning, (3) the status of disaster planning efforts, and (4) special circumstances in planning for oil spills. This testimony is based on prior GAO work on emergency planning and response, including GAO's April 2009 report on the FEMA efforts to lead the development of a national preparedness system. GAO reviewed the policies and plans that form the basis of the preparedness system. GAO did not assess any criteria used or the operational planning for the Deepwater Horizon response. FEMA's National Response Framework identifies criteria for effective response and response planning, including (1) acceptability (meets the requirement of anticipated scenarios and is consistent with applicable laws); (2) adequacy (complies with applicable planning guidance); (3) completeness (incorporates major actions, objectives, and tasks); (4) consistency and standardization of products (consistent with other related documents); (5) feasibility (tasks accomplished with resources available); (6) flexibility (accommodating all hazards and contingencies); and (7) interoperability and collaboration (identifies stakeholders and integrates plans). In addition to the National Response Framework, FEMA has developed standards that call for validation, review, and testing of emergency operations plans. According to FEMA, exercises offer the best way, short of emergencies, to determine if such plans are understood and work. FEMA's guidance also suggests that officials use functional and full-scale emergency management exercises to evaluate plans. Other national standards reflect these practices as well. For example, the Emergency Management Accreditation Program standards call for a program of regularly scheduled drills, exercises, and appropriate follow-through activities, as a critical component of a state, territorial, tribal, or local emergency management program. GAO reported in April 2009 that FEMA lacked a comprehensive approach to managing the development of emergency preparedness policies and plans. Specifically, GAO reported that FEMA had completed many policy and planning documents, but a number of others were not yet completed. In February 2010, the Department of Homeland Security's (DHS) Office of Inspector General reviewed the status of these planning efforts and reported that the full set of plans for any single scenario had not yet been completed partly because of the time required to develop and implement the Integrated Planning System. The Integrated Planning System, required by Annex 1 to Homeland Security Presidential Directive 8 (December 2007), is intended to be a standard and comprehensive approach to national planning. Oil spills are a special case with regard to response. The National Response Framework has 15 functional annexes that provide the structure for coordinating federal interagency support for a federal response to an incident. Emergency Support Function #10--Oil and Hazardous Materials Response Annex--governs oil spills. Under this function, the Environmental Protection Agency is the lead for incidents in the inland zone, and the U.S. Coast Guard, within DHS, is the lead for incidents in the coastal zone. This difference underscores the importance of including clear roles, responsibilities, and legal authorities in developing operational response plans. GAO is not making any new recommendations in this testimony but has made recommendations to FEMA in previous reports to strengthen disaster response planning, including the development of a management plan to ensure the completion of key national policies and planning documents. FEMA concurred and is currently working to address this recommendation. |
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In the midst of the Great Depression, Social Security was enacted to help ensure that the elderly would have adequate retirement incomes and would not have to depend on welfare. The program was designed to provide benefits that workers had earned to some degree through their contributions and those of their employers. The benefit amounts would depend in part on how much the worker had earned and therefore contributed. Today, about 10 percent of the elderly have incomes below the poverty line, compared with 35 percent in 1959. However, for about half of today’s elderly, incomes excluding Social Security benefits are below the poverty line. Importantly, Social Security does not just provide benefits to retired workers. In 1939, coverage was extended to the dependents of retired and deceased workers, and in 1956 the Disability Insurance program was added. To restore the long-term solvency and sustainability of the program, reductions in promised benefits and/or increases in program revenues will be needed. Within the program’s current structure, possible benefit changes might include increases in the full retirement age, changes to the benefit formula, or reductions in cost-of-living increases, among other options. Revenue increases might include increases in payroll taxes or transfers from the Treasury’s general fund. Some proposals would change the structure of the program to incorporate a system of individual retirement savings accounts. Many such proposals would reduce benefits under the current system and make up for those reductions to some degree with income from the individual accounts. Individual account proposals also try to increase revenues, in effect, by providing the potential for higher rates of return on the individual accounts’ investments than the trust funds would earn under the current system. Three key distinctions help to identify the differences between Social Security’s current structure and one that would use individual accounts. Insurance versus savings. Social Security is a form of insurance, while individual accounts would be a form of savings. As social insurance, Social Security protects workers and their dependents against a variety of risks such as the inability to earn income due to old age, disability, or death. In contrast, a savings account provides income only from individuals’ contributions and any earnings on them; individuals effectively insure themselves under a savings approach. Defined-benefit versus defined-contribution. Social Security provides a “defined-benefit” pension, while individual accounts would provide a “defined-contribution” pension. Defined-benefit pensions typically determine benefit amounts using a formula that takes into account individuals’ earnings and years of earnings. The provider assumes the financial and insurance risk associated with funding those promised benefit levels. Defined-contribution pensions, such as 401(k) plans, determine benefit amounts based on the contributions made to the accounts and any earnings on those contributions. As a result, the individual bears the financial and insurance risks under a defined- contribution plan until retirement. Pay-as-you-go versus full funding. Social Security is financed largely on a “pay-as-you-go” basis, while individual accounts would be “fully funded.” In a pay-as-you-go system, contributions that workers make in a given year fund the payments to beneficiaries in that same year, and the system’s trust funds are kept to a relatively small contingency reserve. In contrast, in a fully funded system, contributions for a given year are put aside to pay for future benefits. The investment earnings on these funds contribute considerable revenues and reduce the size of contributions that would otherwise be required to pay for the benefits. Defined-contribution pensions and individual retirement savings are fully funded by definition. To evaluate reform proposals, we have suggested that policy makers should consider three basic criteria: 1. the extent to which the proposal achieves sustainable solvency and how the proposal would affect the economy and the federal budget; 2. the balance struck between the twin goals of individual equity (rates of return on individual contributions) and income adequacy (level and certainty of benefits); and 3. how readily such changes could be implemented, administered, and explained to the public. Providing higher replacement rates for lower earners than for higher earners is just one of several aspects of our criterion for balancing adequacy and equity. With regard to adequacy, this criterion also considers the extent to which the proposal changes benefits for current and future retirees; maintains or enhances benefits for low-income workers who are most reliant on Social Security; and maintains benefits for the disabled, dependents, and survivors. In addition, providing higher replacement rates for lower earners than for higher earners does not by itself ensure adequacy. A reform proposal could make replacement rates vary even more by earnings level than under the current system yet provide lower and less adequate benefits. With regard to equity, our criterion for balancing adequacy and equity also considers the extent to which the proposal ensures that those who contribute receive benefits, expands individual choice and control over program contributions, increases returns on investment, and improves intergenerational equity. Moreover, reform proposals should be evaluated as packages that strike a balance among individual reform elements and important interactive effects. The overall evaluation of any particular reform proposal depends on the weight individual policy makers place on each criterion. In 2001, the President created the Commission to Strengthen Social Security to develop reform plans that strengthen Social Security and increase its fiscal sustainability while meeting certain principles: no changes to benefits for retirees or near retirees, dedication of entire Social Security surplus to Social Security, no increase in Social Security payroll taxes, no government investment of Social Security funds in the stock market, preservation of disability and survivor components, and inclusion of individually controlled voluntary individual retirement accounts. The commission developed three reform models, each of which represented a different approach to including voluntary individual accounts as part of Social Security. Under all three models, individuals could have a portion of their Social Security contributions deposited into individual accounts, and their Social Security defined benefits would be reduced relative to those account contributions. A governing board would administer the accounts in a fashion similar to the Thrift Savings Plan for federal employees. To continue paying benefits while also making deposits to the accounts, funds would need to be transferred from the Treasury’s general fund. The models varied in the size of the account contributions. Models 2 and 3 had additional provisions for reducing certain benefits overall and enhancing benefits for surviving spouses and selected low earners. To assess the extent to which the Social Security program or reform options are progressive—distributes in a way that favors lower earners— researchers first select a number of measures and then compare how different groups of earners fare according to those measures. The choice of measures reflects a particular perspective on the goals of the program. For example, those who analyze Social Security from an adequacy perspective are primarily concerned with the program’s role in securing adequate income and consequently tend to use measures of how much income Social Security provides. In contrast, those who view Social Security from an equity perspective focus on whether beneficiaries receive a fair return on their contributions and tend to choose measures balancing lifetime taxes against lifetime benefits. For each perspective, assessing progressivity involves determining how lower earners fare relative to higher earners on appropriate measures. In the context of Social Security reform, those scenarios in which the well-being of lower earners increased proportionally more, or decreased proportionally less, would be considered more progressive. Because of the different kinds of benefits that Social Security provides, many researchers agree that to investigate the distributional effect of the program, aggregating workers and their dependents into households better captures well-being, but doing so poses certain methodological challenges. Since its inception, Social Security’s primary goal has been to provide adequate income, upon entitlement, so as to reduce dependency and poverty among its participants. Studies emphasizing this goal reflect the adequacy perspective; they view the program more as a safety net that helps ensure a minimum level of subsistence. Consequently, such studies use measures of how much income Social Security benefits provide. These measures include absolute benefit levels at a point in time and benefit-to- earnings ratios. Benefit levels are useful for estimating whether Social Security offers adequate protection for people covered by the system. Benefit-to-earnings ratios, which reflect how much of past earnings Social Security benefits replace, help gauge the extent to which the program allows people to maintain their past standard of living. One way to assess the distributional effect of the current Social Security program or of various reform options is to look at how these adequacy measures are distributed across earners. Regarding benefit levels, one possibility is to compute the ratio of benefits received by lower earners to benefits received by higher earners, at a particular point in time. Comparing these benefit ratios under different policies helps determine how the well-being of lower earners changes relative to that of higher earners across reform proposals. If, for example, benefits collected by individuals in the 20th percentile of the earnings distribution relative to benefits collected by those in the 80th percentile increased from one Social Security system to the next, the adequacy perspective would conclude that, other things being equal, the second is more progressive, that it is tilted toward lower earners. Alternatively, one could compute the proportion of total benefits various groups of earners receive relative to the proportion the median gets and determine the manner in which these relative proportions change across proposals. For all groups below the median, for instance, an increase in this ratio would indicate a more progressive system. The distribution of replacement rates also helps assess progressivity. The change in the replacement rate of lower earners relative to that of high earners across reform options shows the extent to which lower earners are able to maintain their pre-entitlement standard of living relative to higher earners. Under the current Social Security system, for instance, the monthly benefit lower earners receive upon entitlement replaces a larger portion of their monthly earnings; from an adequacy perspective, the system is therefore tilted in their favor. A reform proposal that increased the replacement rate of lower earners relative to higher earners would be deemed more progressive than one that did not. By linking benefits to earnings, which link in turn to contributions, Social Security also incorporates the principle of individual equity. Under the current program, people who pay higher taxes generally collect higher benefits upon entitlement but not directly proportionally higher. Studies that reflect the equity perspective focus on whether, over their lifetimes, beneficiaries can expect to receive a fair return on their contributions or get their money’s worth from the system. These studies use such measures as lifetime benefit-to-tax ratios, internal rates of return, and net lifetime benefit-to-earnings ratios. The benefit-to-tax ratio measure compares the present value of Social Security lifetime benefits with the present value of lifetime Social Security taxes. The internal rate of return can be thought of as the interest rates individuals effectively receive on their lifetime contributions, given their lifetime Social Security benefits. Net lifetime benefit-to-earnings ratios show lifetime benefits minus lifetime taxes relative to lifetime earnings. This measure, also called the average rate of net taxation, borrows from the public finance literature the idea that equity measures ought to contain earnings. From an equity perspective, examining the distribution of these measures helps gauge the distributional effects of Social Security or reform options. Many studies adopting the equity perspective find, for example, that the current program favors lower earners because this group enjoys higher rates of return and benefits whose value is larger relative to the value of their contributions. Other studies confirm this result by observing that the net benefit-to-earnings ratio is higher for low earners. If under a reform proposal, these measures increased more for lower earners, then that system would be considered more progressive. Reform options that involve general revenue transfers to ensure solvency make it difficult to evaluate progressivity from an equity perspective because they do not typically specify how such transfers are to be financed or who will eventually bear their burden. Yet general revenue transfers implicitly require future tax increases, spending cuts, or a combination of both, all of which have substantial distributional consequences. Such consequences are difficult to evaluate analytically. Without knowing who will bear the costs of financing these transfers, the equity perspective cannot accurately determine how well lower earners fare relative to higher earners in a given system or across proposed reforms. Even if we knew how the tax burden of general revenues is distributed today, the tax system could change in the future in ways that would alter the distribution. Some proposals with individual account features, for example, involve general revenue transfers. They divert part of existing payroll tax revenues from traditional Social Security benefits and toward individual accounts. Consequently, to remain financially solvent, such proposals typically require additional resources from Treasury’s general fund for several years after implementation. Both the adequacy and the equity perspectives consider families or households, in addition to individuals, in assessing distributional effects. This is particularly relevant in the Social Security context because the program provides not only worker benefits to retired and disabled individuals, but also auxiliary benefits to current and former spouses, children, and surviving spouses. Household analysis has implications for progressivity. Most studies using equity measures find Social Security somewhat less progressive once workers and their dependents are combined in a single unit. This is largely due to the fact that some individuals with little or no earnings, hence “poor” by themselves, end up in high-earning households. The benefit they collect no longer counts as transfers to low earners. However, the household approach presents analytical challenges. Multiple divorces and marriages, for example, make it difficult to define “household” on a lifetime basis. Moreover, age differences between spouses, which imply different retirement dates, complicate the calculation of “total household benefit” at a given point in time. Nonetheless, researchers believe that aggregating workers and their dependents into households provides insight by giving a more complete picture of their well-being. Social Security’s distributional effects reflect program features, such as its benefit formula, and demographic patterns among its recipients, such as marriage between lower and higher earners. The benefit formula for retired workers favors lower earners by design, replacing a larger proportion of earnings for lower earners than for higher earners. Disability benefits use the same progressive benefit formula, and disability recipients are disproportionately lower lifetime earners. However, the extent to which these features favor lower earners may be offset to some degree by demographic patterns and other program features. Household formation reduces the system’s tilt toward lower-income people because some of the lower-earning individuals helped by the program, in fact, live in high- income households. Differences in mortality rates may reduce rates of return for lower earners and increase rates of return for higher earners. In order to help ensure adequate incomes in retirement, Congress designed Social Security’s benefit formula for retired workers to favor lower earners. When workers retire, Social Security uses their lifetime earnings records to determine their Primary Insurance Amount (PIA), on which initial monthly benefits are based. The PIA is determined by applying the Social Security benefit formula to a worker’s Average Indexed Monthly Earnings (AIME). The AIME is the monthly average of a worker’s 35 best years of earnings, with earnings before age 60 indexed to average wage growth. For workers who become eligible for benefits in 2004, PIA equals 90 percent of the first $612 dollars of AIME plus 32 percent of the next $3,077 dollars of AIME plus 15 percent of AIME above $3,689. Consequently, the benefit formula replaces a higher proportion of pre-retirement earnings for lower lifetime earners than for higher lifetime earners. Figure 1 shows replacement rates for illustrative workers under the current benefit formula. The replacement rate for the low earner is 49 percent, while the rate for the high earner is only around 30 percent. The Disability Insurance (DI) program, which provides benefits to workers who are no longer able to work because of severe long-term disabilities, also favors lower lifetime earners. Disability Insurance not only provides earnings replacement during the pre-retirement years but generally results in beneficiaries receiving higher benefits in retirement than they would have received if they had earned the same amount of money but had not received disability benefits. Disability Insurance favors lower earners because it uses the same progressive benefit formula as retired worker benefits and because DI recipients are more likely to be lower earners. Disability Insurance recipients are disproportionately lower lifetime earners because an inability to continue working is necessary to qualify for benefits. Also, researchers have found that individuals with lower levels of educational attainment are more likely to experience disability. An analysis of lifetime benefits using a microsimulation model illustrates DI’s tilt toward lower earners. To examine the distributional impact of DI, we simulated Social Security benefits for individuals born in 1985 under a scenario that pays retirement but not disability benefits and a scenario that pays all categories of Social Security benefits. Because simulations are sensitive to economic and demographic assumptions, it is more appropriate to compare benefits across the scenarios than to focus on the actual estimates themselves. Median lifetime Social Security benefits are 33 percent higher under the scenario that pays all types of Social Security benefits than under the scenario that does not pay disability benefits, with 30 percent of individuals receiving greater lifetime Social Security benefits due to the DI program. According to these simulations, DI increases median lifetime Social Security benefits for workers in the lowest fifth of lifetime earnings by 43 percent while increasing lifetime benefits for the top fifth by 14 percent (see fig. 2). Social Security favors lower earners less when considered from the household perspective. Some of the lower-earning individuals who gain from the benefit formula or disability benefits do not live in low-income households, because they are married to higher earners. The same is often true for lower earners who receive spouse and survivors benefits. Married individuals are eligible for the greater of their own worker benefits or 50 percent of their spouses’ benefits. Similarly, widows and widowers are eligible for the larger of their own worker benefits or 100 percent of their deceased spouses’ benefits. Because of the nature of spouses’ and survivors’ benefits, recipients are on average lower lifetime earners— effectively they must earn less than their spouses to qualify. However, many of the lower-earning individuals that the system favors through spouses’ and survivors’ benefits actually live at some point in higher- income households because of marriage. Some have suggested that household formation may have less of an impact on the degree to which Social Security favors lower earners in the future. Increased female labor force participation and changing marital patterns suggest there will be less earnings differences between spouses in the future as well as fewer people who are married long enough to qualify for spouses’ and survivors’ benefits. Consequently, there may be fewer instances of the system providing high replacement rates to low-earning spouses from high-income households. An analysis of simulated benefits and taxes illustrates how the system favors lower earners less when considered from the household perspective. For individuals born in 1985, figure 3 depicts the ratio of benefits received to taxes paid for the top and bottom fifths of earnings from an individual perspective and a household perspective. For example, the first bar indicates that individuals in the bottom fifth of earnings receive lifetime benefits that are 1.3 times higher than the lifetime taxes they paid to the program. When analyzed from an individual perspective, individuals are classified by their own lifetime earnings and ratios are calculated for their own taxes and benefits. When analyzed from a household perspective, individuals are classified by household earnings and ratios are calculated for household taxes and benefits. In both cases, benefit-to-tax ratios are higher for the bottom fifth than for the top fifth, suggesting that the system favors lower earners. However, the difference in the benefit-to-tax ratios is smaller when considered from the household perspective. The extent to which the benefit formula and disability benefits favor lower earners may be offset to the extent that lower earners have higher mortality rates than do higher earners. A number of studies suggest that lower earners do not live as long as higher earners. As a result, lower earners are likely to receive retirement benefits for fewer years than higher earners. Researchers have generally found that, to some degree, the relationship between mortality rates and earnings reduces rates of return for lower earners and increase rates of return for higher earners. Social Security taxes are levied on earnings up to a maximum level set each year, and earnings beyond the threshold are not counted when calculating benefits. In 2004, the cap on taxable earnings is $87,900, and in recent years about 6 percent of workers had earnings above the cap. Policy makers often argue that the cap helps higher earners because it results in their paying a smaller percentage of their earnings than do individuals whose earnings do not exceed the cap. Also, while the cap limits both lifetime contributions and benefits, it increases equity measures such as benefit-to-tax ratios and rates of return for high earners. If the cap were repealed, the additional contributions paid by high earners would only be partially reflected in increased benefits, because the benefit formula is weighted toward lower earners. Simulations illustrate that the cap on taxable earnings modestly favors higher earners for individuals born in 1985. We simulate benefits and taxes under a scenario with the cap on taxable earnings and one without the cap. Figure 4 shows household benefit-to-tax ratios by top and bottom fifth of earnings and top percentile of earnings. When the cap is removed, the median benefit-to-tax ratio for the bottom fifth remains unchanged and the ratio for the top fifth of earnings decreases from 0.61 to 0.59. Although 83 percent of households in the top fifth are affected by repealing the cap, the increase in median lifetime taxes, 8.9 percent, is almost offset by the increase in median lifetime benefits, 6.5 percent. However, the impact on very high earners is larger. According to these simulations, the median benefit-to-tax ratio for households in the top 1 percent of earnings decreases from 0.52 to 0.45 when the cap is removed, indicating that very high earners gain from the cap; the increase in median lifetime taxes paid by this group, 50.4 percent, is not offset as much by the increase in their median lifetime benefits, 34.4 percent. We analyzed three proposals that illustrate the variation in the potential distributional effects of different approaches to reform. CSSS Model 2 would create a new system of voluntary individual accounts while reducing Social Security’s defined benefits overall but increasing them for surviving spouses and lower earners. The Ferrara proposal would create a system of voluntary individual accounts that would ultimately be large enough to completely replace Social Security’s old-age benefits for workers and their spouses. The Diamond-Orszag proposal would restore long-term solvency without creating a new system of individual accounts by reducing benefits and increasing revenues while also increasing benefits for surviving spouses and lower earners. Under Model 2 of the President’s Commission to Strengthen Social Security, For individuals choosing to participate, the Social Security system would redirect 4 percentage points of the payroll tax (up to a $1,000 annual limit) into personal investment accounts. Participating individuals could access their accounts in retirement, but Social Security defined benefits would be reduced to reflect the amount diverted to their individual accounts. On net, benefits would increase for individuals whose accounts earned more than a 2 percent return beyond inflation. Social Security defined benefits would be lower than benefits promised under the current benefit formula. Changes to the benefit formula would slow the growth in initial benefits from wage growth to price growth. According to Social Security Administration’s (SSA) Office of the Chief Actuary, these formula changes apply to initial benefits for all types of beneficiaries, including disabled workers. Social Security defined benefits would be enhanced for certain surviving spouses and for low earners. When fully implemented, initial benefits for certain low-wage workers with steady work histories could be raised by as much as 40 percent. Beneficiaries who lived longer than their spouses would receive the larger of their own benefit or 75 percent of the benefit that would be received by the couple if both spouses were alive. We used simulations to examine how Model 2 might affect the distribution of Social Security benefits. We did not examine the distribution of equity measures such as benefit-to-tax ratios or rates of return, because the proposal’s individual account feature requires general revenue transfers. General revenue transfers are problematic when calculating equity measures because it is difficult to determine who ultimately pays for the additional financing. Because simulations are sensitive to economic and demographic assumptions, it is more appropriate to compare benefits across the scenarios than to focus on the actual estimates themselves. Since account participation is voluntary, we used two simulations to examine the effects of the Model 2 provisions, one with universal account participation (Model 2-100 percent) and one with no account participation (Model 2-0 percent). We also assumed that all account participants would invest in the same portfolios; consequently we did not capture any distributional effect that might occur if lower earners were to make different account participation or investment decisions than higher earners. We compared benefits under Model 2 with hypothetical benchmark policy scenarios that would achieve 75-year solvency either by only increasing payroll taxes or by only reducing benefits. The tax- increase, or “promised benefits,” benchmark scenario pays benefits defined by the current benefit formula and raises payroll taxes to bring the Social Security system into financial balance. The proportional benefit- reduction, or “funded benefits,” benchmark scenario maintains current tax rates and achieves financial balance by gradually phasing in proportional benefit reductions. In order to compare Model 2 with the benchmarks, we assumed all account participants convert their account balances at retirement into periodic monthly payments. We did not simulate other sources of retirement income, such as employer pensions or other individual retirement savings, and such sources may interact with Social Security policy. (See app. I for more details on the GEMINI microsimulation model, our benchmark policy scenarios, and our assumptions for CSSS Model 2.) Given our assumptions, our analysis suggests that Model 2 would favor lower earners somewhat more than the benchmark scenarios. Figure 5 shows the share of household lifetime benefits received by the bottom and top fifths of earnings for individuals born in 1985 for both Model 2 and for the promised and funded benefits scenarios. For example, households in the bottom fifth of earnings received about 12.5 percent of all lifetime benefits under both benchmark scenarios. According to our simulations, households in the bottom fifth of earnings would receive greater shares of lifetime benefits under both Model 2 scenarios than under the benchmark scenarios, while households in the top fifth of earnings would receive smaller shares under Model 2 than under the benchmarks. It should be noted that while the simulations suggest that the distribution of benefits under Model 2 is more progressive than under the benchmarks, this does not mean benefit levels are always higher for the bottom fifth under Model 2. (See fig. 6.) According to our simulations, median household lifetime benefits for the bottom fifth under Model 2-0 percent would be 3 percent higher than under the funded benefits scenario but 21 percent lower than under the promised benefits scenario. Median household lifetime benefits for the bottom fifth under Model 2-100 percent would be 26 percent higher than under the funded benefits scenario but 4 percent lower than under the promised benefits scenario. While Model 2 may improve the relative position of lower earners, it may not improve the adequacy of their benefits. To further understand how Model 2 distributes benefits toward lower earners, we examined the distributional effects of each of its core features. First we simulated a version of Model 2-100 percent that included the individual accounts and the reductions in Social Security defined benefits, but not the $1,000 cap on account contributions or the enhanced benefits for low earners and survivors. Next we simulated a version that included the defined-benefit reductions and the individual accounts with the $1,000 cap on account contributions. Finally, we simulated the complete Model 2- 100 percent scenario, which included the enhanced benefits for lower earners and survivors. Our analysis suggests that the effect of the individual accounts and defined benefit reductions, which favor higher earners, would be more than offset by the limit on account contributions and the enhanced benefits for lower earners and survivors. Figure 7 shows the distributional impact of each reform feature. First, we simulated adding the individual accounts and reducing Social Security defined benefits. The share of benefits received by the bottom fifth of earnings falls relative to the benchmarks by as much as a percentage point, and the share received by the top fifth increases by about 1.5 percentage points. Under this scenario, benefits from individual account balances effectively replace some of the benefits calculated from the Social Security benefit formula and the disability program. This shift favors higher earners because, unlike the benefit formula, accounts by themselves do not provide higher replacement rates for lower earners and because DI recipients are more likely to be lower earners. Figure 7 also shows the impact of the cap on contributions and the enhanced benefits for low earners and survivors. Adding the cap on contributions would increase the share of benefits for the lowest fifth of earnings by more than a percentage point and would reduce the top fifth’s share by two percentage points. The cap would reduce total benefits more for higher earners than for lower earners because higher earners have a greater proportion of earnings above the limit. As expected, adding the enhanced benefits for low earners and survivors also favors lower earners. The lowest fifth’s share of benefits increases by about a percentage point, and the top fifth’s share of benefits decreases by almost a percentage point. It should be emphasized that these simulations are only for individuals born in 1985, and the distributional impact of Model 2 could be different for individuals born in later years. For example, under the proposal, initial Social Security defined benefits only grow with prices, while initial benefits from account balances grow with wages. Since wages generally grow faster than prices, Social Security defined benefits will decline as a proportion of total benefits, reducing the importance of the progressive benefit formula, disability benefits, and the enhanced benefits for low earners and survivors. It should also be noted that the account feature of Model 2-100 percent likely exposes recipients to greater financial risk. Greater exposure to risk may not affect the shares of benefits received by the bottom and top fifths of earnings. However, greater risk may be more problematic for lower earners who likely have fewer resources to fall back on if their accounts perform poorly. The “Progressive Proposal for Social Security Personal Accounts,” offered by Peter Ferrara, would establish voluntary, progressive individual accounts and reduce the Social Security retirement and aged survivor benefits for those who participate. A governing board would administer the accounts centrally in a fashion similar to the Thrift Savings Plan for federal employees. Specifically, under the proposal, Account contributions would be redirected from the Social Security payroll tax. They would equal 10 percent of the first $10,000 of annual earnings and 5 percent of earnings over $10,000 up to the maximum taxable earnings level, which is $87,900 in 2004. The $10,000 threshold would increase annually according to Social Security’s national Average Wage Index. Participating workers would be guaranteed that the combined benefits from Social Security’s defined benefit and their personal accounts would at least equal the Social Security benefits that current law promises them, as long as they choose the default investment option. The default investment option would have an allocation of 65 percent in broad indexed equity funds and 35 percent in broad indexed corporate bond funds. Those who never participate in the personal account option would be provided benefits promised by the current system. To continue paying benefits while also making deposits to the accounts, funds would be transferred from the Treasury’s general fund. The accounts would eventually completely replace Social Security’s old- age benefits for workers and their spouses, under the assumptions for investment returns used by Social Security actuaries. Accordingly, the proposal anticipates reductions in the Social Security payroll tax in the long term that would be identical for all workers. Social Security benefits for workers who become disabled or who die before retirement would not be affected. Under the Ferrara proposal, no changes would be made to the Social Security defined benefits scheduled under current law for those who choose not to participate in the accounts or for whom the benefit guarantee would apply. In addition, benefits for disabled workers and those who die before retirement would remain in place, and the distributional effects of these parts of Social Security would remain largely unchanged. Thus, any changes to the distribution of benefits would occur through the individual accounts for those choosing the accounts. All workers would initially continue to pay payroll taxes at the same rate as under current law, which is the same for all earnings up to the maximum taxable earnings. At the same time, lower earners would have larger contributions made from the payroll tax to their voluntary individual accounts. As a result, holding all else equal, the annuities that lower earners could receive from their accounts would replace a higher share of their pre-retirement earnings than annuities for higher earners. However, without rigorous quantitative analysis, it remains unclear how the distributional effects of the accounts would compare with and interact with the effects of the current system. In particular, actual investment returns could vary depending on individuals’ investment choices or on market performance, and in some cases returns may not be high enough to completely replace Social Security benefits, in which case the guarantee would apply. The Ferrara proposal also would have significant distributional effects from an equity perspective due to its revenue provisions. The general revenue transfers needed to cover the transition to individual accounts could have substantial effects on rates of return and other equity measures. Also, once the transition is complete and it becomes possible under the proposal to reduce payroll taxes, such tax reductions would also affect equity measures and how they are distributed. A proposal offered by Peter Diamond and Peter Orszag would restore Social Security’s long-term solvency by increasing revenues and decreasing benefits while also increasing benefits for selected old-age survivors and low earners. Also provisions in the proposal ensure that benefits in the aggregate are not reduced for workers who become disabled and for the young survivors of workers who die before retirement. Specifically, under the proposal, Benefit reductions: Social Security benefits would decrease by having initial benefits grow at a slower rate to reflect expected gains in life expectancy. Benefits would decrease for higher earners through a change to the benefit formula. Benefits would decrease by an additional proportional 0.30 percent beginning in 2023. Revenue increases: Payroll taxes would gradually increase by raising the maximum earnings level subject to the payroll tax, which is $87,900 in 2004. Also, Social Security would cover all new state and local government employees. (This would increase revenues from the payroll tax immediately but would not result in additional benefit payments until the newly covered workers became eligible for benefits.) In addition, payroll taxes would increase 3 percentage points (divided equally between employees and employers) for all earnings above the maximum taxable earnings level. Benefit calculations would not reflect the additional earnings taxed under this provision. The tax on earnings above the maximum taxable earnings level would increase by an additional 0.51 percent annually beginning in 2023. Payroll taxes on earnings at or below the maximum taxable earnings level would increase by an additional 0.255 percent annually beginning in 2023. Benefit enhancements: Benefits would increase for lower earners through a new benefit formula for qualifying workers. This provision is conceptually similar to the enhanced benefit for lower earners under CSSS Model 2 but uses a different formula. Benefits would increase for old-age surviving spouses to 75 percent of the benefit the married couple would have received if both were still alive. This provision is conceptually similar to the enhanced survivor benefit under CSSS Model 2 but is specified somewhat differently. Benefits for those workers who become disabled and their dependents and for the young survivors of workers who die before retirement would increase under a “Super-COLA” through changes to the formula for calculating initial benefits, which would be recalculated each year benefits are received. This provision is designed so that the other reform provisions do not affect these beneficiaries. The Diamond-Orszag proposal would make a variety of benefit changes that would affect the distribution of benefits. Reducing benefits to reflect expected gains in life expectancy would be a proportional reduction, decreasing benefits by the same percentage across all earnings levels. The additional reductions beginning in 2023 would also be proportional. Proportional reductions do not, by definition, change the share of benefits received by each segment of the earnings distribution. Still, they represent a downsizing of a redistributive benefit program. As a result the size of the redistributions would be smaller under these proportional reductions than under the current system, holding all else equal. However, in addition, the proposal contains another benefit reduction that affects only higher earners, which would result in their getting a smaller share of total benefits and in increasing shares for all other workers not affected by the reduction. Moreover, the proposal would increase benefits for lower earners and surviving aged spouses. The proposal also preserves benefits for workers who become disabled and for young the survivors of workers who die before retirement. These workers tend to be lower earners, so all of the proposal's benefit increases would generally increase the share of total benefits received by lower earners. Finally, the proposal includes a variety of revenue increases, most of which increase the tax burden on higher earners relative to lower earners. As a result, the distribution of rates of return and other equity measures would favor lower earners more and higher earners less than under the current system. By design, Social Security distributes benefits and contributions across workers and their families in a variety of ways. These distributional effects illustrate how the program balances the goal of helping ensure adequate incomes with the goal of giving all workers a fair deal on their contributions. Any changes to Social Security would potentially alter those distributional effects and the balance between those goals. Therefore, policy makers need to understand how to evaluate distributional effects of alternative policies. The various evaluation approaches reflect varying emphases on Social Security’s adequacy and equity goals, so the methodological choices are connected inherently to policy choices. Regardless of policy perspectives, methodological issues such as the effects of general revenue transfers muddy distributional analysis. Moreover, greater progressivity is not the same thing as greater adequacy. Under some reform scenarios, Social Security could distribute benefits more progressively than current law yet provide lower, less adequate benefits. At the same time, our analysis shows that reform provisions that favor lower earners can offset other provisions that disfavor them. In addition, greater progressivity may result in less equity. As a result, any evaluations should consider a proposal’s provisions taken together as a whole. Moreover, distributional effects are only one of several kinds of effects proposals would have. A comprehensive evaluation is needed that considers a range of effects together. In our criteria for evaluating reform proposals, progressivity is just one of several aspects of balancing adequacy and equity. We provided SSA an opportunity to comment on the draft report. The agency provided us with written comments, which appear in Appendix II. In general, SSA concurred with the methodology, overall findings and conclusions of the report, noting that our modeling results are consistent with SSA’s internal efforts to model the features of Model 2 of the Commission to Strengthen Social Security. Many of SSA’s comments, for example those regarding progressivity measures and equity measure methodology, involve clarifying our presentation or conducting additional analyses to provide more consistency with other analyses or to extend the readers’ understanding. We revised our draft in response to these suggestions as appropriate, given our time and resource constraints. SSA agreed with GAO’s discussion of the complications involved in applying equity measures to reform proposals that include general revenue transfers and concurred that a satisfactory resolution of the issue is complex and methodologically troublesome. SSA suggested some additional analysis relying on some simplifying assumptions, for example assuming any general revenue transfer is financed through a payroll tax increase, that one could use to tackle the problem. We agree that despite its methodological complexity, the use of general revenue transfers raises many important distributional issues. However, the analytical difficulties raised by this issue would require thoughtful and deliberate research that was beyond the scope of the current study, given our time and resource constraints. SSA also had suggestions concerning our choice of benchmark policy scenarios against which to compare reform proposals. For example, while SSA is supportive of GAO’s development of standard benchmarks, they note that our benchmarks do not match the sustainable solvency achieved by Model 2 beyond 75 years and that this distinction should be noted in the report. SSA also suggests that a third benchmark be considered that would characterize a scenario where no reform action is taken and the program could only pay benefits equal to incoming payroll tax revenues. As we have noted in the past, we agree that sustainable solvency is an important objective and that the GAO benchmarks do not achieve solvency beyond the 75 year period. We share SSA’s emphasis on the importance of careful and complete annotation and we have clarified our report, where appropriate, to minimize the potential for misinterpretation or misunderstanding on this matter. However, in this case, we did not revise our benchmarks because we recognized (along with SSA actuaries we consulted early in the assignment) that the use of sustainable benchmarks would not have a noticeable effect on an analysis of the shape of the distribution of benefits and taxes. Regarding the use of a “no action” benchmark, we continue to believe that comparing a proposal that starts relatively soon to one that posits that no legislative action is ever taken does not provide the consistent bounds for reform captured by our current benchmarks. Appendix I of our report discusses the construction and rationale for the benchmarks used in this report. In our view, our set of benchmarks provides a fair and objective measuring stick with which to compare alternative proposals. SSA also provided technical and other clarifying comments that we incorporated as appropriate. We will send copies of this report to appropriate congressional committees and other interested parties. Copies will also be made available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me at (202) 512-7215, Charles Jeszeck at (202) 512-7036, or Ken Stockbridge at (202) 512-7264, if you have any questions about this report. Other major contributors include Gordon Mermin and Seyda Wentworth. Genuine Microsimulation of Social Security and Accounts (GEMINI) is a microsimulation model developed by the Policy Simulation Group (PSG). GEMINI simulates Social Security benefits and taxes for large representative samples of people born in the same year. GEMINI simulates all types of Social Security benefits including retired workers’, spouses’, survivors’, and disability benefits. It can be used to model a variety of Social Security reforms including the introduction of individual accounts. GEMINI uses inputs from two other PSG models, the Social Security and Accounts Simulator (SSASIM), which has been used in numerous GAO reports, and the Pension Simulator (PENSIM), which has been developed for the Department of Labor. GEMINI relies on SSASIM for economic and demographic projections and relies on PENSIM for simulated life histories of large representative samples of people born in the same year and their spouses. Life histories include educational attainment, labor force participation, earnings, job mobility, marriage, disability, childbirth, retirement, and death. Life histories are validated against data from the Survey of Income and Program Participation, the Current Population Survey, Modeling Income in the Near Term (MINT3), and the Panel Study of Income Dynamics. Additionally, any projected statistics (such as life expectancy, employment patterns, and marital status at age 60) are, where possible, consistent with intermediate-cost projections from Social Security Administration’s Office of the Chief Actuary (OCACT). At their best, such models can only provide very rough estimates of future incomes. However, these estimates may be useful for comparing future incomes across alternative policy scenarios and over time. For this report we used GEMINI to simulate Social Security benefits and taxes for 100,000 individuals born in 1985. Benefits and taxes were simulated under our tax-increase (promised benefits) and proportional benefit-reduction (funded benefits) benchmarks (described below) and under Model 2 of the President’s Commission to Strengthen Social Security (CSSS). We also simulated variations of these scenarios to examine the impact of disability benefits, the cap on taxable earnings, each feature of Model 2, and different assumptions on the return to equities. To examine lifetime earnings, benefits, and taxes on a household basis, we chose a “shared” concept that researchers have used with the MINT3 and DYNASIM microsimulation models. In years that individuals are married, we assign them half of their own earnings, benefits, and contributions and half of their spouses’ earnings, benefits, and contributions. In years that individuals are single, we assign them their entire earnings, benefits, and contributions. This technique accounts for household dynamics including divorce, remarriage, and widowhood. To facilitate our modeling analysis, we made a variety of assumptions regarding economic and demographic trends and how CSSS Model 2’s individual accounts would work. In choosing our assumptions, we focused our analysis to illustrate relevant points about distributional effects and hold equal as much as possible any variables that were either not relevant to or would unduly complicate that focus. As a result of these assumptions as well as issues inherent in any modeling effort, our analysis has some key limitations, especially relating to risk, individual account decisions, and changes over time. The simulations are based on economic and demographic assumptions from the 2003 Social Security trustees’ report. We used trustees’ assumptions for inflation, real wage growth, mortality decline, immigration, labor force participation, and interest rates. The simulations assumed that mortality rates vary by educational attainment and disability status. In every year, mortality rates implied by trustees assumptions are increased for those with lower levels of education and reduced for those with higher levels of education. For example, mortality rates are multiplied by 1.5 for women who do not complete high school, while rates are multiplied by 0.7 for women with four-year college degrees. Adjustment factors for education were chosen to calibrate life expectancy by demographic group with the MINT3 simulation model. Mortality rates are multiplied by a factor of 2 for Disability Insurance (DI) recipients. The adjustment factor for disability was chosen so PENSIM life histories produced aggregate results consistent with 2003 Social Security Trustees Report. Assuming constant adjustment factors over time does not capture any convergence in mortality rates as a birth cohort ages. It may be the case that differences in mortality rates across education levels may narrow by the time a birth cohort retires. If that is the case, our simulations overstate differences in life expectancy at retirement. Rather than model account participation, we instead simulate benefits under two scenarios, one where all individuals participate and another scenario where no one participates. As a result, we do not capture any distributional effects that might result from account participation varying by earnings level. For instance, if lower earners are less likely to participate in the individual accounts, then our simulations may overstate their share of benefits, as account participation is likely to increase benefits. Like the analysis of Model 2 by OCACT we assume all individuals invest in the same portfolio: 50 percent in equities, 30 percent in corporate bonds, and 20 percent in Treasury bonds. We do not capture any distributional effects that might result if portfolio choice varies by earnings level. For instance, if lower earners were more risk averse and therefore choose more conservative portfolios, our simulations overstate the share of benefits for lower earners. We use the same assumptions for asset returns as OCACT: In all years real returns are 6.5 percent for equities, 3.5 percent for corporate bonds, and 3 percent for Treasury bonds, with an annual administrative expense of 30 basis points. For sensitivity analysis, we simulated a version of Model 2 that assumed a 4.9 percent real return to equities, a version that assumed an 8.7 percent real return to equities, and a version that assumed the return to equities varied stochastically across individuals and over time. Shares of benefits by earnings quintile were similar under all specifications. However, if portfolio choice or participation in accounts varied by earnings quintile, then shares of benefits might be more sensitive to rates of return. In order to compare account balances with Social Security defined benefits, we follow the assumption of OCACT that individuals fully annuitize their account balances at retirement. We assume individuals purchase inflation-indexed annuities, while married individuals purchasing inflation-indexed joint and two-thirds survivor annuities. The commission proposal, however, also allows participants to access their accounts through regular monthly withdrawals or through lump sum distributions if their monthly benefits (Social Security defined benefits and any annuity payments) are enough to keep them out of poverty. Given that few defined-contribution pension recipients currently choose to annuitize, it is possible that many retirees under Model 2 would not annuitize their accounts. To the extent that withdrawal decisions vary by earnings level, there may be distributional consequences that our simulations do not capture. For instance, some people may withdraw money too quickly, leaving themselves with inadequate income later in retirement, and such behaviors could vary by earnings level. Our quantitative analysis does not reflect differences in risk across policy scenarios. Because of financial market fluctuations, individual accounts likely expose recipients to greater financial risk. For sensitivity analysis, we simulated a version of Model 2 where the return to equities varied stochastically across individuals and over time. Stochastic rates of return had very little impact on shares of benefits received by earnings quintiles. However, greater risk may be more problematic for lower earners, who likely have fewer resources to fall back on if their accounts perform poorly. Consequently, lower earners may be more risk averse and therefore suffer greater utility loss from increased risk. We simulated benefits for individuals born in 1985 because Model 2’s reform features would be almost fully phased in for such workers. However, the distributional effects of Model 2 might change over time. For example, under the proposal initial Social Security defined benefits only grow with prices, while initial benefits from account balances grow with wages. Since wages generally grow faster than prices, Social Security defined benefits will decline as a proportion of total benefits, reducing the importance of the progressive benefit formula, disability benefits, and the enhanced benefits for low earners and survivors. To capture the distributional impact of pre-retirement mortality, we calculated benefit-to-tax ratios and lifetime benefits for all sample members who survived past age 24. However, our measure of well-being, lifetime earnings, may not be the best way to assess the well-being of those who die before retirement. Some high-wage workers are classified as low lifetime earners simply because they did not live very long, and consequently our analysis overstates the degree to which those who die young are classified as low earners. As a result, our measures underestimate the degree to which Social Security favors lower earners under all of the scenarios we analyze. For sensitivity analysis, we also calculated benefit-to-tax ratios and lifetime benefits only for sample members who lived to age 67 and beyond. While all of the measures of progressivity were lower, the findings were unchanged as the relationships across all of the scenarios remained the same. To assess the reliability of simulated data from GEMINI, we reviewed PSG’s published validation checks, examined the data for reasonableness and consistency, preformed sensitivity analysis, and compared our results with a study by the actuaries at the Social Security Administration. PSG has published a number of validation checks of its simulated life histories. For example, simulated life expectancy is compared with projections from the Social Security Trustees; simulated benefits at age 62 are compared with administrative data from SSA; and simulated educational attainment, labor force participation rates, and job tenure are compared with values from the Current Population Survey. We found that simulated statistics for the life histories were reasonably close to the validation targets. For sensitivity analysis, we simulated benefits and taxes for policy scenarios under a number of alternative specifications including higher and lower returns to equities, stochastic returns to equities, and limiting the sample to those who survive to retirement. Our findings were consistent across all specifications. Finally, we compared our results with those in a memo from the actuaries at the Social Security Administration. Our finding that the lowest earnings quintile receives a greater share of benefits under Model 2-100 percent than under promised benefits is consistent with the actuaries’ projections of benefits for illustrative high- and low- earning couples in 2052. Also, in a previous report we found that GEMINI simulations of promised Social Security benefits were similar to MINT simulations for the 1955 birth cohort. We conclude from our assessment that simulated data from GEMINI are sufficiently reliable for the purposes of this report, particularly since we focus on the differences in simulated measures across scenarios, as opposed to the actual estimates themselves. According to current projections of the Social Security trustees for the next 75 years, revenues will not be adequate to pay full benefits as defined by the current benefit formula. Therefore, estimating future Social Security benefits should reflect that actuarial deficit and account for the fact that some combination of benefit reductions and revenue increases will be necessary to restore long-term solvency. To illustrate a full range of possible outcomes, we developed hypothetical benchmark policy scenarios that would achieve 75-year solvency either by only increasing payroll taxes or by only reducing benefits. In developing these benchmarks, we identified criteria to use to guide their design and selection. Our tax-increase-only benchmark simulates “promised benefits,” or those benefits promised by the current benefit formula, while our benefit-reduction-only benchmarks simulate “funded benefits,” or those benefits for which currently scheduled revenues are projected to be sufficient. Under the latter policy scenarios, the benefit reductions would be phased in between 2005 and 2035 to strike a balance between the size of the incremental reductions each year and the size of the ultimate reduction. At our request, SSA actuaries scored our benchmark policies and determined the parameters for each that would achieve 75-year solvency. Table 1 summarizes our benchmark policy scenarios. For our benefit- reduction scenarios, the actuaries determined these parameters assuming that disabled and survivor benefits would be reduced on the same basis as retired worker and dependent benefits. If disabled and survivor benefits were not reduced at all, reductions in other benefits would be deeper than shown in this analysis. According to our analysis, appropriate benchmark policies should ideally be evaluated against the following criteria: 1. “Distributional neutrality”: the benchmark should reflect the current system as closely as possible while still restoring solvency. In particular, it should try to reflect the goals and effects of the current system with respect to redistribution of income. However, there are many possible ways to interpret what this means, such as a. producing a distribution of benefit levels with a shape similar to the distribution under the current benefit formula (as measured by coefficients of variation, skewness, kurtosis, etc.); b. maintaining a proportional level of income transfers in dollars; c. maintaining proportional replacement rates; and d. maintaining proportional rates of return. 2. Demarcating upper and lower bounds: These would be the bounds within which the effects of alternative proposals would fall. For example, one benchmark would reflect restoring solvency solely by increasing payroll taxes and therefore maximizing benefit levels, while another would solely reduce benefits and therefore minimize payroll tax rates. 3. Ability to model: The benchmark should lend itself to being modeled within the GEMINI model. 4. Plausibility: The benchmark should serve as a reasonable alternative within the current debate; otherwise, the benchmark could be perceived as an invalid basis for comparison. 5. Transparency: The benchmark should be readily explainable to the reader. Our tax-increase-only benchmark would raise payroll taxes once and immediately by the amount of Social Security’s actuarial deficit as a percentage of payroll. It results in the smallest ultimate tax rate of those we considered and spreads the tax burden most evenly across generations; this is the primary basis for our selection. The later that taxes are increased, the higher the ultimate tax rate needed to achieve solvency, and in turn the higher the tax burden on later taxpayers and lower on earlier taxpayers. Still, any policy scenario that achieves 75-year solvency only by increasing revenues would have the same effect on the adequacy of future benefits in that promised benefits would not be reduced. Nevertheless, alternative approaches to increasing revenues could have very different effects on individual equity. We developed alternative benefit-reduction benchmarks for our analysis. For ease of modeling, all benefit-reduction benchmarks take the form of reductions in the benefit formula factors; they differ in the relative size of those reductions across the three factors, which are 90, 32, and 15 percent under the current formula. Each benchmark has three dimensions of specification: scope, phase-in period, and the factor changes themselves. For our analysis, we apply benefit reductions in our benchmarks very generally to all types of benefits, including disability and survivors’ benefits as well as old-age benefits. Our objective is to find policies that achieve solvency while reflecting the distributional effects of the current program as closely as possible. Therefore, it would not be appropriate to reduce some benefits and not others. If disability and survivors’ benefits were not reduced at all, reductions in other benefits would be deeper than shown in this analysis. We selected a phase-in period that begins with those reaching age 62 in 2005 and continues for 30 years. We chose this phase-in period to achieve a balance between two competing objectives: (1) minimizing the size of the ultimate benefit reduction and (2) minimizing the size of each year’s incremental reduction to avoid “notches,” or unduly large incremental reductions. Notches create marked inequities between beneficiaries close in age to each other. Later birth cohorts are generally agreed to experience lower rates of return on their contributions already under the current system. Therefore, minimizing the size of the ultimate benefit reduction would also minimize further reductions in rates of return for later cohorts. The smaller each year’s reduction, the longer it will take for benefit reductions to achieve solvency, and in turn the deeper the eventual reductions will have to be. However, the smallest possible ultimate reduction would be achieved by reducing benefits immediately for all new retirees by over 10 percent; this would create a huge notch. Our analysis shows that a 30-year phase-in should produce incremental annual reductions that would be relatively small and avoid significant notches. In contrast, longer phase-in periods would require deeper ultimate reductions. In addition, we feel it is appropriate to delay the first year of the benefit reductions for a few years because those within a few years of retirement would not have adequate time to adjust their retirement planning if the reductions applied immediately. The Maintain Tax Rates (MTR) benchmark in the 1994-96 Advisory Council Report also provided for a similar delay. Finally, the timing of any policy changes in a benchmark scenario should be consistent with the proposals against which the benchmark is compared. The analysis of any proposal assumes that the proposal is enacted, usually within a few years. Consistency requires that any benchmark also assume enactment of the benchmark policy in the same time frame. Some analysts have suggested using a benchmark scenario in which Congress does not act at all and the trust funds become exhausted. However, such a benchmark assumes that no action is taken while the proposals against which it is compared assume that action is taken, which is inconsistent. It also seems unlikely that a policy enacted over the next few years would wait to reduce benefits until the trust funds are exhausted; such a policy would result in sudden, large benefit reductions and create substantial inequities across generations. When workers retire, become disabled, or die, Social Security uses their lifetime earnings records to determine each worker’s PIA, on which the initial benefit and auxiliary benefits are based. The PIA is the result of two elements—the Average Indexed Monthly Earnings (AIME) and the benefit formula. The AIME is determined by taking the lifetime earnings earnings record, indexing it, and taking the average of the highest 35 years of indexed wages. To determine the PIA, the AIME is then applied to a step- like formula, shown here for 2004. PIA = 90% (AIME $612) + 32% (AIME > $612 and $3689) + 15% (AIME > $3689) where AIME is the applicable portion of AIME. All of our benefit-reduction benchmarks are variations of changes in PIA formula factors. Proportional reduction: Each formula factor is reduced annually by subtracting a constant proportion of that factor’s value under current law, resulting in a constant percentage reduction of currently promised benefits for everyone. That is, x) represents the 3 PIA formula factors in year t and x = constant proportional formula factor reduction. The value of x is calculated to achieve 75-year solvency, given the chosen phase-in period and scope of reductions. The formula for this reduction specifies that the proportional reduction is always taken as a proportion of the current law factors rather than the factors for each preceding year. This maintains a constant rate of benefit reduction from year to year. In contrast, taking the reduction as a proportion of each preceding year’s factors implies a decelerating of the benefit reduction over time because each preceding year’s factors get smaller with each reduction. To achieve the same level of 75-year solvency, this would require a greater proportional reduction in earlier years because of the smaller reductions in later years. The proportional reduction hits lower earners hard because the constant x percent of the higher formula factors results in a larger percentage point reduction over the lower earnings segments of the formula. For example, in a year when the cumulative size of the proportional reduction has reached 10 percent, the 90 percent factor would then have been reduced by 9 percentage points, the 32 percent factor by 3.2 percentage points, and the 15 percent factor by 1.5 percentage points. As a result, earnings in the first segment of the benefit formula would be replaced at 9 percentage points less than the current formula, while earnings in the third segment of the formula would be replaced at only 1.5 percentage points less than the current formula. Hypothetical-account reduction: Each formula factor is reduced by annually subtracting a constant amount that is the same for all factors in all years. That is, where y = constant formula factor reduction. The value of y is calculated to achieve 75-year solvency, given the chosen phase-in period and scope of reductions. This reduction results in equal percentage point reductions in the formula factors, by definition, and subjects earnings across all segments of the PIA formula to the same reduction. Therefore, it avoids hitting lower earners as hard as the proportional reduction. We call this a hypothetical-account reduction because it has the same effect as a benefit reduction based on using a hypothetical account. In fact, we developed this benchmark first using a hypothetical-account approach and then discovered it can be reduced to a simple change in the PIA formula. Hypothetical-account calculations have become a common way to offset benefits under individual account proposals, such as those by the President’s Commission to Strengthen Social Security. Such proposals reduce Social Security’s defined benefit to reflect the fact that contributions have been diverted from the trust funds into the individual accounts. The account contributions are accumulated in a hypothetical account at a specified rate of return and then converted to an annuity value. We used a hypothetical-account offset in our 1990 analysis of a partial privatization proposal. In that analysis, we were charged with finding a benefit reduction that would leave the redistributive effects of the program unchanged while allowing a diversion of 2 percentage points of contributions into individual accounts. We demonstrated the distributional neutrality of this benefit reduction by showing that if all individuals earned exactly the cohort rate of return on their individual accounts, then their income under the proposal from Social Security and the new accounts would be exactly the same as under the current system. For the purposes of developing a benefit-reduction benchmark, we applied the hypothetical-account approach even though there are no actual individual accounts. From our previous analysis, we realized a hypothetical-account approach may produce distributional effects that might in some sense be more neutral than other reduction approaches and therefore worth studying as an alternative. In effect, using it to calculate a benefit-reduction benchmark implies calculating an annuity value of the percent of payroll that represents the system’s revenue shortage. As it turns out mathematically, the hypothetical-account approach to reducing benefits translates into PIA formula factor changes. Such a benefit reduction is proportional to the AIME, not to the PIA, because the contributions to a hypothetical account are proportional to earnings. Therefore, a benefit reduction based on such an account would also be proportional to earnings; that is, Benefit reduction = y AIME Therefore, the new PIA would be PIAnew =(90% - y) AIME + (32% - y) AIME + (15% - y) AIME Thus, the reduction from a hypothetical account can be translated into a change in the PIA formula factors. Because this reduction can be described as subtracting a constant amount from each PIA formula factor, it is reasonably transparent. In our analysis of CSSS Model 2, we found that Model 2 had a benefit distribution that was very close to our hypothetical-account benefit- reduction benchmark. For example, households in the bottom fifth of earnings received about 13.8 percent of all lifetime benefits under Model 2, compared with 13.5 percent under the hypothetical-account benefit- reduction benchmark. In this report, we present the results using the proportional benefit-reduction benchmark because this benefit-reduction approach is more easily understood. Table 2 summarizes the features of our three benchmarks. Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario. GAO-03-907. Washington, D.C.: July 29, 2003. Social Security and Minorities: Earnings, Disability Incidence, and Mortality Are Key Factors That Influence Taxes Paid and Benefits Received. GAO-03-387. Washington, D.C.: Apr. 23, 2003. Social Security Reform: Analysis of Reform Models Developed by the President's Commission to Strengthen Social Security. GAO-03-310. Washington, D.C.: Jan. 15, 2003. Social Security: Program’s Role in Helping Ensure Income Adequacy. GAO-02-62. Washington, D.C.: Nov. 30, 2001. Social Security Reform: Potential Effects on SSA’s Disability Programs and Beneficiaries. GAO-01-35. Washington, D.C.: Jan. 24, 2001. Social Security Reform: Information on the Archer-Shaw Proposal. GAO/AIMD/HEHS-00-56. Washington, D.C.: Jan. 18, 2000. Social Security: Evaluating Reform Proposals. GAO/AIMD/HEHS-00-29. Washington, D.C.: Nov. 4, 1999. Social Security: Issues in Comparing Rates of Return with Market Investments. GAO/HEHS-99-110. Washington, D.C.: Aug. 5, 1999. Social Security: Criteria for Evaluating Social Security Reform Proposals. GAO/T-HEHS-99-94. Washington, D.C.: Mar. 25, 1999. Social Security: Different Approaches for Addressing Program Solvency. GAO/HEHS-98-33. Washington, D.C.: July 22, 1998. Social Security Financing: Implications of Government Stock Investing for the Trust Fund, the Federal Budget, and the Economy. GAO/AIMD/HEHS-98-74. Washington, D.C.: Apr. 22, 1998. Social Security: Restoring Long-Term Solvency Will Require Difficult Choices. GAO/T-HEHS-98-95. Washington, D.C.: Feb. 10, 1998. | Under the current Social Security benefit formula, retired workers receive benefits that equal about 50 percent of pre-retirement earnings for a low-wage worker but only about 30 percent for a relatively high-wage worker. Factors other than earnings also influence the distribution of benefits, including the program's provisions for disabled workers, spouses, children, and survivors. Changes in the program over time also affect the distribution of benefits across generations. Social Security faces a long-term structural financing shortfall. Program changes to address that shortfall could alter the way Social Security's benefits and revenues are distributed across the population and affect the income security of millions of Americans. To gain a better understanding of the distributional effects of potential program changes, the Chairman and Ranking Minority Member of the Senate Special Committee on Aging asked us to address (1) how to define and describe "progressivity," that is, the distribution of benefits and taxes with respect to earnings level, when assessing the current Social Security system or proposed changes to it; (2) what factors influence the distributional effects of the current Social Security program; and (3) what would be the distributional effects of various reform proposals, compared with alternative solvent baselines for the current system. Two distinct perspectives on Social Security's goals suggest different approaches to measuring "progressivity," or the distribution of benefits and taxes with respect to earnings level. Both perspectives provide valuable insights. An adequacy perspective focuses on benefit levels and how well they maintain pre-entitlement living standards. An equity perspective focuses on rates of return and other measures relating lifetime benefits to contributions. Both perspectives examine how their measures are distributed across earnings levels. However, equity measures take all benefits and taxes into account, which is difficult for reform proposals that rely on general revenue transfers because it is unclear who pays for those general revenues. The Social Security program's distributional effects reflect both program features and demographic patterns among its recipients. In addition to the benefit formula, disability benefits favor lower earners because disabled workers are more likely to be lower lifetime earners. In contrast, household patterns reduce the system's tilt toward lower earners, for example, when lower earners have high-earner spouses. The advantage for lower earners is also diminished by the fact that they may not live as long as higher earners and therefore would get benefits for fewer years on average. Proposals to alter the Social Security program would have different distributional effects, depending on their design. Model 2 of the President's Commission to Strengthen Social Security proposes new individual accounts, certain benefit reductions for all beneficiaries, and certain benefit enhancements for selected low earners and survivors. According to our simulations, the combined effect could result in lower earners receiving a greater share of all benefits than promised or funded under the current system if all workers invest in the same portfolio. |
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FHA was established in 1934 under the National Housing Act (P.L. 73-479) to broaden homeownership, shore up and protect lending institutions, and stimulate employment in the building industry. FHA insures private lenders against losses on mortgages that finance purchases of properties with one to four housing units. Many FHA-insured loans are made to low-income, minority, and first-time homebuyers. Generally, borrowers are required to purchase single-family mortgage insurance when the value of the mortgage is large relative to the price of the house. FHA, the Department of Veterans Affairs, and private mortgage insurers provide virtually all of this insurance. In recent years private mortgage insurers and conventional mortgage lenders have begun to offer alternatives to borrowers who want to make little or no down payment. FHA provides most of its single-family insurance through a program supported by the Mutual Mortgage Insurance Fund. The Fund is organized as a mutual insurance fund in that any income received in excess of the amounts required to cover initial insuring costs, operating expenses, and losses due to claims may be paid to borrowers in the form of distributive shares after they pay their mortgages in full or voluntarily terminate their FHA insurance. The economic value of the Fund depends on the relative sizes of cash outflows and inflows over time. Cash flows out of the Fund from payments associated with claims on foreclosed properties, refunds of up-front premiums on mortgages that are prepaid, and administrative expenses for management of the program (see fig. 1). To cover these outflows, FHA deposits cash inflows—up-front and annual insurance premiums from participating homebuyers and net proceeds from the sale of foreclosed properties—into the Fund. If the Fund were to be exhausted, the U.S. Treasury would have to cover lenders' claims and administrative costs directly. The Fund remained relatively healthy from its inception until the 1980s when losses were substantial, primarily because of high foreclosure rates in regions experiencing economic stress, particularly the oil-producing states in the west south central section of the United States. These losses prompted the reforms that were first enacted in November 1990 as part of the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508). The reforms that were designed to place the Fund on an actuarially sound basis required the Secretary of HUD to take steps to ensure that the Fund attains a capital ratio of 2 percent of the insurance-in-force by November 2000 and maintains that ratio at a minimum at all times thereafter; an independent contractor to conduct an annual actuarial review of the the Secretary of HUD to suspend the payment of distributive shares, which had been paid continuously from 1943 to 1990, until the Fund is actuarially sound; and FHA borrowers to pay more in insurance premiums over the life of their loans by adding a risk-adjusted annual premium to the one time, up- front premium. The Federal Credit Reform Act of 1990, enacted as part of the Omnibus Budget Reconciliation Act of 1990, also reformed budgeting methods for federal credit programs including FHA's mutual insurance program. The 1990 credit reforms were intended to ensure that the full cost of credit activities for the current budget year would be reflected in the federal budget so that the executive branch and the Congress could consider these costs when making annual budget decisions. As a result, FHA's budget is required to reflect the subsidy cost to the government—the estimated long- term cost calculated on a net present value basis—of FHA's loan insurance activities for that year. During the 1990s, the estimated economic value of the Fund—comprised of capital resources and the net present value of future cash flows—grew substantially. As figure 2 shows, by the end of fiscal year 1995, the Fund had attained an estimated economic value that slightly exceeded the amount required for a 2-percent capital ratio. Since that time, the estimated economic value of the Fund has continued to grow and has always exceeded the amount required for a 2-percent capital ratio. As a result of the 1990 housing reforms, the Fund must not only meet capital ratio requirements, but it must also achieve actuarial soundness; that is, the Fund must contain sufficient reserves and funding to cover estimated future losses resulting from the payment of claims on foreclosed mortgages and administrative costs. However, neither the legislation nor the actuarial profession defines actuarial soundness. Price Waterhouse (now PricewaterhouseCoopers) in 1989 concluded that for the Fund to be actuarially sound, it should have capital resources that could withstand losses from reasonably adverse, but not catastrophic, economic downturns. The Price Waterhouse report did not clearly distinguish adverse from catastrophic downturns; however, they said that private mortgage insurers are required to hold contingency reserves to protect against catastrophic losses. In turn, rating agencies require that private mortgage insurers have enough capital on hand to withstand severe losses that would occur if loans they insure across the entire nation had losses similar to those experienced in the west south central states in the 1980s. Because economic downturns put downward pressure on house prices and incomes, they can stress FHA's ability to meet its obligations. Thus, it is reasonable that measures of the financial soundness of the Fund would be based on tests of the Fund's ability to withstand recent recessions or regional economic downturns. In the last 25 years, we have experienced a national recession and regional economic declines that did or could have placed stress on FHA. For example, the nation experienced a recession in 1981 and 1982 that strained mortgage markets. Regionally, states in the west south central portion of the nation experienced an economic decline in 1986 through 1989 precipitated by a sharp drop in the price of crude oil. Similarly, the economic decline experienced by California from 1992 through 1995 placed stress on FHA. Because FHA does substantial business in these regions of the country, these experiences led to substantial losses for FHA. In contrast, the economic decline experienced by the New England states from 1989 through 1991 placed little strain on FHA because insured mortgages in this region do not make up a large portion of FHA's total portfolio. However, experiences similar to the New England downturn, during which the unemployment rate increased by almost 140 percent and house prices decreased by 5.5 percent, could place stress on FHA if they occurred in other regions or the nation as a whole. On the basis of our economic model of FHA's home loan program and forecasts of several key economic factors, we estimate that at the end of fiscal year 1999, the Fund had an economic value of about $15.8 billion. This value, which is 3.20 percent of the unamortized insurance-in-force, reflects the robust economy and relatively high premium rates prevailing through most of the 1990s and the good economic performance forecast for the future. In comparison, Deloitte & Touche estimated that the Fund's 1999 economic value was over $800 million larger than our estimate—or about 3.66 percent of its estimate of FHA's unamortized insurance-in-force. Although we did not evaluate the quality of Deloitte's estimates, we believe that Deloitte's and our estimates are comparable because of the uncertainty inherent in forecasting and the professional judgments made in this type of analysis. However, Deloitte's analysis and ours differ in several ways, including the time when the analyses were performed and some of the assumptions made. Using conservative assumptions, we estimate that at the end of fiscal year 1999, the Fund had an economic value of about $15.8 billion. The economic value of the Fund consists of the capital resources on hand and the net present value of future cash flows. Documents used to prepare FHA's 1999 financial statements show that the Fund had capital resources of about $14.3 billion at the end of that fiscal year. We estimated the relationship between historical FHA foreclosures and prepayments and certain key economic factors to forecast foreclosures and prepayments and the resulting cash flows over the next 30-year period for mortgages insured by FHA before the end of fiscal 1999. As a result of this analysis, we estimate that at the end of 1999 the net present value of future cash flows was about $1.5 billion. Summing the capital resources and future cash flows gives us an economic value of about $15.8 billion. See appendix II for a detailed discussion of the forecasting and cash flow models used to estimate the economic value of the Fund. We also estimate that the Fund's capital ratio—the Fund's economic value divided by its insurance-in-force—exceeded 3-percent at the end of fiscal year 1999. From the individual loan data provided by HUD, we calculated that the unamortized insurance-in-force at the end of fiscal year 1999 was about $494 billion and that the amortized value of that insurance, an estimate of the outstanding balance of the loans and thus FHA's insurance liability, was about $455.8 billion. Therefore, the economic value of the Fund represented 3.20 percent of the unamortized insurance-in-force and about 3.47 percent of the amortized insurance-in-force on September 30, 1999. The robust economy and the increased premium rates established by the 1990 legislation contributed to the strength of the Fund at the end of fiscal year 1999. The Fund's economic value principally reflects the large amount of capital resources that the Fund has accrued. Because current capital resources are the result of previous cash flows, the robustness of the economy and the higher premium rates throughout most of the 1990s accounted for the accumulation of these substantial capital resources. Good economic times that are accompanied by relatively low interest rates and relatively high levels of employment are usually associated with high levels of mortgage activity and relatively low levels of foreclosure; therefore, cash inflows have been high relative to outflows during this period. The estimated value of future cash flows also contributed to the strength of the Fund at the end of fiscal 1999. As a result of relatively low interest rates and the robust economy, FHA insured a relatively large number of mortgages in fiscal years 1998 and 1999. These loans make up a large portion of FHA's insurance-in-force, because many borrowers refinanced their FHA-insured mortgages originated in earlier years, probably as a result of interest rates having fallen to relatively low levels in 1998 and 1999. Because these recent loans have low interest rates and because forecasts of economic variables for the near future show house prices rising while unemployment and interest rates remain fairly stable, our models predict that these new loans will have low levels of foreclosure and prepayment. As a result, our models predict that future cash flows out of the Fund will be relatively small. At the same time, we assume that FHA- insured homebuyers will continue to pay the annual premiums that were reinstituted in 1991. Thus, our models predict that cash flowing into the Fund from mortgages already in FHA's portfolio at the end of fiscal year 1999 will be more than sufficient to cover the cash outflows associated with these loans. As a result, the estimated economic value of the Fund is even higher than the level of its current capital resources. As table 1 shows, Deloitte's independent actuarial analysis of the Fund for fiscal year 1999 estimated a capital ratio that was somewhat higher than ours, 3.66 percent rather than 3.20 percent of unamortized insurance-in- force. Although we did not evaluate the quality of Deloitte's estimates, we did identify some reasons that its estimate of the capital ratio was higher than ours. The ratio is higher because Deloitte estimates both a higher economic value of the Fund and a lower amount of insurance-in-force. Deloitte's higher estimated economic value of the Fund includes a higher estimated value for capital resources on hand that is somewhat offset by a lower estimate of the net present value of future cash flows. Our estimate and that of Deloitte rely on forecasts of foreclosures and prepayments over the next 30 years, and, in turn, these forecasts necessarily rest on forecasts of certain economic factors. In addition, the estimates depend on the choices made concerning a variety of other assumptions. As a result of the inherent uncertainty and the need for professional judgment in this type of analysis, we believe that our estimates and Deloitte's estimates of the Fund's economic value and capital ratio are comparable. Although the estimates are comparable, Deloitte's estimates of capital resources and insurance-in-force differ from ours primarily because the analyses were conducted at different times. Because Deloitte performed its analysis before the end of 1999, it had to estimate some data for which we had year-end values. In particular, Deloitte overestimated the 1999 value of capital resources by extrapolating from the 1998 value. In contrast, we used values developed for FHA's 1999 financial statements that were about $1 billion lower than Deloitte's estimate. Using our value for capital resources, Deloitte's estimated capital ratio would be 3.44 percent rather than 3.66 percent of insurance-in-force. Similarly, Deloitte underestimated the number of loans that FHA insured in the fourth quarter of fiscal year 1999 and, thus, underestimated the value of loans insured for all of fiscal year 1999 by about $33 billion, though this appears to have had little effect on the estimated capital ratio. Our analysis of the net present value of future cash flows and that of Deloitte also differ in several respects. Both our estimates and Deloitte's rely on forecasts of future foreclosures and prepayments. In turn, these forecasts are generated from models that are based on estimated relationships between the probability of loan foreclosure and prepayment and key explanatory factors, such as borrowers' home equity and interest and unemployment rates. Our model differs from Deloitte's in the way that it specifies these relationships. For example, Deloitte specified changes in household income as one of the key explanatory factors, while we did not. The analyses also differ in the assumptions made about some future economic values and costs associated with FHA's insurance program. For example, we assumed lower house price appreciation rates and higher discount rates for calculating net present values than did Deloitte. In addition, the analyses differ in the way that they use HUD's data. We used a sample of individual loans while Deloitte grouped loans into categories to do its analysis. Although these factors could be important in identifying why the two estimates differ, we could not quantify their impact because we did not have access to Deloitte's models. According to our estimates, worse-than-expected loan performance that could be brought on by moderately severe economic conditions would not cause the estimated value of the fund at the end of fiscal year 1999 to decline by more than 2 percent of insurance-in-force. However, a few more severe economic scenarios that we examined could result in such poor loan performance that the estimated value of the fund at the end of fiscal year 1999 could decline by more than 2 percent of insurance-in-force. Two of the three scenarios that showed such a large decline extended adverse conditions more widely than the moderately severe scenarios and, therefore, are less likely to occur. While these estimates suggest that the capital ratios are more than sufficient to protect the Fund at this time from many worse-than-expected loan performance scenarios, factors not fully captured in our models could affect the Fund's ability to withstand worse- than-expected experiences over time. These factors include recent changes in FHA's insurance program and the conventional mortgage market that could affect the likelihood of poor loan performance and the ability of the Fund to withstand that performance. For example, conventional mortgage lenders and private mortgage insurers have recently lowered the required down payment on loans. Such actions may have attracted some lower risk borrowers who would otherwise have insured their loans with FHA. As a result, the overall riskiness of FHA's portfolio may be greater than we have estimated, making a given amount of capital less likely to withstand future economic downturns than we have predicted. Beginning with the robust economy and the value of the Fund in 1999, our analysis shows that a 2-percent capital ratio appears sufficient to withstand worse-than-expected loan performance that results from moderately severe economic scenarios similar to those experienced over the last 25 years. Our model and others that are based on historical experience suggest that falling house prices and high levels of unemployment are likely to produce poor mortgage performance. Thus, to test the Fund's ability to withstand worse-than-expected loan performance, we developed economic scenarios that are based on certain regional downturns and the 1981-82 national recession. We tested the adequacy of the capital ratio using economic scenarios that were based on three recent regional economic downturns—one in the west south central region of the United States that began in 1986, one in New England that began in 1989, and one in California that began in 1992—that produced high mortgage foreclosure rates in those regions. The degree to which these downturns affected the Fund depended on their severity as well as on the volume of mortgages insured by FHA in that region. Thus, while New England suffered a severe downturn in the late 1980s and early 1990s, the Fund did not suffer significantly because the volume of loans that FHA insures in New England represents a small share of FHA's total volume of insured loans. Because regional averages diminish the impact of the adverse economic experience, from each region we selected a state with particularly poor experience as the basis for our scenarios. We also adjusted the scenarios to recognize that the forecasts start from the economic conditions that existed at the end of 1999. See appendix III for further discussion of the scenarios that we used to test the adequacy of FHA's capital ratio. As can be seen in table 2, neither the scenarios that are based on regional downturns nor the scenario that is based on the 1981-82 national recession had much of an effect on the value of the Fund. More specifically, in these worse-than-expected scenarios that are based on specific historical experiences, the estimated capital ratio never falls below 2.8 percent, which is only 0.4 percentage points below our estimated capital ratio using expected economic conditions. However, the national recession had the greatest impact because it affected FHA's entire portfolio. Although the Fund's estimated capital ratio at the end of fiscal year 1999 fell by considerably less than 2 percentage points under economic scenarios that are based on recent regional experiences and the 1981-82 national recession, our model suggests that extensions of some historical regional scenarios to broader regions of the country could cause the capital ratio to fall by more than 2 percentage points. Specifically, to test whether a 2-percent capital ratio could withstand more severe economic conditions, we extended the regional scenarios to two regions and then to the nation as a whole. However, we recognize that these extensions are less likely to occur than the historical scenarios that affected a single region. As table 3 shows, if any of these downturns simultaneously hit two regions where FHA has significant business—the west south central and Pacific regions— the estimated capital ratio would be less than 2 percentage points lower than it would be with expected loan performance. In addition, even if the entire nation experienced a downturn similar to two of the three regional downturns that we analyzed, the estimated capital ratio would still fall by less than 2 percentage points. However, a national downturn as severe as that experienced by Massachusetts from 1989 through 1992 would cause our estimate of the 1999 capital ratio to fall by more than 2 percentage points. Because we were concerned that the historical scenarios we were considering might not be adequate to test the effect of changes in interest rates, we developed two additional scenarios: one in which mortgage interest rates fall and then a recession sets in and one in which mortgage and other interest rates rise to levels that are higher than those in the expected economic conditions scenario. The first scenario is more likely to exhaust a 2-percent capital ratio. Under a scenario in which mortgage interest rates fall and then a recession sets in, the drop in interest rates might induce some homeowners to refinance their mortgages. For those homeowners who refinance outside of FHA, the fund would no longer be accumulating revenue in the form of annual premiums; if the homeowners have not had their mortgages for long, they would receive some premium refunds. Moreover, those borrowers who use FHA's streamline refinance provision that allows borrowers to refinance their mortgages without a new appraisal of their home will likely pay annual premiums for fewer years than if they had not refinanced. So, cash outflows would have increased and cash inflows would have decreased before the recession hits. When the recession hits, cash outflows would increase further because of increased foreclosures among the remaining borrowers. As table 3 shows, our model predicts that the capital ratio would fall substantially—by almost 2 percentage points— under this scenario. A scenario with rising mortgage interest rates will affect various loan types differently. Because the payments on adjustable rate mortgages increase as interest rates rise, there is an increased likelihood that borrowers with these types of mortgages will default. However, since FHA-insured mortgages are assumable, rising interest rates make fixed-rate mortgages more valuable to those borrowers holding them. This decreases the likelihood that borrowers with these types of mortgages will default. Insurance on loans originated in 1998 and 1999 make up 42 percent of FHA's portfolio at the end of fiscal year 1999, and the insured loans are predominately fixed rate mortgages. Consequently, it is not surprising that a rising interest rate scenario leads to an increase in the value of the Fund. Because our economic model did not predict regional or national foreclosure rates as high as those experienced during the 1980s in any of our scenarios, we estimated cash flows using foreclosure rates that more closely matched regional experience during the 1980s. Specifically, we assumed that for mortgages originated from 1989 through 1999, foreclosure rates in 2000 through 2004 would equal those experienced from 1986 through 1990 by FHA-insured loans that originated between 1975 and 1985 in a given region. As table 3 shows, the capital ratio fell to 0.92 percent under this scenario. To test an even more severe scenario, one similar to that used by rating agencies for private mortgage insurers, we also calculated future cash flows assuming that foreclosure rates in 2000 through 2004 extended the very poor performance of the west south central mortgages in the 1980s to ever larger portions of FHA's insurance portfolio. As figure 3 shows, we found that if 36.5 percent of FHA-insured mortgages experienced these high default rates, the estimated capital ratio for fiscal year 1999 would fall by 2 percentage points. If about 55 percent of FHA's portfolio experienced these conditions, a less likely event, the capital ratio would be 0. Because our models are based on the relationship between foreclosures and prepayments and certain economic factors from fiscal years 1975 through 1999, they do not account for the potential impact of recent events, such as changes in FHA's program or in the behavior of the conventional mortgage market. In addition, our models assume that no additional changes in FHA's program or the conventional mortgage market that would affect FHA-insured loans originated through 1999 take place during the forecast period, which extends from fiscal years 2000 through 2028. To the extent that any such changes cause foreclosure and prepayment rates on existing FHA-insured loans to be higher or lower than we have predicted, the Fund's capital ratio would be different under the various scenarios we have discussed. Furthermore, our analysis does not attempt to predict how loans insured by FHA after fiscal year 1999 will behave. Future changes in FHA's program, such as the premium changes adopted as of January 1, 2001, or in the conventional mortgage market may make future loans perform better or worse than we might expect from past experience. In addition, these changes may increase or reduce the amount of cash flowing into the Fund and thus its ability to withstand worse-than-expected loan performance in the future. HUD and the Congress can change FHA's insurance program in a variety of ways, including changes in refund policy and underwriting standards. In fact, HUD and the Congress have taken the following actions in recent years that could affect the Fund in ways that are not accounted for in our models: HUD has suggested that it will reinstitute distributive shares and Members of Congress have introduced bills requiring HUD to take that action. The immediate consequence of this action would be that cash flows out of the Fund would be higher than our estimates. During the late 1990s, the Congress required that FHA implement a new loss mitigation program that encourages lenders to take actions to lower defaults on FHA-insured mortgages. The program requires that lenders provide homebuyers with certain options to avoid foreclosure. While it is hoped that losses from foreclosures will decline as a result of this program, if foreclosure is simply delayed as a result of forbearance, losses could ultimately be larger in the long run. In either case, actual cash flows would likely be different than our estimates. FHA has also reduced up-front premiums for new homeowners who receive financial counseling before buying a home. If the program reduces the likelihood that these homeowners will default, losses would be lower than we have estimated. HUD has taken action to improve the oversight of lenders and better dispose of properties and is continuing to implement new programs in these areas. Better oversight of lenders could mean that losses on existing business would be lower than we have predicted, and better practices for disposing of property could reduce losses associated with foreclosed properties below the level we have estimated. Our models do not look at cash flows associated with loans that FHA would insure after fiscal year 1999. However, recent and future changes in FHA's insurance program will affect the likelihood that these loans will perform differently than past experience suggests they will. If, for example, FHA loosens underwriting standards, there is a greater likelihood that future loans would perform worse than past experience suggests. In addition, changes in premiums, such as the recent reductions in up-front premiums, could reduce cash inflows into the Fund and, therefore, reduce the Fund's ability to withstand poor loan performance. However, this premium change could also lower the riskiness of the loans FHA insures. Recent changes in the conventional mortgage market, especially changes in FHA's competitors' behavior, may also affect the estimates we have made concerning the Fund's ability to withstand adverse economic conditions over the long run. Homebuyers' demand for FHA-insured loans depends, in part, on the alternatives available to them. In recent years, FHA's competitors in the conventional mortgage market—private mortgage insurers and conventional mortgage lenders—are increasingly offering products that compete with FHA's for those homebuyers who are borrowing more than 95 percent of the value of their home. These developments in the conventional mortgage market may have increased the average risk of FHA-insured loans in the late 1990s. In particular, by lowering the required down payment, conventional mortgage lenders and private mortgage insurers may have attracted some borrowers who might otherwise have insured their mortgages with FHA. If, by selectively offering these low down payment loans, conventional mortgage lenders and private mortgage insurers were able to attract FHA's lower-risk borrowers, recent FHA loans with down payments of less than 5 percent may be more risky on average than they have been historically. If this effect, known as adverse selection, has been substantial, the economic value of the Fund may be lower than we estimate, and it may be more difficult for the Fund to withstand worse-than-expected loan performance than our estimates suggest. In addition, should these competitive pressures persist, newly insured loans are likely to perform worse than prior experience would suggest, and then any given capital ratio would be less able to withstand such performance. FHA is taking some action to more effectively compete. For example, FHA is attempting to implement an automated underwriting system that could enhance the ability of lenders underwriting FHA-insured mortgages to distinguish better credit risks from poorer ones. Although this effort is likely to increase the speed with which lenders process FHA- insured loans, it may not improve the risk profile of FHA borrowers unless lenders can lower the price of insurance for better credit risks. Several options are available to the Secretary of HUD under current legislative authority that could result in reducing FHA's capital ratio. Other options would require legislative action. Reliably measuring the impacts of these options on the Fund's capital ratio and FHA borrowers is difficult without using tools designed to estimate the multiple impacts that policy changes often have. While HUD has substantially improved its ability to monitor the financial condition of the Fund, neither the models used by HUD to assess the financial health of the Fund, nor those used by others, explicitly recognize the indirect effects of policy changes on the volume and riskiness of FHA's loans. As a result, the impacts of the various policy options on the federal budget are difficult to discern. However, any option that results in a reduction in the Fund’s reserve, if not accompanied by a similar reduction in other government spending or by an increase in receipts, would result in either a reduction in the surplus or an increase in any existing deficit. There are several changes to the FHA single-family loan program that could be adopted if the Secretary of HUD or the Congress believes that the economic value of the Fund is higher than the amount needed to ensure actuarial soundness. For example, actions that the Secretary could take that could reduce the value of the fund include lowering insurance premiums, adjusting underwriting standards, and reinstituting distributive shares. However, congressional action in the form of new legislation would be required to make other program changes that are not now authorized or clearly contemplated by the statute. These would include actions such as changing the maximum amount FHA-insured homebuyers may borrow relative to the price of the house they are purchasing and using the Fund's reserves for other federal programs. Generally, the Secretary of HUD, in making any authorized changes to the FHA single-family program, must meet certain operational goals. These operational goals include (1) maintaining an adequate capital ratio, (2) meeting the needs of homebuyers with low down payments and first-time homebuyers by providing access to mortgage credit, (3) minimizing the risk to the Fund and to homeowners from homeowner default, and (4) avoiding adverse selection. Reliably estimating the potential effect of various options on the Fund's capital ratio and FHA borrowers is difficult because the impacts of these policy changes are complex and tools available for handling these complexities may not be adequate. Policy changes have not only immediate, straightforward impacts on the Fund and FHA's borrowers, but also more indirect impacts that may intensify or offset the original effect. Implementing these options could affect both the volume and the average riskiness of loans made, which, in turn, could affect any future estimate of the Fund's economic value. As a result of this complexity, obtaining a reliable estimate would likely require that economic models be used to estimate the indirect effects of policy changes. In 1990, the Congress enacted legislation designed to provide better information on the Fund's financial condition. The Omnibus Budget Reconciliation Act requires annual independent actuarial reviews of the Fund and includes credit reforms that require HUD to estimate, for loans originated in a given year, the net present value of the anticipated cash flows over all the years that the loans will be in existence. The models developed by HUD to comply with these requirements are based on detailed analyses of the Fund's historical claim and loss rates and have improved HUD's ability to monitor the financial condition of the Fund. At this time, however, neither the models used by HUD to assess the financial health of the Fund, nor those used by others, explicitly recognize the indirect effects of policy changes on the volume and riskiness of FHA's loans. As a result, HUD cannot reliably estimate the impact of policy changes on the Fund. Although it is difficult to predict the overall impact of a change on the Fund's capital ratio and thus on FHA borrowers as a whole, different options would likely have different impacts on current and prospective FHA-insured borrowers. Many of the proposals to reduce the capital ratio, such as lowering premiums or reinstituting distributive shares, will reduce the price of FHA insurance to the borrower. If no change in the volume of loans FHA insures is considered, then the effect of lowering premiums, for example, clearly would be to lower the economic value of the Fund. However, for two reasons, this price reduction is likely to increase the volume of FHA loans originated, which would increase both premium income and claims against the Fund when some of these new loans default. First, by lowering the price of FHA insurance relative to the price of private mortgage insurance, this premium reduction would likely induce some borrowers who otherwise would have obtained private mortgage insurance to obtain FHA insurance instead, thereby increasing FHA's market share. Second, people who were deferring home purchases because of the high price of FHA insurance might buy homes with FHA insurance once the price is lower. Without a complete analysis of the impact on the volume of loans, reliably estimating the effect of lowering the premiums on the Fund's economic value is difficult. Furthermore, the economic value of the Fund is influenced not only by the volume of loans FHA insures, but also by the riskiness of those loans. Therefore, determining the effect a policy change will have on the economic value of the Fund requires determining how the policy will affect the riskiness of FHA-insured loans. In the case of lowering up-front premiums, for example, the new FHA-insured loans could be less risky than FHA's existing loans. As a result, the new loans would be profitable and offset the direct impact of lower premiums. Generally, private mortgage insurers require that borrowers meet higher credit standards than does FHA. So, to the extent that these new FHA borrowers would have obtained private mortgage insurance without the lower premiums, they are likely to have lower risk profiles than the average for all current FHA borrowers. At the same time, lowering up-front premiums is not likely to attract many additional higher-risk borrowers who would previously not have qualified for FHA-insured loans. Because HUD does not have adequate tools to handle the complexities of estimating the ultimate impact of policy changes on the volume of FHA- insured loans and the riskiness of those loans, these factors are not always considered in assessing the impact of policy changes. For example, assuming that the volume and riskiness of FHA-insured loans will not change, HUD estimates that the recent reductions in up-front premiums combined with the introduction of mortgage insurance cancellation policies will lower the estimated value of the Fund by almost $6 billion over the next 6 years. Because this estimate does not consider the possible changes in the volume of loans that will be insured and the riskiness of those loans, it is an estimate only of the direct impact rather than the full impact of policy changes. Similarly, a recent study presents estimates that lowering up-front premiums to 1.5 percent would result in an almost fivefold increase in the likelihood that cash inflows would be less than outflows over a random 10-year period. However, this study notes that it did not look at how these changes would affect the riskiness of new loans. The complexity of estimating the impact of policy changes on the Fund implies that economic models would be needed to reliably estimate the likely outcomes. The most likely sources for such models would be the studies that compute the economic value of the Fund; however, the models HUD and others have been using to assess the financial health of the Fund do not explicitly recognize the impact of policy changes on the economic value of the Fund. Instead, they assume that FHA's market share remains static. Although it is difficult to predict the overall impact of a change on the Fund's capital ratio and thus on FHA borrowers as a whole, different options would likely have different impacts on various FHA-insured borrowers. Some proposals would more likely benefit existing and future FHA-insured borrowers, while others would benefit only future borrowers, and still others would benefit neither of these groups. One interpretation of the higher premiums that borrowers paid during the period in which the economic value of the fund has been rising is that borrowers during the 1990s “overpaid” for their insurance. Some options for reducing the capital ratio, such as reinstituting distributive shares, would be more likely to compensate these borrowers. Paying distributive shares would benefit certain existing borrowers who voluntarily terminate their mortgages. If these policies continued into the future, they would also benefit future policyholders. Alternatively, reducing up-front premiums, reducing the number of years over which annual insurance premiums must be paid, or relaxing underwriting standards would tend to benefit only future borrowers. Policy options that propose to use some of FHA's capital resources for spending on other programs would benefit neither existing nor future FHA-insured borrowers, but would instead benefit the recipients of those programs receiving the new expenditures. For example, reducing the capital ratio by shifting funds from the Fund to subsidize multifamily housing may primarily benefit renters rather than single-family homeowners. However, over time such a policy could be sustained only so long as FHA borrowers continue to pay premiums higher than the cost to FHA of insuring single-family mortgages. Because of the difficulty in reliably measuring the effect of most actions that could be taken either by the Secretary of HUD or the Congress on the Fund's capital ratio, we cannot precisely measure the effect of these policies on the budget. However, any actions taken by the Secretary or the Congress that influence the Fund's capital ratio will have a similar effect on the federal budget. Specifically, any proposal that results in a reduction in the Fund’s reserve, if not accompanied by a similar reduction in other government spending or by an increase in receipts, would result in either a reduction in the surplus or an increase in any existing deficit. If the Secretary or the Congress adopts policies, such as paying distributive shares or relaxing underwriting standards, that could reduce the profitability of the Fund, both the negative subsidy amount reported in FHA's budget submission and the Fund's reserve would be lower. Some of these policies—such as paying distributive shares—would affect FHA's cash flows immediately. Thus, the amount of money available for FHA to invest in Treasury securities would be lower. The Treasury, in turn, would have less money available for other purposes, and any overall surplus would decline or any deficit would rise. If the amounts of cash flowing out of the Fund exceeded current receipts, FHA would be required to redeem its investments in Treasury securities to make the required payments. The Treasury, then, would be required to either increase borrowing from the public or use general tax revenues to meet its financial obligations to FHA. In either case, any annual budget surplus would be lower or deficit higher. At the end of fiscal year 1999, the Fund had a capital ratio that exceeded 2 percent of FHA's insurance-in-force—the minimum required by law; however, whether the fund was actuarially sound is not so clear. Neither the statute nor HUD has established criteria to determine how severe of a stress the Fund should be able to withstand, that is, what constitutes actuarial soundness. Our results show that as of the end of fiscal year 1999, only the most severe circumstances that we analyzed would cause the current economic value of the Fund to fall below 0. One method of determining actuarial soundness would be to estimate the value of the Fund under various economic and other scenarios. In our analysis, the required minimum capital ratio of 2 percent appears sufficient to cover most of the adverse economic scenarios we tested, although it would not be possible to maintain the minimum under all scenarios. Nonetheless, we urge caution in concluding that the estimated value of the Fund today implies that the Fund could withstand the specified economic scenarios regardless of the future activities of FHA or the market. Our estimates and those of others are valid only under a certain set of conditions, including that loans FHA recently insured respond to economic conditions similarly to those it insured in the more distant past, and that cash inflows associated with future loans at least offset outflows associated with those loans. However, HUD is changing several policies that may affect the volume and quality of its future business. Further, adverse economic events cannot be predicted with certainty; therefore, we cannot attach a likelihood to any of the scenarios that we tested (even though we recognize that it is less likely that a severe economic downturn will affect the whole nation than one or two regions). It is instructive to remember in considering the uncertainty of the future, that the Fund had an even higher capital ratio in 1979 when the economic value of the Fund equaled 5.3 percent of insurance-in-force, but in little more than a decade— after a national recession, the substitution of an up-front premium for annual insurance premiums, and regional real estate declines—the economic value of the Fund was negative. Thus, it is important to periodically reevaluate the actuarial soundness of the Fund. Today, FHA knows more about the condition of the Fund but could still improve its evaluation of the impact that unexpected economic downturns and policy changes may have on the Fund. HUD has already taken some action that it estimates will lower the value of the Fund, including reducing up-front insurance premiums on newly insured mortgages. HUD has done so without the tools necessary to reliably measure the multiple impacts that these policies are likely to have. While the direct impact of policies that are likely to reduce the Fund's capital ratio can be estimated with the models used in the actuarial reviews, those models cannot isolate the indirect effects on the volume of loans insured by FHA and the riskiness of those loans. The Congress may want to consider taking action to amend the laws governing the Fund to specify criteria for determining when the Fund is actuarially sound. Because we believe that actuarial soundness depends on a variety of factors that could vary over time, setting a minimum or target capital ratio will not guarantee that the Fund will be actuarially sound over time. For example, if the Fund were comprised primarily of seasoned loans with known characteristics, a capital ratio below the current 2-percent minimum might be adequate, but under conditions such as those that prevail today, when the Fund is comprised of many new loans, a 2-percent ratio might be inadequate if recent and future loans perform considerably worse than expected. Thus, the Congress may want to consider defining the types of economic conditions under which the Fund would be expected to meet its commitments without borrowing from the Treasury. If the Congress decides that no further guidance is necessary, to better evaluate the health of the Fund and determine the appropriate types and timing of policy changes, we recommend that HUD develop criteria for measuring the actuarial soundness of the Fund. These criteria should specify the economic conditions that the Fund would be expected to withstand and may specify capital ratios currently consistent with those criteria. Because many conditions affect the adequacy of a given capital ratio, we recommend that the independent annual actuarial analysis give more attention to tests of the Fund's ability to withstand appropriate stresses. These tests should include more severe scenarios that capture worse-than- expected loan performance that may be due to economic conditions and other factors, such as changes in policy and the conventional mortgage market. To more fully assess the impact of policy changes that are likely to permanently affect the profitability of certain FHA-insured loans, we recommend that the Secretary of HUD develop better tools for assessing the impact these changes may have on the volume and riskiness of loans that FHA insures. Such analysis is particularly important where the policy change permanently affects certain loans, as in the case of underwriting and premium changes. Without a better analytical framework to assess the full impact of policy changes that permanently affect certain loans, we recommend that such changes be made in small increments so that their impact can be monitored and adjustments can be made over time. We provided a draft of this report to the Secretary of HUD for his review and comment. HUD agreed with the report's findings regarding the estimated value of the fund, and the ability of the fund to withstand moderately severe economic downturns that could lead to worse-than- expected loan performance. However, HUD expressed concern that the report did not note the probability of the most stressful scenarios we tested and FHA's ability to react to adverse developments. HUD also thought our reference to the substantial decline in the capital ratio that occurred during the 1980s left a false impression that the Fund is currently in jeopardy. In addition, HUD expressed concern that the report did not fully recognize the improvements it has made in analyzing policy changes and monitoring the performance of the Fund and disagreed with our recommendations. HUD's letter is reproduced in appendix IV. In response, we clarified that scenarios in which we extend historical adverse economic conditions more widely are less likely to occur. However, we cannot attribute a probability to any scenario we used. We also acknowledge that the annual actuarial reviews and the annual reestimates of the Fund required under the housing and credit reforms of 1990 enable HUD to better monitor the performance of the Fund and, therefore, react to adverse developments. However, we remain concerned that HUD's analyses of policy changes do not fully recognize the impact that these policy changes may have on the volume of loans FHA will insure and the riskiness of those loans. We also disagree that the reference to the decline in the capital ratio experienced in the 1980s implies that the Fund is in jeopardy today. In fact, this example serves to illustrate that changes in the economy and HUD policy can have a dramatic impact on the value of the Fund. With regard to our recommendation that HUD develop criteria for measuring the actuarial soundness of the Fund, HUD seems to infer that we believe a static capital ratio should be the criterion for measuring actuarial soundness. We do not recommend a static capital ratio for measuring actuarial soundness. Rather, we believe that it is important to measure actuarial soundness under different economic and other scenarios; therefore, we recommend that HUD specify the conditions that the Fund would be expected to withstand. We revised this recommendation to make clear that the definition of actuarial soundness should consider the economic conditions that the Fund would be expected to withstand. Regarding our recommendation that the independent annual actuarial analysis give more attention to tests of the Fund's ability to withstand appropriate stresses, HUD noted that it believed it was already complying with this recommendation and asked that our report define more specifically what tests are needed. In response, we clarified that the annual actuarial review should include more severe scenarios that capture worse- than-expected loan performance that may be due to economic conditions and other factors, such as changes in HUD policy and the conventional mortgage market. HUD's recent actuarial analysis included two scenarios—an interest rate spike scenario and a lower house price appreciation scenario—for testing the value of the Fund under a stressed economic state, and in neither scenario do house prices decline or unemployment rates rise. With regard to our recommendation concerning tools for assessing the impact of policy changes, HUD disagreed that any tools are needed beyond those that it already has. Specifically, HUD cites the annual analyses done in compliance with the Federal Credit Reform Act of 1990 and its annual actuarial reviews that already focus on policy changes. Further, HUD notes that it has made its program data more accessible for policy analysis through the creation of the Single Family Data Warehouse. However, we remain concerned that HUD does not have adequate tools for assessing the full impact that policy changes may have. Tools such as models for estimating the change in demand and the risk characteristics of future loans would enable HUD to better estimate the full impact that policy changes may have on the value of the Fund. HUD also disagreed with the idea that any policy actions it takes should be only incremental and reversible. We revised our recommendation to make clear that incremental changes are appropriate where a policy change permanently affects certain loans. Copies of this report will be distributed to interested congressional committees; the Honorable Mel Martinez, Secretary of the Department of Housing and Urban Development; the Honorable Mitchell E. Daniels, Jr., the Director of the Office of Management and Budget; and the Honorable Dan L. Crippen, the Director of the Congressional Budget Office. We will also make copies available to others on request. If you or your staff have any questions about this report, please contact me at (202) 512-8678. Key contributors to this report are listed in appendix V. To estimate the economic value of the Federal Housing Administration's (FHA) Fund as of September 30, 1999, and its resulting capital ratio, we developed econometric and cash flow models. These models were based on models that we developed several years ago for this purpose. In developing the earlier models, we examined existing studies of the single- family housing programs of both the Department of Housing and Urban Development (HUD) and the Department of Veterans Affairs (VA); academic literature on the modeling of mortgage foreclosures and prepayments; and previous work that Price Waterhouse (now PricewaterhouseCoopers), HUD, VA, ourselves, and others had performed on modeling government mortgage programs. For our current analysis, we modified our previous models on the basis of our examination of work performed recently by PricewaterhouseCoopers, Deloitte & Touche, and others; discussions we held with analysts familiar with modeling mortgage foreclosures and prepayments; and program changes made by FHA since our previous work was performed. For these models, we used data supplied by FHA and Standard & Poor’s DRI, a private economic forecasting company. We also used information from FHA’s independent actuarial reviews in our analysis. Our econometric analysis estimated the historical relationships between the probability of loan foreclosure and prepayment and key explanatory factors, such as the borrower's equity and the interest rate. To estimate these relationships, we used HUD’s A-43 data on the default and prepayment experience of FHA-insured home mortgage loans that originated from fiscal years 1975 through 1999. To test the validity of our econometric models, we examined how well the models predicted the actual rates of FHA's loan foreclosures and prepayments through fiscal year 1999. We found that our predicted rates closely resembled the actual rates. Next, we used our estimates of these relationships and forecasts of future economic conditions provided by Standard & Poor’s DRI to develop a baseline forecast of future loan foreclosures and prepayments for loans that were active at the end of fiscal year 1999. To estimate the net present value of future cash flows of the Fund under expected economic conditions, we used our forecast of future loan foreclosures and prepayments in conjunction with a cash flow model that we developed to measure the primary sources and uses of cash for loans that originated from fiscal years 1975 through 1999. Our cash flow model was constructed to estimate cash flows for each policy year through the life of a mortgage. An important component of the model was the conversion of all income and expense streams—regardless of the period in which they are actually forecasted to occur—into their 1999 present value equivalents. We then added the forecasted 1999 present values of the future cash flows to the current cash available to the Fund, which we obtained from documents used to prepare FHA's 1999 audited financial statements, to estimate the Fund's economic value and resulting capital ratio. A detailed discussion of our models and methodology for estimating the economic value and capital ratio of the Fund appears in appendix II. To compare our estimates of the Fund's economic value and capital ratio with the estimates prepared for FHA by Deloitte & Touche, we reviewed Deloitte's report and met with its analysts and HUD officials to learn more about that study's methodology, data, and assumptions. To determine the extent to which a capital ratio of 2 percent would allow the Fund to withstand worse-than-expected loan performance, we developed various scenarios for future economic conditions that we anticipated would result in substantially worse loan performance than we forecasted in our scenario using expected economic conditions. We based these scenarios on the economic conditions that led to episodes of relatively high foreclosure rates for FHA single-family loans in certain regions of the country at different times during the 1975 through 1999 period and on those experienced nationally during the 1981-82 recession. We developed additional scenarios that extended the adverse regional economic conditions to larger sections of the country to analyze how well the Fund could withstand conditions even worse than what we had experienced in the past 25 years. We also developed some additional scenarios with even higher foreclosure rates to further analyze the Fund's ability to withstand adverse conditions. Under each of the scenarios that we developed, we used our estimated relationships between foreclosure and prepayment rates and various explanatory factors, and the future economic conditions implied by the scenarios, to forecast future foreclosures and prepayments for loans that were active at the end of fiscal year 1999. We then used these forecasts, in conjunction with our cash flow model, to estimate the economic value and capital ratio of the Fund under each scenario. The difference between these estimates and our estimate under expected economic conditions shows whether each scenario is likely to result in a reduction of the Fund's economic value of more than 2 percent and, therefore, whether a 2-percent capital ratio is likely to be sufficient to allow the Fund to withstand the worse-than-expected loan performance associated with such a scenario. Our analysis of the adequacy of FHA’s capital ratio is limited to the performance of loans in FHA's portfolio as of the end of fiscal year 1999. That is, our analysis assesses the likelihood that an economic value of 2 percent of the unamortized insurance-in-force would be sufficient to cover the excess of future payments over future cash inflows (on a net present value basis) on those loans if they perform worse than expected. Our analysis of the ability of the Fund to withstand various adverse economic conditions requires making the assumption that the adverse conditions would not also cause loans insured by FHA after fiscal year 1999 to be an economic drain on the Fund. Since the 1990 reforms, the cash flows associated with each year’s loans have been estimated to have a positive economic value, thereby adding to the economic value of the entire Fund. However, during adverse economic times, new loans might perform worse than loans that were insured by FHA during the 1990s. If the newly insured loans perform so poorly that they have a negative economic value, then the loss to the Fund in any of the adverse economic scenarios that we have considered would be greater than what we have estimated. Alternatively, if the newly insured loans have positive economic values, then the Fund would continue to grow. To identify other factors, such as recent program and market changes, that could cause worse-than-expected loan performance, we reviewed the laws and regulations governing FHA’s insurance program, studied recent actuarial reviews of the Fund, and interviewed experts. We considered these other factors because the relationships estimated in our econometric models are based on historical relationships since 1975. As a result, these models might not capture the effects of recent changes in FHA programs or the conventional mortgage market on the likelihood that loans insured in the late 1990s will foreclose or prepay. In addition, our forecasts of future cash flows assume that FHA’s program and the private mortgage market will not change over the 30-year forecast period in any way that would affect FHA-insured loans originated through 1999. To identify options for adjusting the size of the Fund and determining the impact that these options might have, we reviewed the laws and regulations governing FHA’s insurance program and proposals to use the Fund’s economic value or otherwise change FHA’s insurance program. Additionally, we interviewed experts both within and outside the federal government. When available, we collected HUD’s estimates of the impact of various options on the Fund and the estimates of other experts. To determine the impact of these changes on the federal budget, we relied on our own experts as well as those at the Office of Management and Budget and the Congressional Budget Office. We conducted our review from December 1999 to February 2001 in accordance with generally accepted government auditing standards. We built econometric and cash flow models to estimate the economic value of HUD's FHA's Mutual Mortgage Insurance Fund (Fund) as of the end of fiscal year 1999. The goal of the econometric analysis was to forecast mortgage foreclosure and prepayment activity, which affect the flow of cash into and out of the Fund. We forecasted activity for all loans active at the end of fiscal year 1999 for each year from fiscal years 2000 to 2028 on the basis of assumptions stated in this appendix. We estimated equations from data covering fiscal years 1975 through 1999 that included all 50 states and the District of Columbia, but excluded U.S. territories. Our econometric models used observations on loan years—that is, information on the characteristics and status of an insured loan during each year of its life—to estimate conditional foreclosure and prepayment probabilities. These probabilities were estimated using observed patterns of prepayments and foreclosures in a large set of FHA-insured loans. More specifically, our model used logistic equations to estimate the logarithm of the odds ratio, from which the probability of a loan's payment (or a loan's prepayment) in a given year can be calculated. These equations are expressed as a function of interest and unemployment rates, the borrower's equity (computed using a house's price and current and contract interest rates as well as a loan's duration), the loan-to-value (LTV) ratio, the loan's size, the geographic location of the house, and the number of years that the loan has been active. The results of the logistic regressions were used to estimate the probabilities of a loan being foreclosed or prepaid in each year. FHA pays a claim on a foreclosed mortgage and sometimes, depending on the age of the loan, refunds a portion of the up-front premium when a mortgage prepays. These two actions contribute to cash outflows. Cash inflows are generated when FHA sells foreclosed properties and when borrowers pay mortgage insurance premiums. We forecasted the cash flows into and out of the Fund on the basis of our foreclosure and prepayment models and key economic variables. We then used the forecasted cash flows, including an estimate of interest that would be earned, and the Fund's capital resources to estimate the economic value of the Fund. We prepared separate estimates for fixed-rate mortgages, adjustable rate mortgages (ARMs), and investor loans. The fixed-rate mortgages with terms of 25 years or more (long-term loans) were divided between those that refinanced and those that were purchase money mortgages (mortgages associated with home purchase). Separate estimates were prepared for each group of long-term loans. Likewise, investor loans were divided between mortgages that refinanced and the loans that were purchase money mortgages. We prepared separate estimates for each group of investor loans (refinanced and purchase money mortgages). A separate analysis was also prepared for loans with terms that were less than 25 years (short-term loans). A complete description of our models, the data that we used, and the results that we obtained is presented in detail in the following sections. In particular, this appendix describes (1) the sample data that we used; (2) our model specification and the independent variables in the regression models; (3) the model results; (4) the cash flow model, with emphasis on key economic variables; and (5) a sensitivity analysis that demonstrates the sensitivity of our forecasts to the values of some key variables. For our analysis, we selected from FHA's computerized files a 10-percent sample of records of mortgages insured by FHA from fiscal years 1975 through 1999 (1,465,852 loans). For the econometric models related to long-term, fixed-rate mortgages, we used 25 percent of the long-term loans in our sample. From the FHA records, we obtained information on the initial characteristics of each loan, such as the year of the loan's origination and the state in which the loan originated; LTV ratio; loan amount; and contract interest rates. We categorized the loans as foreclosed, prepaid, or active as of the end of fiscal year 1999. To describe macroeconomic conditions at the national and state levels, we obtained data from Standard & Poor's DRI, by state, on annual civilian unemployment rates and data from the 2000 Economic Report of the President on the implicit price deflator for personal consumption expenditures. We used Standard & Poor's DRI data on quarterly interest rates for 30-year mortgages on existing housing along with its forecast data, at the state level, on median house prices and civilian unemployment rates, and at the national level, on interest rates on 1- and 10-year U.S. Treasury securities. People buy houses for consumption and investment purposes. Normally, people do not plan to default on loans. However, conditions that lead to defaults do occur. Defaults may be triggered by a number of events, including unemployment, divorce, or death. These events are not likely to trigger defaults if the owner has positive equity in his/her home because the sale of the home with realization of a profit is better than the loss of the home through foreclosure. However, if the property is worth less than the mortgage, these events may trigger defaults. Prepayments of home mortgages can also occur. These may be triggered by events such as declining interest rates, which prompts refinancing, and rising house prices, which prompts the take out of accumulated equity or the sale of the residence. Because FHA mortgages are assumable, the sale of a residence does not automatically trigger prepayment. For example, if interest rates have risen substantially since the time that the mortgage was originated, a new purchaser may prefer to assume the seller's mortgage. We hypothesized that foreclosure behavior is influenced by, among other things, the (1) level of unemployment, (2) size of the loan, (3) value of the home, (4) current interest rates, (5) contract interest rates, (6) home equity, and (7) region of the country within which the home is located. We hypothesized that prepayment behavior is influenced by, among other things, the (1) difference between the interest rate specified in the mortgage contract and the mortgage rates generally prevailing in each subsequent year, (2) amount of accumulated equity, (3) size of the loan, and (4) region of the country in which the home is located. Our first regression model estimated conditional mortgage foreclosure probabilities as a function of a variety of explanatory variables. In this regression, the dependent variable is a 0/1 indicator of whether a given loan was foreclosed in a given year. The outstanding mortgage balance, expressed in inflation-adjusted dollars, weighted each loan-year observation. Our foreclosure rates were conditional on whether the loan survives an additional year. We estimated conditional foreclosures in a logistic regression equation. Logistic regression is commonly used when the variable to be estimated is the probability that an event, such as a loan's foreclosure, will occur. We regressed the dependent variable (whose value is 1 if foreclosure occurs and 0 otherwise) on the explanatory variables previously listed. Our second regression model estimated conditional prepayment probabilities. The independent variables included a measure that is based on the relationship between the current mortgage interest rate and the contract rate, the primary determinant of a mortgage's refinance activity. We further separated this variable between ratios above and below 1 to allow for the possibility of different marginal impacts in higher and lower ranges. The variables that we used to predict foreclosures and prepayments fall into two general categories: descriptions of states of the economy and characteristics of the loan. In choosing explanatory variables, we relied on the results of our own and others’ previous efforts to model foreclosure and prepayment probabilities and on implications drawn from economic principles. We allowed for many of the same variables to affect both foreclosure and prepayment. The single most important determinant of a loan’s foreclosure is the borrower’s equity in the property, which changes over time because (1) payments reduce the amount owed on the mortgage and (2) property values can increase or decrease. Equity is a measure of the current value of a property compared with the current value of the mortgage on that property. Previous research strongly indicates that borrowers with small amounts of equity, or even negative equity, are more likely than other borrowers to default. We computed the percentage of equity as 1 minus the ratio of the present value of the loan balance evaluated at the current mortgage interest rate, to the current estimated house price. For example, if the current estimated house price is $100,000, and the value of the mortgage at the current interest rate is $80,000, then equity is .2 (20 percent), or 1-(80/100). To measure equity, we calculated the value of the mortgage as the present value of the remaining mortgage, evaluated at the current year's fixed-rate mortgage interest rate. We calculated the value of a property by multiplying the value of that property at the time of the loan’s origination by the change in the state's median nominal house price, adjusted for quality changes, between the year of origination and the current year. Because the effects on foreclosure of small changes in equity may differ depending on whether the level of equity is large or small, we used a pair of equity variables, LAGEQHIGH and LAGEQLOW, in our foreclosure regression. The effect of equity is lagged 1 year, as we are predicting the time of foreclosure, which usually occurs many months after a loan first defaults. We anticipated that higher levels of equity would be associated with an increased likelihood of prepayment. Borrowers with substantial equity in their home may be more interested in prepaying their existing mortgage and taking out a larger one to obtain cash for other purposes. Borrowers with little or no equity may be less likely to prepay because they may have to take money from other savings to pay off their loan and cover transaction costs. For the prepayment regression, we used a variable that measures book equity—the estimated property value less the amortized balance of the loan—instead of market equity. It is book value, not market value, that the borrower must pay to retire the debt. Additionally, the important effect of interest rate changes on prepayment is captured by two other equity variables, RELEQHI and RELEQLO, which are sensitive to the difference between a loan's contract rate and the interest rate on 30-year mortgages available in the current year. These variables are described below. We included an additional set of variables in our regressions related to equity: the initial LTV ratio. We entered LTV as a series of dummy variables, depending on its size. Loans fit into eight discrete LTV categories. In some years, FHA measured LTV as the loan amount less mortgage insurance premium financed in the numerator of the ratio and appraised value plus closing costs in the denominator. To reflect true economic LTV, we adjusted FHA’s measure by removing closing costs from the denominator and including financed premiums in the numerator. A borrower’s initial equity can be expressed as a function of LTV, so we anticipated that if LTV was an important predictor in an equation that also includes a variable measuring current equity, it would probably be positively related to the probability of foreclosure. One reason for including LTV is that it measures initial equity accurately. Our measures of current equity are less accurate because we do not have data on the actual rate of change in the mortgage loan balance or the actual rate of house price change for a specific house. Loans with higher LTVs are more likely to foreclose. For the long-term nonrefinanced equation, the ARM equation, and the short-term equation, we deleted the lower category of LTV loans. We expected LTV to have a positive sign in the foreclosure equations at higher levels of LTV. LTV in our foreclosure equations may capture the effects of income constraints. We were unable to include borrowers’ income or payment-to-income ratio directly because data on borrowers’ income were not available. However, it seems likely that borrowers with little or no down payment (high LTV) are more likely to be financially stretched in meeting their payments and, therefore, more likely to default. The anticipated relationship between LTV and the probability of prepayment is uncertain. For some loan type categories, we used down payment information directly, rather than the series of LTV variables. We defined down payment to ensure that closing costs were included in the loan amount and excluded from the house price. We used the annual unemployment rates for each state for the period from fiscal years 1975 through 1999 to measure the relative condition of the economy in the state where a loan was made. We anticipated that foreclosures would be higher in years and states with higher unemployment rates and that prepayments would be lower because property sales slow down during recessions. The actual variable we used in our regressions, LAGUNEMP, is defined as the logarithm of the preceding year’s unemployment rate in that state. We included the logarithm of the interest rate on the mortgage as an explanatory variable in the foreclosure equation. We expected a higher interest rate to be associated with a higher probability of foreclosure because high interest rates cause a higher monthly payment. However, in explaining the likelihood of prepayment, our model uses information on the level of current mortgage rates relative to the contract rate on the borrower's mortgage. A borrower's incentive to prepay is high when the interest rate on a loan is greater than the rate at which money can now be borrowed, and it diminishes as current interest rates increase. In our prepayment regression, we defined two variables, RELEQHI and RELEQLO. RELEQHI is defined as the ratio of the market value of the mortgage to the book value of the mortgage but is never smaller than 1. RELEQLO is also defined as the ratio of the market value of the mortgage to the book value but is never larger than 1. When currently available mortgage rates are lower than the contract interest rate, market equity exceeds book equity because the present value of the remaining payments evaluated at the current rate exceeds the present value of the remaining payments evaluated at the contract rate. Thus, RELEQHI captures a borrower’s incentive to refinance, and RELEQLO captures a new buyer’s incentive to assume the seller’s mortgage. We created two 0/1 variables, REFIN and REFIN2, that take on a value of 1 if a borrower had not taken advantage of a refinancing opportunity in the past and 0 otherwise. We defined a refinancing opportunity as having occurred if the interest rate on fixed-rate mortgages in any previous year in which a loan was active was at least 200 basis points below the rate on the mortgage in any year up through 1994 or 150 basis points below the rate on the mortgage in any year after 1994. REFIN takes a value of 1 if the borrower had passed up a refinancing opportunity at least once in the past. REFIN2 takes on a value of 1 if the borrower had passed up two or more refinancing opportunities in the past. Several reasons might explain why borrowers passed up apparently profitable refinancing opportunities. For example, if they had been unemployed or their property had fallen in value they might have had difficulty obtaining refinancing. This reasoning suggests that REFIN and REFIN2 would be positively related to the probability of foreclosure; that is, a borrower unable to obtain refinancing previously because of poor financial status might be more likely to default. Similar reasoning suggests a negative relationship between REFIN and REFIN2 and the probability of prepayment; a borrower unable to obtain refinancing previously might also be unlikely to obtain refinancing currently. A negative relationship might also exist if a borrower’s passing up one profitable refinancing opportunity reflected a lack of financial sophistication that, in turn, would be associated with passing up additional opportunities. However, a borrower who anticipated moving soon might pass up an apparently profitable refinancing opportunity to avoid the transaction costs associated with refinancing. In this case, there might be a positive relationship, with the probability of prepayment being higher if the borrower fulfilled his/her anticipation and moved, thereby prepaying the loan. Another explanatory variable is the volatility of interest rates, INTVOL, which is defined as the standard deviation of the monthly average of the Federal Home Loan Mortgage Corporation’s series of 30-year, fixed-rate mortgage effective interest rates. We calculated the standard deviation over the previous 12 months. Financial theory predicts that borrowers are likely to refinance more slowly at times of volatile rates because there is a larger incentive to wait for a still-lower interest rate. We also included the slope of the yield curve, YC, in our prepayment estimates, which we calculated as the difference between the 1- and 10- year Treasury rates of interest. We then subtracted 250 basis points from this difference and set differences that were less than 0 to 0. This variable measured the relative attractiveness of ARMs versus fixed-rate mortgages; the steeper the yield curve, the more attractive ARMs would be. When ARMs have low rates, borrowers with fixed-rate mortgages may be induced into refinancing into ARMs to lower their monthly payments. For ARMs, we did not use relative equity variables as we did with fixed-rate mortgages. Instead, we defined four variables, CHANGEPOS, CHANGENEG, CAPPEDPOS, and CAPPEDNEG, to capture the relationship between current interest rates and the interest rate paid on each mortgage. CHANGEPOS measures how far the interest rate on the mortgage has increased since origination, with a minimum of 0, while CHANGENEG measures how far the rate has decreased, with a maximum of 0. CAPPEDPOS measures how much farther the interest rate on the mortgage would rise, if prevailing interest rates in the market did not change, while CAPPEDNEG measures how much farther the mortgage’s rate would fall, if prevailing interest rates did not change. For example, if an ARM was originated at 7 percent and interest rates increased by 250 basis points 1 year later, CHANGEPOS would equal 100 because FHA’s ARMs can increase by no more than 100 basis points in a year. CAPPEDPOS would equal 150 basis points, since the mortgage rate would eventually increase by another 150 basis points if market interest rates did not change, and CHANGENEG and CAPPEDNEG would equal 0. Because interest rates have generally trended downwards since FHA introduced ARMs, there is very little experience with ARMs in an increasing interest rate environment. We created nine 0/1 variables to reflect the geographic distribution of FHA loans and included them in both regressions. Location differences may capture the effects of differences in borrowers’ income, underwriting standards by lenders, economic conditions not captured by the unemployment rate, or other factors that may affect foreclosure and prepayment rates. We assigned each loan to one of the nine Bureau of the Census (Census) divisions on the basis of the state in which the borrower resided. The Pacific division was the omitted category; that is, the regression coefficients show how each of the regions was different from the Pacific division. We also created a variable, JUDICIAL, to indicate states that allowed judicial foreclosure procedures in place of nonjudicial foreclosures. We anticipated that the probability of foreclosure would be lower where judicial foreclosure procedures were allowed because of the greater time and expense required for the lender to foreclose on a loan. To obtain an insight into the differential effect of relatively larger loans on mortgage foreclosures and prepayments, we assigned each loan to 1 of 10 loan-size categorical variables (LOAN1 to LOAN10). The omitted category in our regressions was loans between $80,000 and $90,000, and results on loan size are relative to those loans between $80,000 and $90,000. All dollar amounts are inflation-adjusted and represent 1999 dollars. The number of units covered by a single mortgage was a key determinate in deciding which loans were more likely to be investor loans. Loans were noted as investor loans if the LTV ratio was between specific values, depending on the year of the loan, or if there were two or more units covered by the loan. Once a loan was identified as an investor loan, we separated the refinanced loans from the purchase money mortgages and performed foreclosure and payoff analyses on each. For each of the investor equations, we used two dummy variables defined according to the number of units in the dwelling. LIVUNT2 has the value of 1 when a property has two dwelling units and a value of 0 otherwise. LIVUNT3 has a value of 1 when a property has three or more dwelling units and a value of 0 otherwise. The missing category in our regressions was investors with one unit. Our database covers only loans with no more than four units. To capture the time pattern of foreclosures and prepayments (given the effects of equity and the other explanatory variables), we defined seven variables on the basis of the number of years that had passed since the year of the loan’s origination. We refer to these variables as YEAR1 to YEAR7 and set them equal to 1 during the corresponding policy year and 0 otherwise. Finally, for those loan type categories for which we did not estimate separate models for refinancing loans and nonrefinancing loans, we created a variable called REFINANCE DUMMY to indicate whether a loan was a refinancing loan. Table 4 summarizes the variables that we used to predict foreclosures and prepayments. Table 5 presents mean values for our predictor variables for each mortgage type for which we ran a separate regression. As previously described, we used logistic regressions to model loan foreclosures and prepayments as a function of a variety of predictor variables. We estimated separate regressions for fixed-rate purchase money mortgages (and refinanced loans) with terms over and under 25 years, ARMs, and investor loans. We used data on loan activity throughout the life of the loans for loans originated from fiscal years 1975 through 1999. The outstanding loan balance of the observation weighted the regressions. The logistic regressions estimated the probability of a loan being foreclosed or prepaid in each year. The standard errors of the regression coefficients are biased downward because the errors in the regressions are not independent. The observations are on loan years, and the error terms are correlated because the same underlying loan can appear several times. However, we did not view this downward bias as a problem because our purpose was to forecast the dependent variables, not to test hypotheses concerning the effects of independent variables. In general, our results are consistent with the economic reasoning that underlies our models. Most importantly, the probability of foreclosure declines as equity increases, and the probability of prepayment increases as the current mortgage interest rate falls below the contract mortgage interest rate. As shown in tables 6 and 7, both of these effects occur in each regression model and are very strong. These tables present the estimated coefficients for all of the predictor variables for the foreclosure and prepayment equations. Table 6 shows our foreclosure regression results. As expected, the unemployment rate is positively related to the probability of foreclosure and negatively related to the probability of prepayment. Our results also indicate that generally the probability of foreclosure is higher when LTV and contract interest rate are higher. The overall goodness of fit was satisfactory: Chi-Square statistics were significant on all regressions at the 0.01-percent level. Because the coefficients from a nonlinear regression can be difficult to interpret, we transformed some of the coefficients for the long-term, nonrefinanced, fixed-rate regressions into statements about changes in the probabilities of foreclosure and prepayment. Overall conditional foreclosure probabilities for this mortgage type are estimated to be about 0.5 percent. In other words, on average, there is a ½ of a 1-percent chance for a loan of this type to result in a claim payment in any particular year. By holding other predictor variables at their mean values, we can describe the effect on the conditional foreclosure probability of changes in the values of predictor variables of interest. For example, if the average value of the unemployment rate were to increase by 1 percentage point from its mean value (in our sample) of about 6 percent to about 7 percent, the conditional foreclosure probability would increase by about 20 percent (from 0.5 percent to about 0.6 percent). Similarly, a 1-percentage-point increase in the mortgage contract rate from its mean value of about 9.25 to about 10.25 would also raise the conditional foreclosure probability by 20 percent (from about 0.5 percent to about 0.6 percent). Values of homeowners' equity of 10 percent, 20 percent, 30 percent, and 40 percent result in conditional foreclosure probabilities of 0.8 percent, 0.7 percent, 0.5 percent, and 0.3 percent, respectively, illustrating the importance of increased equity in reducing the probability of foreclosure. *B), where X refers to the mean value of the ith explanatory variable and the Bs are the estimated coefficients. the loan dollars outstanding will prepay, on average. Prepayment probability is quite sensitive to the relationship between the contract interest rate and the currently available mortgage rates. We modeled this relationship using RELEQHI and RELEQLO. Holding other variables at their mean values, if the spread between mortgage rates available in each year and the contract interest rate widened by one percentage point, the conditional prepayment probability would increase by about 80 percent to 8.6 percent. To test the validity of our model, we examined how well the model predicted actual patterns of FHA’s foreclosure and prepayment rates through fiscal year 1999. Using a sample of 10 percent of FHA’s loans made from fiscal years 1975 to 1999, we found that our predicted rates closely resembled actual rates. The economic value of the Fund is defined in the Omnibus Budget Reconciliation Act of 1990 as the “current cash available to the Fund, plus the net present value of all future cash inflows and outflows expected to result from the outstanding mortgages in the Fund.” We obtained information on the capital resources of the Fund from documents used to prepare FHA’s audited financial statements. These capital resources were reported to be $14.3 billion. To estimate the net present value of future cash flows of the Fund, we constructed a cash flow model to estimate the five primary future outflows and inflows of cash through 2028 resulting from the books of business written from fiscal years 1975 through 1999. Cash flows out of the fund from payments associated with claims on foreclosed properties, refunds of up-front premiums on mortgages that are prepaid, and administrative expenses for management of the program. Cash flows into the fund from income from mortgagees' insurance premiums and from the net proceeds from the sale of foreclosed properties. To estimate the Fund's cash flow, we first forecasted, for active loans at the end of 1999, the dollar value of loans predicted to foreclose or prepay in any year through 2028. From those estimates, we derived estimates of the outstanding principal balances for the loans remaining active for each year in the forecast period. Our cash flow model used these estimates of foreclosure and prepayment dollars and outstanding principal balances to derive estimates of each of the primary cash flows. We forecasted future loan activity (foreclosures and prepayments) on the basis of the regression results described above and forecasts of the key economic and housing market variables made by Standard & Poor's DRI. Standard & Poor's DRI forecasts the median sales price of existing housing, by state and year, through fiscal year 2005. We assumed that after 2005 those prices would rise at 3 percent per year. In creating the borrower's equity variable, we used DRI forecasts of existing housing prices by state and subtracted 2 percentage points per year to adjust for improvements in the quality of housing over time and the depreciation of individual housing units. We also subtracted another 1 percentage point per year from the company’s forecasts, to be conservative. We made similar adjustments to our assumed value of median house price change for the years beyond the range of these forecasts. We used DRI forecasts of each state’s unemployment rate and assumed that rates from fiscal year 2026 on would equal the rates in 2025. We also used Standard & Poor's DRI forecasts of interest rates on 30-year mortgages and 1- and 10-year Treasury securities. Using the results of the econometric model, the cash flow model estimates cash flows for each policy year through the life of a mortgage. An important component of the model is converting all income and expense streams—regardless of the period in which they actually occurred—into 1999 present value dollars. We applied discount rates to match as closely as possible the rate of return FHA likely earned in the past or would earn in the future from its investment in Treasury securities. As an approximation of what FHA earned for each book of business, we used a rate of return comparable to the yield on 7-year Treasury securities prevailing when that book was written to discount all cash flows occurring in the first 7 years of that book's existence. We assumed that after 7 years, the Fund's investment was rolled over into new Treasury securities at the interest rate prevailing at that time and used that rate to discount cash flows to the rollover date. For rollover dates occurring in fiscal year 1999 and beyond, we used 6 percent as the new discount rate. As an example, cash flows associated with the fiscal year 1992 book of business and occurring from fiscal years 1992 through 1998 (i.e., the first 7 policy years) were discounted at the 7-year Treasury rate prevailing in fiscal year 1992. Cash flows associated with the fiscal year 1992 book of business but occurring in fiscal year 1999 and beyond are discounted at a rate of 6 percent. Our methodology for estimating each of the five principal cash flows is described below. Because FHA’s premium policy has changed over time, our calculations of premium income to the Fund change depending on the date of the mortgage’s origination. We describe all premium income, including up- front premiums, even though they play no role in estimating the future cash flows for the Fund at the end of fiscal year 1999. For loans originating from fiscal years 1975 through 1983, premiums equal the annual outstanding principal balance times 0.5 percent. For loans originating from fiscal years 1984 through June 30, 1991, premiums equal the original loan amount times the mortgage insurance premium. The mortgage insurance premium during this period was equal to 3.8 percent for 30-year mortgages and 2.4 percent for 15-year mortgages. Because there are no annual premiums for this group of loans, the future cash flows would include no premium income. For the purposes of this analysis, mortgages of other lengths of time are grouped with those they most closely approximate. Effective July 1, 1991, FHA added an annual premium of 0.5 percent of the outstanding principal balance to its up-front premiums. The number of years for which a borrower would be liable for making premium payments depended on the LTV ratio at the time of origination. (See tables 8 and 9.) For loans originating from July 1, 1991, through the time of our review, premiums equal the original loan amount times the respective up-front premium plus the product of the annual outstanding principal balance times the respective annual premium rate for as many years as annual premiums were required. Some loans that originated in the 1990s are streamline refinanced mortgages that are subject to different premium rates. Since streamline refinances do not require an appraisal, we decided that mortgages coded in FHA’s database with an LTV of 0 could reasonably be assumed to represent streamline refinance business. For streamline refinance mortgages that originated before July 1, 1991, we applied the premium rates from table 10. For all streamline refinance mortgages that originated after July 1, 1991, we applied the premium rates for non-streamline loans. That is, for up-front premium rates, we followed the 15-year or 30-year non-streamline premium schedule for loans of those maturities. For annual premium rates and number of years that annual premiums are paid, we applied the rates for loans with an LTV of less than 90 percent. Claim payments equal the outstanding principal balance on foreclosed mortgages times the acquisition cost ratio. We defined the acquisition cost ratio as being equal to the total amount paid by FHA to settle a claim and acquire a property (i.e., FHA’s "acquisition cost" as reported in its database) divided by the outstanding principal balance on the mortgage at the time of foreclosure. For the purposes of our analysis, we calculated an average acquisition cost ratio for each year’s book of business using actual data for fiscal years 1975 through 1999. Acquisition cost ratios generally decreased over time from a high of 1.51 for loans originating in 1975 to a low of 1.09 for loans originating in 1999. FHA’s net proceeds from the sale of foreclosed properties depend on both the lag rate—the proportion of a year that passes between the time of a foreclosure and the time the proceeds are received—and the loss rate—the proportion of the cost of the property acquired that is not recovered when the property is sold. These are calculated as follows: Net Proceeds = Lag rate x claim payments from previous period x (1 - loss rate) + (12-lag rate) x claim payments from the current period x (1 - loss rate). The lag, which is the number of months between the payment of a claim and the receipt of proceeds from the disposition of the property, varied as follows. Before 1995, the lag was 5.9 months; in 1995, 5.35 months; in 1996, 4.7 months; and in 1997, 5.26 months. For the years after 1997, we used a lag of 5.26 months. To calculate the lag rate for each period, we divided the lag by 12. We defined the loss rate as equal to FHA’s reported dollar loss after the disposition of property divided by the reported acquisition cost over the historical period. We determined a loss rate for each year per book of business for years 1 through 25. We used an auto-regressive model to forecast future loss rates. In addition to past values of loss rates, we used the origination year and policy year of the loan as independent variables in this model. Using the results of this model, we forecast loss rates over the period from fiscal years 2000 through 2023. For fiscal years 2024 through 2028, we used the estimated rate for 2023. Our loss rates averaged 37 percent over the forecast period. The amount of premium refunds paid by FHA depends on the policy year in which the mortgage is prepaid and the type of mortgage. For mortgages prepaid between October 1, 1983, and December 31, 1993, refunds were equal to the original loan amount times the refund rate. However, we converted these rates to express them as a percentage of the up-front premium. In 1993, FHA changed its refund policy to affect mortgages prepaid on or after January 1, 1994. For loans prepaying on or after January 1, 1994, refunds are equal to the up-front mortgage insurance premium times the refund rate. (See table 11.) Administrative expenses equal the outstanding principal balance times the administrative expense rate. The estimates of the administrative expense rates were 0.098 percent for the years before 1995, 0.113 percent for 1995, 0.097 percent for 1996, 0.102 percent for 1997, and 0.103 percent for 1998 and all future years. We conducted additional analyses to determine the sensitivity of our forecasts to the values of certain key variables. Because we found that projected losses from foreclosures are sensitive to the rates of unemployment and house price appreciation, we adjusted the forecasts of unemployment and price appreciation to provide a range of estimates of the Fund's economic value under alternative economic scenarios. Our starting points for forecasts of the key economic variables were forecasts made by Standard & Poor's DRI, as previously described. For our low case scenario, we made these forecasts more pessimistic by subtracting 2 percentage points per year from the forecasts of house price appreciation rates and adding 1 percentage point per year to the unemployment rate forecasts. For our high case scenario, we added 2 percentage points per year to our base case forecast of house price appreciation rates. Under these alternatives, we estimated economic values of about $13.6 billion and about $16.4 billion, respectively, for the low and high cases, compared with about $15.8 billion for our base case. These estimates correspond to estimates of the capital ratio of about 2.75 percent and 3.32 percent, respectively, for the low and high cases, compared with our base case estimate for the capital ratio of 3.20 percent. These estimates are shown in table 12. To assess the impact of our assumptions about the loss and discount rates on the economic value of the Fund, we operated our cash flow model with alternative values for these variables. We found that for the economic scenario of our base case, a 1-percentage-point increase in the forecasted loss rate resulted in a 0.7-percent decline in our estimate of the economic value of the Fund. Conversely, each percentage point decrease in the loss rate resulted in a 0.7-percent increase in our estimate of economic value. With respect to the discount rate, we found that for our base case economic scenario, a 1-percentage-point increase in the interest rate applied to most periods’ future cash flow resulted in a 0.3-percent increase in our estimate of economic value. Conversely, each percentage point decrease in the discount rate resulted in a 0.4-percent decrease in our estimate of economic value. This appendix describes the scenarios that we used to estimate the ability of the Fund to withstand adverse future economic conditions. Each scenario specifies values of key economic variables, which our models indicate are associated with mortgage claims and prepayments, during the forecast period. We used these values with the forecasting models presented in appendix II to estimate future mortgage claims and prepayments. We then used these forecasted values of claim and prepayment dollars in our cash flow model to estimate the economic value of the Fund and the capital ratio under each scenario. We developed two types of scenarios—historical and judgmental. We designed the historical scenarios to test the ability of the Fund to withstand adverse economic conditions similar to those that adversely affected the Fund in the 1980s and 1990s. Because some of these adverse conditions affected only certain regions, in some scenarios we expanded our analysis to include estimates of the capital ratio when the historical conditions were assumed to affect a larger share of FHA's business, including when they were assumed to affect the entire nation. In contrast, the judgmental scenarios that we developed are not based on historical experience. Instead, they represent conditions that we believe might place stress on the Fund. The key economic variables for which we forecast different values in the different scenarios are the rate of house price appreciation; the unemployment rate; and, in some instances, certain interest rates, especially the mortgage interest rate. In addition, we assumed that FHA's loss per claim (the loss rate), expressed as a percentage of the claim amount, was greater than the loss rate that we used in our base case analysis under expected economic conditions. We assumed that FHA would experience higher loss rates when foreclosures were substantially higher because of the difficulty of managing and disposing of a large number of properties at the same time. In addition, the demand for housing would be likely to fall during an economic downturn, making it more difficult to dispose of properties than in the base case. Three regional economic downturns and the 1981-82 national recession form the bases of our historical scenarios. Each regional downturn was associated with a regional decline in house prices. Declining house prices represent a particularly adverse condition for the Fund because of the strong negative relationship between borrowers' equity and the probability of defaults leading to foreclosures. The three regional economic downturns, and associated housing price declines, that we used were (1) the late 1980s' decline in the oil-producing states of the west south central region; (2) the late 1980s' and early 1990s' decline in New England; and (3) the early to mid-1990s' decline in the Pacific region, particularly in California. For each scenario that is based on a regional downturn, we assumed that for 4 years the rate of house price change for the part of the nation assumed to be affected by the downturn equaled the rate of house price change in the state in that region that we selected to represent the regional experience. We selected the experiences of (1) Louisiana, beginning in 1986, to represent the oil price downturn; (2) Massachusetts, beginning in 1988, to represent the New England economic downturn; and (3) California, beginning in 1991, to represent the California housing market downturn. Table 13 shows the median house prices for existing houses in these states during their economic downturns. In calculating homeowner's equity, we made the same adjustment to annual changes in median house prices that we did in our base case, as described in appendix II. Similarly, in our scenarios that are based on regional downturns, we assumed that unemployment rates would change in the affected area for 4 years by the same percentages as those rates changed in Louisiana; Massachusetts; and California, respectively. We developed six separate scenarios that are based on each regional downturn, by varying the scope (i.e., the number of states assumed to be affected) and timing of the adverse economic conditions in the forecast period. Specifically, we used three different scopes. In the narrowest scope, we assumed that only the particular region was affected. That is, for the scenario based on the downturn in the west south central region in the late 1980s, we assumed that during 4 years of the forecast period, all of the states in the west south central region experienced the same changes in key economic variables as Louisiana experienced from 1987 through 1990. We then expanded the scope by assuming that two regions in which FHA has a lot of borrowers, the west south central and Pacific regions, were affected. Finally, we then expanded the scope to the entire nation, by assuming that all states were affected. Regarding timing, for each scope we developed two scenarios, one in which the downturn began in 2000 and one in which it began in 2001. Although we know that an economic downturn did not begin in 2000, we developed scenarios starting then to test the ability of the Fund to withstand an economic downturn that occurs when the portfolio contains many recent loans. Scenarios in which the downturn does not begin until 2001 would be expected to be less adverse because most of the large number of borrowers who took out mortgages in 1998 and 1999 would have seen substantial price appreciation in 2000, thereby reducing the likelihood of default. We developed two historical scenarios that are based on the 1981-82 recession and subsequent recovery. In those scenarios, we assumed that in each state, the rates of change in house price appreciation and unemployment for 5 years during the forecast period are the same as they were from 1981 through 1985. In one scenario, we assumed that these adverse conditions replicating 1981 through 1985 began in 2000; in the other scenario, we assumed that they began in 2001. Under these scenarios, some states fared better than in the base case scenario. Because it will be more difficult to manage and dispose of foreclosed properties during an economic downturn, we increased the loss rates on the proportion of mortgages affected by a given scenario during the years the scenario runs. We assumed that losses on affected foreclosed properties would rise to 45 percent of the property’s value. Without this, loss rates average about 37 percent. Our estimates of the economic value of the Fund and the capital ratio for the historical scenarios are presented in table 14. Judgmental Scenarios We developed several judgmental scenarios to test the ability of the Fund to withstand various types of economic conditions that might adversely affect the Fund without regard to their relationship to historical experience. In one scenario, we assumed that median existing house prices declined by 5 percent per year for 3 consecutive years—an extremely steep rate of decline—and that unemployment increased compared with the base case, with both changes beginning in 2001. Specifically, we increased the unemployment rates in each state from forecasted levels by 2 percentage points in 2001; 5 percentage points in 2002, 2003, and 2004; and 2 percentage points in 2005. In a second scenario, we allowed the mortgage interest rate to decline in 2000—by 2 percentage points from its forecasted level—and then to return to forecasted levels. We did this to precipitate a wave of refinancing. We also assumed declining house prices and rising unemployment beginning in 2001, as in the previous judgmental scenario. We used this scenario to test what might happen if premium income turns out to be substantially less than expected and premium refunds substantially more than expected because of rapid prepayment of loans, most of which would not default. In our third scenario, we added 1 percentage point to the base case forecasts of the mortgage interest rate, and 1- and 10-year Treasury rates for the year 2000, 3 percentage points to the forecasts of these interest rates between 2001 and 2003, and 1 percentage point in 2004. We used this scenario to test what might happen if interest rates were to rise more than anticipated. In a fourth scenario, we used the same rising interest rates as in the third scenario and also added one percentage point to the forecasts of median existing house prices over that period. Our estimates of the economic value of the Fund and the capital ratio for the judgmental scenarios are also presented in table 14. In another type of judgmental scenario, we did not forecast the economic variables and then use the forecasted claims and prepayments from our econometric model, as we did with all of our other scenarios, both judgmental and historical. Instead, because none of our other scenarios produced foreclosure rates nearly as high as FHA experienced in the 1980s, we developed two scenarios in which we directly assumed higher foreclosure rates. First, we assumed that in 2000 through 2004, the proportion of loans insured in each region experienced for the 1989 through 1999 books of business the same foreclosure rates that the 1975 through 1985 books of business experienced in that region in 1986 through 1990. This scenario produced a capital ratio of 0.92 percent. Second, we assumed that in 2000 through 2004, varying proportions of FHA’s portfolio experienced for the 1989 through 1999 books of business the same foreclosure rates that the 1975 through 1985 books of business experienced in the west south central states in 1986 through 1990. Because streamline refinanced mortgages and ARMs did not exist or were minimal parts of FHA’s portfolio from 1975 through 1985, foreclosure rates were not adjusted for these types of loans. For the other products—30-year fixed- rate, 15-year fixed-rate, investor, and graduated payment mortgages— foreclosure rates were adjusted accordingly for each type of product. For this scenario, we found that if 36.5 percent of FHA-insured mortgages experienced these high default rates, the estimated capital ratio for fiscal year 1999 would fall by 2 percentage points, and if about 55 percent of FHA's portfolio experienced these conditions, the economic value would be depleted. In addition to those named above, Nancy Barry, Elaine Boudreau, Steve Brown, Jay Cherlow, Kimberly Granger, DuEwa Kamara, John McDonough, Salvatore F. Sorebllo Jr., Mark Stover, and Patrick Valentine made key contributions to this report. Financial Health of the Federal Housing Administration's Mutual Mortgage Insurance Fund (GAO/T-RCED-00-287, Sept. 12, 2000). Level of Annual Premiums That Place a Ceiling on Distributions to FHA Policyholders (GAO/RCED-00-280R, Sept. 8, 2000). Single-Family Housing: Stronger Measures Needed to Encourage Better Performance by Management and Marketing Contractors (GAO/T-RCED- 00-180, May 16, 2000, and GAO/RCED-00-117, May 12, 2000). Single-Family Housing: Stronger Oversight of FHA Lenders Could Reduce HUD's Insurance Risk (GAO/RCED-00-112, Apr. 28, 2000). Homeownership: Results of and Challenges Faced by FHA's Single-Family Mortgage Insurance Program (GAO/T-RCED-99-133, Mar. 25, 1999). Homeownership: Achievements of and Challenges Faced by FHA's Single- Family Mortgage Insurance Program (GAO/T-RCED-98-217, June 2, 1998). Homeownership: Management Challenges Facing FHA's Single-Family Housing Operations (GAO/T-RCED-98-121, Apr. 1, 1998). Homeownership: Mixed Results and High Costs Raise Concerns about HUD's Mortgage Assignment Program (GAO/RCED-96-2, Oct. 18, 1995). Homeownership: Information on Single Family Loans Sold by HUD (GAO/RCED-99-145, June 15, 1999). Homeownership: Information on Foreclosed FHA-Insured Loans and HUD- Owned Properties in Six Cities (GAO/RCED-98-2, Oct. 8, 1997). Homeownership: Potential Effects of Reducing FHA's Insurance Coverage for Home Mortgages (GAO/RCED-97-93, May 1, 1997). Homeownership: FHA's Role in Helping People Obtain Home Mortgages (GAO/RCED-96-123, Aug. 13, 1996). Mortgage Financing: FHA Has Achieved Its Home Mortgage Capital Reserve Target (GAO/RCED-96-50, Apr. 12, 1996). The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. 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. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 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. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: [email protected] 1-800-424-5454 (automated answering system) | The Mutual Mortgage Insurance Fund has maintained an economic value of at least two percent of the Fund's insurance-in-force, as required by law. GAO's and the Department of Housing and Urban Development's (HUD) analysis show that the Fund had an economic value of $15.8 billion (3.20 percent) and $16.6 billion (3.66 percent), respectively. Given the economic value of the Fund and the state of the economy at the end of fiscal year 1999, a two-percent capital ratio appears sufficient to withstand moderately severe economic downturns that could lead to worse-than-expected loan performance. However, under more severe economic conditions, the economic value of two percent of insurance-in-force would not be adequate. Because of the uncertainty and professional judgment associated with this type of economic analysis, GAO cautions against relying on one estimate or even a group of estimates to determine the adequacy of the Fund's reserves over the longer term. HUD could exercise several options under current legislative authority to reduce the capital ratio for the Fund. It is difficult, however, to reliably measure the impact of policy changes on the Fund's capital ratio and Federal Housing Administration borrowers without using tools designed to estimate the multiple impacts that policy changes often have. Nonetheless, any option that reduces the Fund's reserve, if not accompanied by a similar reduction in other government spending, would result in a budget surplus reduction or a deficit increase. |
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Beginning January 1, 2014, PPACA required most citizens and legal residents of the United States to maintain health insurance that qualifies as minimum essential coverage for themselves and their dependents or pay a tax penalty. Individuals are exempt from this requirement if they would have to pay more than 8 percent of their household income for the lowest-cost self-only health plan that is available to the individual. Beginning October 1, 2013, individuals were able to shop for private health insurance coverage that qualifies as minimum essential coverage through marketplaces, also referred to as exchanges, which offer choices of qualified health plans. In 34 states, the federal government operated the individual exchanges, known as federally facilitated exchanges, while 17 states operated state-based exchanges in 2014.purchase self-only plans, or they can purchase family plans for themselves, their spouses, and their dependents. Individuals can Qualified health plans on the exchanges may provide minimum essential coverage at one of four levels of coverage that reflect out-of-pocket costs that may be incurred by an enrollee. The four levels of coverage correspond to a plan’s actuarial value—the percentage of the total average costs of allowed benefits paid by a health plan—and are designated by metal tiers: 60 percent (bronze), 70 percent (silver), 80 percent (gold), and 90 percent (platinum). For example, a gold plan with an 80 percent actuarial value would be expected to pay, on average, 80 percent of a standard population’s expected medical expenses for the essential health benefits. The individuals covered by the plan would be expected to pay, on average, the remaining 20 percent of the expected cost-sharing expenses in the form of deductibles, copayments, and coinsurance. Under PPACA, issuers are allowed to adjust premium rates within specified limits for plans, based on the number of people covered under a particular policy and the covered individuals’ age, tobacco use, and area of residence. Each state must divide its state into one or more rating areas that all issuers must use in setting premium rates. The rating area is the lowest geographic level by which issuers can vary premiums. Individuals obtaining insurance through the exchanges may be eligible for the APTC under PPACA if they meet applicable income requirements and are not be eligible for coverage under another qualifying plan or program, such as ESI or Medicaid. To meet the APTC’s income requirements, individuals must have household incomes between 100 and 400 percent of the FPL (see table 1). The amount of the APTC is calculated based on an eligible individual’s household income relative to the cost of premiums for the “reference plan,” even if the individual chooses to enroll in a different plan. The reference plan is the second-lowest-cost silver plan available. The APTC in effect caps the maximum amount of income that an individual would be required to contribute to the premiums for the reference plan. The capped amount varies depending on the enrollee’s household income relative to the FPL and is less for enrollees with lower household income. Table 2 shows the maximum percentage of household income a qualifying enrollee would have to pay if they enrolled in the reference plan. If the enrollee chooses a more expensive plan, such as a gold or platinum plan, they would pay a higher percentage of their income. If the enrollee chooses a less expensive plan, such as a bronze plan, they would pay less. The amount of the APTC is determined based on an enrollee’s family size and anticipated household income for the year, which is subject to adjustment—or reconciliation—the following year. Specifically, the final amount of the credit is determined when the enrollee files an income tax return for the taxable year, which may result in a tax liability or refund if the enrollee’s actual, reported household income amount is greater or less than the anticipated income on which the amount of APTC was based. To further improve access to care, certain low-income individuals may also be eligible for an additional type of income-based subsidy established by PPACA, known as cost-sharing subsidies, which reduce out-of-pocket costs for such things as copayments for physician visits or prescription drugs. To be eligible for these cost-sharing subsidies, individuals must have household incomes between 100 and 250 percent of the FPL, not be eligible for coverage under another qualifying plan or program such as Medicaid or ESI, and be enrolled in a silver plan through an exchange.of the silver plan. Cost-sharing subsidies effectively raise the actuarial value As a practical matter, because individuals eligible for Medicaid are not eligible for the APTC, the minimum income level for these subsidies differs between states that chose to expand Medicaid under PPACA and those that did not. In states that chose to expand Medicaid under PPACA, nonelderly adults are eligible for Medicaid when their household income is less than 138 percent of the FPL. Because those eligible for Medicaid are not eligible for the APTC, the minimum income level for the APTC in Medicaid expansion states is effectively 138 percent of the FPL. In states that chose not to expand Medicaid, the minimum income level for individuals to qualify for APTC and cost-sharing subsidies is 100 percent of the FPL, as specified in PPACA, assuming the state’s As of January Medicaid eligibility threshold is at or below this level.2015, 27 states and the District of Columbia opted to expand Medicaid under PPACA. Under PPACA, employers that meet certain conditions must offer health insurance to some employees. Employers with at least 50 full-time equivalent employees—which includes employees whose hours average at least 30-hours per week—must offer qualifying health insurance to their full time employees or face tax penalties if at least one full-time employee receives the APTC. In contrast to PPACA’s affordability threshold of 8 percent of household income for the purpose of assessing penalties for failure to maintain minimum essential coverage, PPACA requires ESI to meet two different affordability tests for the purposes of determining eligibility for the APTC. First, the employee’s share of the ESI premiums covering an individual, also referred to as a self-only plan, must not exceed 9.5 percent of the employee’s household income. Second, the insurance offered must cover 60 percent of the actuarial value of health care for the average person to qualify as affordable for purposes of the APTC. Employees who are offered ESI that meets both of these tests are not eligible for the APTC. Some employees may be offered qualifying ESI that costs between 8 and 9.5 percent of household income. If these individuals do not have access to insurance on an individual exchange that costs less than 8 percent of household income, they are exempt from the individual mandate and will not have to pay a tax penalty if they forgo coverage. However, these individuals are not eligible for the APTC. Because small employers are not required to offer health insurance and have been less likely to offer health insurance than large employers, PPACA established a small employer tax credit as an incentive for them to provide insurance by making it more affordable.available to certain employers—small business and tax-exempt entities— with employees earning low wages and that pay at least half of their employees’ health insurance premiums. To qualify for the credit, employers must employ fewer than 25 full-time equivalent employees (excluding certain employees, such as business owners and their family The credit is members), and pay average annual wages per employee of less than $50,800 per year in 2014. The amount of the credit depends on several factors, such as the number of full-time equivalent employees and their total annual wages. In addition, the amount of the credit is limited if the premiums paid by an employer are more than the state’s average small group market premiums, as determined by HHS. Employers may claim the small employer tax credit for up to 6 years—the initial 4 years from 2010 through 2013 and, starting in 2014, any 2 consecutive years if they buy insurance through the Small Business Health Option Programs (SHOP). PPACA required the establishment of SHOPs in each state by January 1, 2014, to allow small employers to compare available health insurance options in their states and facilitate the enrollment of their employees in coverage. In states electing not to establish and operate a state-based SHOP, PPACA required the federal government to establish and operate a federally facilitated SHOP in the state. Starting in 2014, employers that wanted to claim the small employer tax credit had to enroll their employees through the SHOP exchanges. Early evidence suggests that the APTC likely contributed to an expansion of health insurance coverage because it significantly reduced the cost of premiums for those eligible, though there are limitations to measuring the effects of the APTC using currently available data. In contrast, few employers claimed the small employer tax credit, limiting its effect on health insurance coverage. Early evidence suggests that the APTC likely contributed to an expansion in health insurance coverage. We identified three surveys that estimated the uninsured rate by household income. Although limitations exist in measuring the direct, causal effects of the APTC on health insurance coverage using currently available data, these surveys can be used to make early observations about changes in the rate of uninsured. They found that the uninsured rate declined among households with incomes between 139 and 400 percent of the FPL—that is, households financially eligible for the APTC in all states (see table 3). For example, one study found that the rate of uninsured among individuals with household incomes between 139 and 400 percent of the FPL fell 9 percentage points between January 1, 2012, and June 30, 2014, in Medicaid expansion states. Further, the results from this survey found that gains in insurance coverage were statistically significant for individuals in this income bracket regardless of the states’ Medicaid expansion decisions. This expansion in health insurance coverage is likely partially a result of the APTC having reduced the cost of health insurance premiums for those deemed eligible. As of April 19, 2014, HHS initially estimated that 8 million individuals (including dependents) had selected a health plan through either a state-based exchange or a federally facilitated exchange, and most of them (85 percent) were deemed eligible for the APTC at the time that they selected a health plan. Among those who selected a plan through 1 of the 34 federally facilitated exchanges or the 2 state-based exchanges that used the federal website for enrollment in 2014 and were deemed eligible for the APTC (4.7 million individuals), the APTC reduced premiums by 76 percent, on average (see table 4). For those who selected a silver plan through these 36 exchanges and were deemed eligible for the APTC, the APTC reduced premiums the most—an 80 percent reduction. Overall, most individuals who selected a plan through these 36 exchanges and received the APTC (69 percent) saw their premiums reduced to $100 per month or less ($1,200 annually or less), and nearly half (46 percent) had their monthly premiums reduced to $50 or less ($600 annually or less). However, results from an early survey and experts we interviewed suggested that the APTC may have been less effective in expanding health insurance coverage for individuals financially eligible for a smaller APTC amount and ineligible for cost- sharing reduction subsidies than for individuals eligible for a larger APTC amount as well as for cost-sharing reduction subsidies. As of January 2015, data were not available on the extent to which the APTC reduced 2015 premiums for enrollees. Studies that examined changes in premiums between 2014 and 2015 found that, on average, premiums changed modestly. For example, HHS reported that premiums for the reference plan (before applying the APTC) increased by 2 percent, on average, between 2014 and 2015, and premiums for the lowest-cost silver plan increased by an average of 5 percent. However, studies found variation across rating areas, and some rating areas had significant increases or decreases in average premiums. Further, premiums are likely to continue to change in future years as issuers gain more data about enrollees in the exchanges and how they compare to enrollees previously purchasing individual insurance or ESI. In addition, while the APTC helps protect eligible individuals from large increases in premiums by capping the amount of household income individuals have to pay for the reference plan, some who reenrolled in their health plan in 2015, rather than shopping for and switching to a lower cost plan, may find that their premiums, after accounting for the APTC, increased substantially. HHS estimated that more than 7 in 10 current exchange enrollees could find a lower-cost plan within the same metal level as they selected in 2014 if they selected the new lowest-cost plan in 2015, rather than reenroll in their same 2014 plan, but the extent to which this occurred was not yet known as of January 2015. According to results from four early surveys of nonelderly adults and one group of experts we interviewed, lack of awareness of the APTC may have limited take-up of health insurance coverage among some individuals likely eligible for the APTC. Three of the four surveys estimated that, of those who remained uninsured in 2014, between 59 and 60 percent cited affordability or the cost of premiums as the reason for not purchasing health insurance coverage. However, less than half—between 38 and 47 percent—of the uninsured surveyed were aware of the availability of financial assistance to purchase insurance through the individual exchanges. When interpreting data on the effect of the APTC on changes in health insurance coverage, there are several limitations to consider: Large-scale, rigorous survey data are needed to more accurately measure the direct, causal effect of the APTC on changes in health insurance coverage. While early survey data provide some indications of the effect of the APTC on coverage, these surveys generally have lower response rates and smaller sample sizes, which could cause large margins of error when examining changes in health insurance coverage by subgroups, such as by household income. However, results from larger, more rigorous surveys are not expected to be available until the summer of 2015 at the earliest. Available summary data from HHS on those who received the APTC are limited and subject to change because the data: Did not account for effectuated enrollment—that is, whether those who initially selected a health plan paid their premium—nor did it account for individuals who did not submit required documentation to verify their eligibility for the exchanges or the APTC, or those who may have selected a plan after open enrollment ended. Did not include the amount of APTC that individuals in 15 state- based exchanges received. reported to HHS’s Centers for Medicare & Medicaid Services (CMS) the number of individuals who were deemed eligible for the APTC at the time that they selected a plan, CMS officials we spoke with stated that voluntary reporting on the amount of APTC individuals received was limited and variable across states. Did not account for adjustments to the amount of APTC that may occur when the amount of APTC received is reconciled against enrollees’ actual income reported in their 2014 income tax returns, which will begin to occur when individuals start to file their income tax returns in 2015. HHS included data from 2 of the 17 state-based exchanges—Idaho and New Mexico— in its summary data on the amount of APTC received by individuals who selected a health plan and were deemed eligible for the APTC. These two state-based exchanges used the federal website, http://www.healthcare.gov, for their 2014 exchange enrollment. Take-up of the small employer tax credit has continued to be lower than anticipated, limiting the effect of the credit on expanding health insurance coverage. About 167,600 employers claimed the credit in 2012 (the most recent year for which data were available), slightly fewer than the 170,300 employers that claimed the credit in 2010 (see fig. 1). These figures are low compared to the number of employers eligible for the credit. In 2012, we found that selected estimates of the number of employers eligible ranged from about 1.4 million to 4 million. Although about the same number of small employers claimed the credit in 2012 as in 2010, these employers paid all or some of the premiums for more employees in 2012 (900,800 employees) than in 2010 (770,000 employees). As we found in 2012, experts we interviewed for this report generally told us that features of the small employer tax credit did not provide a strong enough incentive to employers to begin to offer or to continue offering health insurance. First, experts explained that the maximum amount of the credit is targeted to very small employers, most of which do not offer health insurance, and experts told us the size of the credit is not large enough to be an incentive to employers to offer or maintain insurance. The maximum amount of the small employer tax credit is available to for- profit employers with ten or fewer full-time equivalent employees that pay an average of $25,400 or less in wages. Such an employer could be eligible for a credit worth up to 50 percent of the employer contributions to premiums in 2014. The credit amount “phases out” to zero as employers employ up to 25 full-time equivalent employees at higher wages—up to an average of $50,000. For example, employers with 24 full-time equivalent employees are only eligible for the credit if they paid wages that averaged $25,400 or less; such employers may be eligible for a credit worth up to 2.2 percent of employer contributions to premiums. Second, the limited availability of the credit—employers can claim it for only two consecutive years after 2013—further detracts from any potential incentive for small employers that do not offer coverage to begin offering coverage. Experts we interviewed told us that employers are reluctant to provide a benefit to employees that would be at risk of being taken away later when the credit is no longer available. Finally, experts told us that the complexity of applying for the credit outweighed its benefit. According to tax preparers and other stakeholders we interviewed for this and our previous report, the complexity of the paperwork required to claim the credit was significant, and small employers likely did not view the credit as a sufficient incentive to begin offering health insurance, given the time required to claim it. The trend in low take-up of the small employer tax credit is likely to continue given the low enrollment in SHOPs, and thus it is unlikely that its effects on coverage will change in the near future. This is because employers were required to offer health insurance coverage through SHOP exchanges to be eligible for the small employer tax credit beginning in 2014. We previously found that 2014 enrollment in SHOP was significantly below expectations. Specifically, we found that as of June 2014, the 18 state-based SHOP exchanges had enrolled about 76,000 employees through nearly 12,000 small employers, although not all of these employers were eligible for the credit. Enrollment in states with federally facilitated SHOPs was not known as of January 2015, although CMS officials said they did not have reason to expect significant differences in enrollment trends for 2014 between the state-based SHOPs and the federally facilitated SHOPs. In comparison, the Congressional Budget Office (CBO) had estimated that, in 2014, 2 million employees would enroll in coverage through either state-based or federally facilitated SHOP exchanges. Most nonelderly adults had access to affordable minimum essential coverage through their employer, Medicaid, the exchanges, or other sources, although about 16 percent of nonelderly adults remained uninsured as of March 2014. While there are many reasons people remain uninsured, some—including certain families or individuals not eligible for the APTC—may not have access to affordable coverage. The affordability of health insurance coverage obtained through the exchanges varied depending on one’s age, household size, income, and place of residence. Regardless of the affordability of premiums, some may face challenges in maintaining their insurance. Most nonelderly adults had access to affordable minimum essential coverage through their employer, Medicaid, the exchanges, or other sources. While specific data on individuals’ access to affordable coverage is not available, estimates of the number of nonelderly adults who are insured through various types of coverage indicate that most have access to coverage that would be considered affordable under PPACA. For example, one survey estimated that, as of March 2014, 59 percent of nonelderly adults had obtained coverage through an employer. For most individuals with ESI, the coverage would be considered affordable under PPACA—that is, premiums for the self-only ESI plan offered cost less than 9.5 percent of their household income. Individuals who are offered ESI that does not meet this affordability threshold may be eligible, depending on their household income, to receive the APTC to instead purchase an affordable exchange plan. As of March 2014, an estimated 2 percent of nonelderly adults purchased coverage through an exchange—an estimated 85 percent of whom received the APTC. An additional 9 percent of nonelderly adults were enrolled in Medicaid coverage, which requires either no or minimal premiums. Finally, an estimated 14 percent of nonelderly adults had other sources of coverage, such as TRICARE for certain members of the armed forces, or health plans sold off the exchanges. An estimated 16 percent of nonelderly adults (31.4 million) were uninsured as of March 2014, according to one early survey. CBO estimated that, in 2016, most of those who will remain uninsured—at least 77 percent—will likely be exempt from the requirement to maintain minimum essential coverage because, for example, they are undocumented immigrants or lack access to health insurance coverage that is considered affordable under PPACA. While there are many reasons people remain uninsured, some individuals may not have access to affordable health insurance coverage. For example, some may be low-income and live in a Medicaid nonexpansion state or they may lack access to affordable ESI yet are also ineligible for the APTC to instead purchase affordable coverage through the individual exchanges. Some states permit certain nonelderly adults with incomes greater than 100 percent of the FPL to enroll in Medicaid, such as those who are pregnant or disabled. the individual exchanges was likely unaffordable for these uninsured individuals. For example, an individual age 27 with household income at 99 percent of the FPL in a Medicaid nonexpansion state would have had to spend between 10 and 32 percent of their household income on the lowest-cost bronze plan, depending on their place of residence. One study estimated that roughly 4 million nonelderly adults with household incomes below 100 percent of the FPL living in a Medicaid nonexpansion state were uninsured in 2014. Although some families have access to ESI that is considered affordable under PPACA, they may have to spend more than 9.5 percent of their household income on such coverage. The ESI affordability threshold is based on the cost of a self-only plan even though premiums for a family plan are typically more expensive, requiring them to spend more than they would on a self-only plan. Because the family would be considered to have access to affordable ESI under PPACA based on the self-only plan, it would not be eligible to receive financial assistance through the APTC to purchase a family plan through the individual exchanges. This has created a situation that some have referred to as “the family glitch,” where families offered ESI may find that coverage to be unaffordable yet they are ineligible for the APTC. The Agency for Healthcare Research and Quality (AHRQ) recently estimated that 10.5 million adults and children may be in this situation. Some nonelderly adults who lack access to affordable coverage elsewhere, such as through an employer, and instead shop for health insurance coverage on the individual exchanges may find this insurance unaffordable without financial assistance from the APTC—those with household incomes greater than 400 percent of the FPL. Results from one early survey suggest that about 6 percent of nonelderly adults were uninsured in 2014 and had household income greater than 400 percent of the FPL. In addition, based on nine household scenarios we examined, the affordability of the lowest-cost bronze plans available in the individual exchanges for such individuals varied by age, household size, income, and location in 2014. For example, in most rating areas in 2014 the lowest-cost bronze plan available would have been considered unaffordable to older individuals with household income between, for example, 401 and 500 percent of the FPL. However, in nearly all rating areas such coverage was likely affordable for younger individuals regardless of their household income. The affordability of the lowest- cost bronze plans also varied by location and income for a family of four with two parents aged 40 years old and two children under 21 years of age. (See fig 2. For a more detailed version of the maps included in fig. 2, see appendix III.) Based on nine household scenarios we examined, the affordability of the lowest-cost bronze plans available varied across different demographic subsets in the United States, for example: Individual age 60-years-old: A 60-year-old individual with household income at 450 percent of the FPL would have had to spend greater than 8 percent of their household income for the lowest-cost bronze plan in most (84 percent) of the 501 rating areas in the United States. Specifically, in 17 percent of rating areas such an individual would have had to spend greater than 12 percent of their household income, in nearly two-thirds (67 percent) of rating areas they would have had to spend greater than 8 through 12 percent, and in 16 percent of all rating areas they would have had to spend from 4 through 8 percent of their household income on the lowest-cost bronze plan. Even with somewhat higher household income at 500 percent of the FPL, the lowest-cost bronze plan would be considered unaffordable for older individuals in most rating areas (72 percent). Moreover, in the most expensive rating area for a 60-year-old individual (counties near Albany, GA), the lowest-cost bronze plan had an annual premium of $9,487. Among those with income too high to receive the APTC, this plan would have been considered unaffordable for a 60-year-old individual if they earned between $46,797 (401 percent of the FPL) and $118,588 (1,016 percent of the FPL) in that rating area. Individual age 27-years-old: The lowest-cost bronze plan would have been considered affordable in all but one rating area for a 27-year-old with income too high to receive the APTC. In nearly half (47 percent) of all rating areas, such individuals with household income at 450 percent of the FPL, for example, would have had to spend from 4 through 8 percent of their income on the lowest-cost bronze plan, and in 53 percent of rating areas they would have had to spend less than 4 percent of their income. There is only one rating area where 27-year-olds with household income greater than 400 percent of the FPL would have had to spend greater than 8 percent of their household income on the lowest-cost bronze plan. In the most expensive rating area for a 27-year-old (the state of Vermont), the lowest-cost bronze plan had an annual premium of $4,032. Among those with income too high to receive the APTC, this plan would have been considered unaffordable for a 27-year-old individual if they earned between $46,797 (401 percent of the FPL) and $50,400 (432 percent of the FPL) in that rating area. Married couple age 40-years-old with two children under 21-years-old: In 75 percent of all rating areas such a family with household income at 450 percent of the FPL would have had to spend from 4 through 8 percent of its household income on the lowest-cost bronze plan, and in 25 percent of all rating areas it would have had to spend greater than 8 through 12 percent of its household income. In one rating area such a family would have had to spend greater than 12 percent of its household income. In the most expensive rating area for a married couple aged 40 with two children and household income too high to receive the APTC (counties near Albany, GA), the lowest- cost bronze plan had an annual premium of $13,374, which would have been considered unaffordable for such a family if it earned between $95,639 (401 percent of the FPL) and $167,176 (701 percent of the FPL) in that rating area. Changes in premiums for plans offered on the individual exchanges between 2014 and 2015 likely affected variation in the affordability of lowest-cost bronze plans by rating area in 2015. Studies have estimated that, while the average cost of premiums for the reference or lowest-cost plans have changed only modestly between 2014 and 2015, average premiums increased significantly in some rating areas and decreased significantly in others. Regardless of the affordability of premiums, some may face challenges in maintaining minimum essential coverage, and for those who retain insurance, obtaining health care may be costly. For example, among those eligible for the APTC, some may experience changes in their income that affect their eligibility, which may lead to coverage gaps or discontinuity in coverage. It is too soon to know how many people became ineligible for the APTC in 2014, but experts we interviewed and studies of past years’ data indicate that income changes are fairly common, particularly among those with lower incomes. Changes in employment status and family composition can change enrollees’ eligibility for certain types of insurance, which could lead to challenges maintaining health insurance. For example, a change in employment status can affect eligibility for ESI, the most common form of insurance for the nonelderly. One survey found that among nonelderly adults who reported having had a gap in ESI coverage in 2011, 67 percent reported that it was due to a change in employment status.Changes in family composition can also cause challenges for people seeking to maintain health insurance. For example, divorce can cause one spouse to lose access to the other’s ESI, or may change household income such that eligibility changes for federal subsidies or Medicaid. Even if individuals are able to maintain health insurance that meets the criteria for minimum essential coverage, obtaining medical care may be costly. When enrollees receive health care services, they are often responsible for cost-sharing payments such as copayments or coinsurance. Enrollees’ cost-sharing responsibilities for silver, gold, and platinum plans are lower than for bronze plans, but out-of-pocket costs for all plans can be considerable depending on an enrollee’s health care needs and the structure of one’s health plan. Insurers can structure plans to charge more or less for certain services or medications, as long as the out-of-pocket costs are limited to no more than $6,350 per year for in- network goods and services for single coverage of those with incomes above 250 percent of FPL. of FPL ($28,725), $6,350 represents about 22 percent of their annual income. This limit does not include premiums, balance billing amounts for non-network providers and other out-of-network cost-sharing, or spending for non-essential health benefits that are not covered by the plan. required to contribute toward a plan’s deductible, and are ineligible for federal cost-sharing subsidies. Furthermore, experts told us that some insurers have limited the networks of providers covered by the plans offered on the exchanges. Experts explained that restricting networks allows insurers to reduce premiums by limiting the number of provider choices, but increases the possibility that a provider sought by an enrollee will be out-of-network. This report provides an early look at the effect of the tax credits and affordability of health insurance under PPACA, finding that evidence suggests that the APTC likely contributed to an expansion of health insurance coverage because it significantly reduced the cost of premiums for those eligible. However, the effects of the APTC and the affordability of health insurance in 2014 and beyond is uncertain for several reasons. First, complete data on the number of people who claimed the APTC in 2014 and the amount of the APTC claimed are not yet available because of the limited data reported from most state-based exchanges as well as the lag time during which enrollees file taxes and IRS completes reconciliation. Second, insurers will likely adjust premiums in exchange plans as more data become available about enrollees in the exchanges, including how the health profiles of exchange enrollees compares to that of enrollees previously purchasing individual insurance or ESI. Thus, trends for premiums in exchange plans may not stabilize for several years, although PPACA established certain requirements intended to reduce variation. Third, health insurance premiums are in large part driven by the underlying costs of health care. While the rate of growth of health care costs has slowed in recent years, there is no guarantee that such a trend will continue. As a result, it is important to note that our findings about the first year of the exchanges cannot be generalized to future years. We received technical comments on a draft of this report from HHS and IRS and incorporated them as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Department of Health and Human Services, the Commissioner of the Internal Revenue Service, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. In addition to the two objectives we addressed in this report, PPACA mandated that GAO review what is known about the potential effects of lowering the employer-sponsored insurance (ESI) affordability threshold.Under the 2014 income threshold, “affordable” means that employees’ premium contribution for a self-only plan must cost no more than 9.5 percent of their household income. Our literature review found no peer-reviewed studies that have examined the effects of lowering the ESI affordability threshold below 9.5 percent of household income. mixed potential effects. Lowering the ESI affordability threshold would shift more of the cost of premiums onto employers—that is, employers would have to increase their contribution towards employees’ premiums. Some experts stated that such a shift could encourage some employers to discontinue offering health insurance. In particular, experts told us that employers most likely to discontinue are those that employ a low-wage workforce. These employers face less competition in attracting lower-paid workers than higher-paid workers, so they have less incentive to offer health insurance coverage to attract workers. Employers with more than 50 full-time equivalent employees that do not provide health insurance coverage would be subject to the tax penalty on employers if any of their employees obtain health insurance coverage through the exchanges with assistance from the advance premium tax credit (APTC). One expert commented that employers that cease offering health insurance may also choose to compensate employees for the loss of health insurance by increasing wages. Alternatively, one expert told us that employers that choose to continue offering health insurance might adjust employees’ compensation packages to account for an increase in the employer contribution to health insurance premiums. These employers would avoid the tax penalty on employers that fail to offer affordable health insurance to employees. See appendix II for details on our search for studies. such an increase is unclear. Federal costs would increase if employers stop offering health insurance and employees that subsequently seek exchange coverage are eligible for and claim the APTC and cost-sharing subsidies. At the same time, federal tax revenue may also increase if employers dropping health insurance raised taxable wages and paid employer penalties because of their failure to offer health insurance. However, experts told us this increase in tax revenue would likely not be high enough to offset the increase in federal costs from employees’ APTC and cost-sharing subsidy claims. Because studies have estimated that relatively few people have an offer from their employer of self-only health insurance coverage that exceeds the affordability threshold of 9.5 percent of household income, relatively few are likely to be affected if the threshold were lowered. Three studies varied in their estimates, with the highest estimating up to 1 million people In comparison, the Congressional Budget Office may have such an offer.(CBO) estimates that in 2014, 156 million nonelderly people received ESI coverage. The three studies found: The Agency for Healthcare Research and Quality (AHRQ) estimated that about one million people with household incomes between 139 to 400 percent of the federal poverty level (FPL) have an unaffordable offer. CBO estimated that between 0 and 500,000 people had an unaffordable offer in 2014 and sought coverage on an exchange. Congressional Budget Office, Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act (Washington, D.C.: Congressional Budget Office, April 2014). Another study combined different data sets to generate estimates of the number of households that had an unaffordable ESI offer.study found that if employers keep employee contributions at the national average (which the study authors calculated as 20 percent for self-only coverage in 2009), no employees’ contribution would have exceeded the ESI affordability threshold in 2009. These studies estimated that a relatively low number of people are offered ESI coverage that exceed 9.5 percent of their income because generally, employee contributions for self-only ESI coverage are small compared to income. The average ESI premiums in 2014 were $6,025 per year for single coverage, and employees contributed about $1,081, Employees with household income of more than $11,380 on average.would be considered to have affordable premiums. To describe what is known about the effects of the Advance Premium Tax Credit (APTC) and the small employer tax credit on health insurance coverage, as well as what is known about the potential effects of changing the employer-sponsored insurance (ESI) affordability threshold, we conducted a structured literature search for studies. To conduct this review, we searched over 30 bibliographic databases, including ABI/INFORM Global, MEDLINE, and WorldCat, for studies on these topics published between January 1, 2010, and November 12, 2014. Two analysts independently reviewed each of the results for relevance and then reconciled differences. We determined that a study was directly relevant to our objectives if it: (1) included empirical analysis related to the effects of the APTC or the small employer tax credit on the provision of health insurance or maintenance of health insurance; or (2) analyzed the effects of changing the ESI affordability threshold on the actions of employers, employees, or the federal budget. To supplement our search of reference databases, we: searched the Internet using Google.com and terms such as “APTC maintain health insurance” and “surveys insurance Patient Protection and Affordable Care Act (PPACA)”; searched the websites of health policy research organizations such as the Henry J. Kaiser Family Foundation (KFF), the Urban Institute, and the American Enterprise Institute; and asked the experts we interviewed to recommend sources of literature that would address our objectives. Through all of these literature searches, we identified 23 studies that were useful for the objectives of our report. Among these studies, we identified summary results from three surveys that estimated the change in the rate of uninsured nonelderly adults between 2013 and 2014 by household income amounts comparable to APTC eligibility limits. These surveys generally had low response rates and small sample sizes, which can introduce potential errors in estimating individuals’ health insurance status, especially by population subgroups, such as by individuals’ household income or type of health insurance coverage. Table 5 provides a summary of the response rate, sample size, and margin of error for these three surveys. To improve the reliability of estimates produced from the survey results, the studies’ authors used certain sampling methodologies, such as stratified sampling to over-sample populations commonly underrepresented in such surveys (e.g., low-income populations), and weighted regression models. In addition, the authors validated their estimates against prior estimates from larger, more rigorous surveys, such as the American Community Survey, and found their estimates to be generally comparable, though with small differences in some cases. Because of these approaches to improve reliability, we determined the studies were sufficiently reliable for our purposes. We also reviewed laws, regulations, and guidance related to PPACA’s individual mandate, the APTC, the small employer tax credit, individual exchange regulation, and the ESI affordability threshold. We also reviewed the legislative history of the ESI affordability threshold. We interviewed a range of experts to explore what is known about the effects of the APTC and the small employer tax credit on health insurance coverage and what is known about the extent to which health benefit plans are available and individuals are able to maintain minimum essential coverage, as well as what is known about the potential effects of changing the ESI affordability threshold. We asked experts at 11 research and industry organizations, in addition to officials at the Department of Health and Human Services (HHS) and the Internal Revenue Service (IRS), about their work related to the potential effect of tax credits on health insurance coverage, the types of individuals that may have more or less difficulty maintaining minimum essential coverage, and the potential effects on employers, employees, and federal costs of changing the ESI affordability threshold (we did not ask every question of every expert). We chose these experts based on relevance of their published or other work to our objectives. To further analyze what is known about the effects of the small employer tax credit on health insurance coverage, we requested summary data from the IRS on small employer tax credit claims, the number of employee premiums covered, and the total cost of the credit that IRS provided for tax years 2011 and 2012. Data on tax year 2013 and 2014 were not available at the time of our analysis. To assess the reliability of the data, we reviewed the data and supporting documentation for obvious errors, as well as IRS’s internal controls for producing the data. found the data to be sufficiently reliable for our purposes. To supplement these data, we also incorporated summary data from our previous report on this topic. Internal control is a process effected by an entity’s oversight body, management, and other personnel that provides reasonable assurance that the objectives of an entity will be achieved. premiums for all health plans offered in the individual health insurance exchanges by rating area, excluding New York. KFF compiled the data using HHS’s Centers for Medicare & Medicaid Services’ Landscape file, which, for 2014, captured data on premiums for plans participating in the 34 federally facilitated exchanges and 2 state-based exchanges that used the federal website, http://www.healthcare.gov, for enrollment. KFF supplemented the Landscape file data with data on premiums for plans offered in the other 15 state-based exchanges, which it acquired by reviewing health insurance companies’ rate filings in each state and validating these data through state exchange websites when possible. We assessed the reliability of these data by: interviewing KFF officials about how they compiled and validated the data as well as their internal controls, testing the data for duplicate data and outliers, and comparing the publicly available Landscape data on federally facilitated exchanges to the KFF data. Second, from the state of New York, we obtained premium data for plans offered through the state’s individual exchange during the initial open enrollment period (October 1, 2013, through March 31, 2014). To assess these data for reliability, we checked the data for outliers and validated selected data through the New York state exchange website. We found both the KFF data and the New York data to be sufficiently reliable for our purposes. We used the 2013 federal poverty level because 2014 eligibility for APTC and Medicaid was based on the 2013 level. individual or household would need in order to pay 8 percent of household income for the lowest-cost bronze plan available by rating area. We conducted this performance audit from July 2014 through March 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. John E. Dicken, (202) 512-7114 or [email protected]. In addition to the contact named above, Kristi Peterson (Assistant Director), Anna Bonelli, Christine Davis, Leia Dickerson, Giselle Hicks, Katherine Mack, James R. McTigue, Jr., Yesook Merrill, Laurie Pachter, Vikki Porter, and Jennifer Whitworth made key contributions to this report. | The number of uninsured individuals and the rising cost of health insurance have been long-standing issues. PPACA mandated that most individuals have health insurance that provides minimum essential coverage or pay a tax penalty. To make health insurance more affordable and expand access, PPACA created the APTC to subsidize the cost of exchange plans' premiums for those eligible. PPACA used two standards for defining affordability of health insurance: 8 percent of household income for the purposes of minimum essential coverage and 9.5 percent for APTC eligibility for individuals offered employer-sponsored plans. PPACA mandated that GAO review the affordability of health insurance coverage. GAO examined (1) what is known about the effects of the APTC and (2) the extent to which affordable health benefits plans are available and individuals are able to maintain minimum essential coverage. GAO conducted a structured literature search to identify studies on the rate of uninsured individuals, among other topics, and interviewed experts from HHS, the Internal Revenue Service (IRS), and 11 research and industry organizations to understand factors affecting affordability. GAO also analyzed the variation in the affordability of exchange plan premiums nationwide using 2014 data—the most recent data available at the time of GAO's analysis. GAO received technical comments on a draft of this report from HHS and IRS and incorporated them as appropriate. Early evidence suggests that the advance premium tax credit (APTC)—the refundable tax credit that can be paid on an advance basis—likely contributed to an expansion of health insurance coverage in 2014 because it significantly reduced the cost of exchange plans' premiums for those eligible. Although there are limitations to measuring the effects of the APTC using currently available data, surveys GAO identified estimated that the uninsured rate declined significantly among households with incomes eligible for the APTC. For example, one survey found that the rate of uninsured among individuals with household incomes that make them financially eligible for the APTC fell 5.2 percentage points between September 2013 and September 2014.This expansion in health insurance coverage is likely partially a result of the APTC having reduced the cost of health insurance premiums for those eligible. Among those eligible for the APTC who the Department of Health and Human Services (HHS) initially reported selected a plan through a federally facilitated exchange or one of two state-based exchanges, the APTC reduced premiums by 76 percent, on average. As of January 2015, data were not yet available on the extent to which the APTC reduced 2015 premiums, although studies have found that, on average, premiums (before applying the APTC) changed only modestly from 2014 to 2015, though some areas saw significant increases or decreases. Most nonelderly adults had access to affordable health benefits plans—as defined by the Patient Protection and Affordable Care Act (PPACA)—but some may face challenges maintaining coverage. Most nonelderly adults had access to affordable plans through their employer, Medicaid, the exchanges, or other sources as of March 2014, although about 16 percent of nonelderly adults remained uninsured. While there are many reasons people remain uninsured, some people may not have access to affordable coverage, including (1) low-income nonelderly adults—those with household income below 100 percent of the federal poverty level—who live in one of the 23 states that chose not to expand Medicaid and (2) some nonelderly adults who do not have affordable employer-sponsored insurance and who were not eligible for the APTC. For those with incomes too high to qualify for the APTC, the affordability of health insurance coverage available in the individual exchanges in 2014 varied by age, household size, income, and location. For example, a 60-year-old with an income of 450 percent of the federal poverty level would have had to spend more than 8 percent of their household income for the lowest-cost plan in 84 percent of all health insurance rating areas in the United States, but a 27-year-old had access to an affordable plan in all but one. Regardless of the affordability of premiums, some may face challenges in maintaining coverage that qualifies under PPACA as minimum essential coverage; for example, changes in income can result in changes in APTC eligibility. This report provides an early look at the effect of the APTC and the affordability of health insurance under PPACA. However, it is important to note that these findings about the first year of the exchanges cannot be generalized to future years. Numerous factors, including additional data and changes in trends in health care costs, could affect the affordability of health insurance going forward. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
Interest rates are key assumptions in calculating the present value of promised future pension benefits. When interest rates are lower, more money is needed today to finance future benefits because it will earn less income when invested. At a 6-percent interest rate, for example, a promise to pay $1.00 per year for the next 30 years has a present value of about $14. If the interest rate is reduced to 1.0 percent, however, the present value of $1.00 per year for the next 30 years increases to about $26 because the $26, when invested, will earn the relatively small income associated with a 1-percent interest rate. Therefore, lower interest rate assumptions result in higher current liability and lump-sum amounts. The interest rate appropriate for measuring the present value of a plan’s pension liabilities may differ depending on a number of factors, including the purpose of the measurement. For example, the interest rate appropriate for measuring the present value of a plan’s pension liabilities on an ongoing basis may reflect the assumed rate of return that the plan is expected to achieve on the investment of its assets. On the other hand, the interest rate appropriate for measuring the present value of that same plan’s pension liabilities at plan termination may reflect interest rates implicit in annuity purchase rates. Before ERISA, few rules governed the funding of defined benefit plans, and there were no guarantees that participants would receive promised benefits. When the pension plan of a major automobile manufacturer failed in the 1960s, for example, thousands of defined benefit plan participants lost their pensions. As part of ERISA, the Congress established PBGC to pay pension benefits in the event that an employer could not. In addition to establishing PBGC, ERISA and IRC require employers to make minimum contributions to under-funded plans and prevent employers from making tax-deductible contributions to plans exceeding specified funding limits. “. . . the determination of whether an interest rate is reasonable depends on the cost of purchasing an annuity sufficient to satisfy current liability. The interest rate is to be a reasonable estimate of the interest rate used to determine the cost of such annuity, assuming that the cost only reflected the present value of the payments under the annuity (i.e., and did not reflect the seller’s profit, administrative expenses, etc.). For example, if an annuity costs $1,100, the cost of $1,100 is considered to be the present value of the payments under the annuity for purposes of the interest rate rule, even though $100 of the $1,100 represents the seller’s administrative expenses and profit. In making the determination with respect to the interest rate . . . other factors and assumptions (e.g., mortality) are to be individually reasonable.” In 1987, the range of permissible interest rates was from 10-percent below to 10-percent above the weighted average 30-year Treasury bond rate. In 1994, IRC was amended to reduce the upper limit of the permissible range of interest rates from 10 percent to 5 percent above weighted average rate. The House Report accompanying the bill stated that the 1987 legislation was intended to address the chronic under-funding of pension plans that had persisted since passage of ERISA. However, when measuring current liability, plans could decrease contributions by choosing an interest rate at the high end of the range. According to the report, the highest allowable interest rate was reduced to 105 percent to minimize a plan’s ability to decrease its current liability through the choice of interest rates. Additionally, in 1994, IRC was amended to require that employers determine the minimum value of certain optional forms of benefit, such as lump sums, using an interest rate no higher than the interest rate for 30-year Treasury bonds. To prevent employers from exceeding the maximum lump-sum payment specified by law, IRC also required employers to use an interest rate no lower than 30-year Treasury bond rates when calculating lump sums for certain highly paid employees. The Congress enacted the amendment for a number of reasons, including to ensure that rates for determining lump-sum payments better reflected prices in the insurance annuity market. Figure 1 shows, for 1987 to 2002, the range of allowable rates for current liability calculations and the allowable interest rates for lump-sum calculations. In November 2002, for example, the interest rate for 30-year Treasury bonds was 4.96 percent. That month, the 4-year weighted average rate for 30-year Treasury bonds was 5.58 percent, and the range of allowable interest rates for current liability calculations was 5.02 percent to 6.70 percent. Our analysis of the law and related congressional documents, and discussions with PBGC and Treasury officials, indicates that the interest rates used in current liability and lump-sum calculations were to have two characteristics. They were to: (1) reflect group annuity purchase rates and (2) not be vulnerable to manipulation by interested parties. Because actual group annuity purchase rates are unknown, the Congress specified rates to regulate an employer’s selection of an interest rate. While 30-year Treasury rates may have been close to group annuity purchase rates in 1987, PBGC was not aware of any available studies that documented that proximity. Officials said that, in addition to their possible proximity to group annuity purchase rates, the Congress adopted 30-year Treasury bond rates as the basis for interest rates because they could not be easily manipulated by interested parties. In this regard, Treasury bonds were actively traded in large markets and interest rate data for them were available from government sources, which helped ensure that the rates accurately represented market conditions and could not be easily manipulated by interested parties. However, the Department of the Treasury stopped issuing new 30-year Treasury bonds in 2001. Information needed to determine actual group annuity purchase rates is not available because annuity purchases are private transactions between insurance companies and employers who terminate their pension plan. To terminate a defined benefit plan, an employer determines the benefits that have been earned by each participant up to the time of plan termination and purchases a single-premium group annuity contract from an insurance company, under which the insurance company guarantees to pay the accrued benefits when they are due. The insurance company determines the employer’s premium by analyzing participant demographics and making assumptions about a number of variables, including: Interest rates. The assumed interest rate is used to determine the present value of projected benefit payments and costs at the annuity purchase date. Rates reflect current market rates for the securities in which the company is likely to invest the premium paid by the plan: generally fixed income securities, such as corporate bonds and mortgage- backed securities, with a relatively low credit risk. Interest rate assumptions may vary according to a number of factors at plan termination, including the projected cash flow of the plan and the yield curve on relevant securities.(See app. II.) Interest rates are adjusted to produce the insurer’s target level of capital requirements and profits from the annuity. Mortality rates. The assumed mortality rate reflects death rates associated with known or assumed characteristics of the participant population, with some adjustments to account for future potential improvements in mortality. Administrative expenses, taxes, and other costs. Administrative expenses for annuities include the cost of setting up accounts and tracking payments. Many insurers assume a flat rate for each annuitant in pricing some administrative expenses, such as account set-up charges. Some insurers reduce their interest rate assumption to account for those expenses. Information about insurance company assumptions, or premium payments and projected benefits, would be needed to estimate actual group annuity purchase rates; however, this information is often not available publicly. For example, employers who decide to terminate their pension plans typically contact a broker or consultant who then solicits bids for a group annuity contract from qualified insurance companies. Insurance companies bid on the contract through the broker or consultant. Negotiations or an auction may take place, which may further affect the price. Insurance companies typically do not disclose assumptions made during this process. Thirty-year Treasury bonds had several desirable characteristics when they were selected to approximate group annuity purchase rates in 1987. For example, the American Academy of Actuaries said that in 1987, the 30-year Treasury bond rate plus 0.3 percentage points (30 basis points) would have replicated group annuity purchase rates. This would indicate that the difference between the rate of return on 30-year Treasury bonds and the typical insurance company investment (such as long-term, high- quality corporate bonds) approximated the expenses and other annuity pricing factors that insurance companies would consider. The extent to which 30-year Treasury bond rates maintained their proximity to group annuity purchase rates would depend upon how closely Treasury rates continued to approximate insurance company investment rates of return, after adjusting them for expected administrative expenses and other annuity pricing factors. Additionally, policymakers said that 30-year Treasury bond rates were selected as the interest rate in 1987 in part because interested parties could not easily manipulate Treasury rates. Two characteristics of 30-year Treasury bonds that would indicate their rates could not be easily manipulated were their “transparency” and “liquidity.” Thirty-year Treasury bond rates were transparent. For a rate to be transparent, information about it must be widely available and frequently updated. The Federal Reserve Board of Governors, using data provided by the Department of the Treasury, published information on 30-year Treasury rates. The Department of the Treasury constructed 30-year Treasury bond rates using data collected from private vendors and reviewed and compiled by the Federal Reserve Bank of New York. Thirty-year Treasury bonds were liquid. For a bond to be liquid, the market in which it is traded must be large and active so that isolated events or erratic behavior by a single market participant are unlikely to have a major effect on market prices. According to a senior market analyst, the 30-year Treasury bond market in 1987 was likely the deepest and most liquid market in low risk 30-year bonds in the world. While 30-year Treasury bonds had several favorable characteristics when they were selected to approximate group annuity purchase rates, their issuance has since been suspended. The 30-year Treasury bond rates that are currently used as an interest rate for pension calculations are published by the Internal Revenue Service (IRS) based on rates for the last 30-year Treasury bonds, which were issued in February 2001. Actuaries and others have proposed a number of alternatives that could be used to control the selection of interest rates for current liability and lump-sum calculations, including (1) interest rates set in credit markets for various securities, such as long-term Treasury securities; long-term, high- quality corporate bonds; 30-year GSE bonds; and 30-year interest rate swaps; and (2) PBGC interest rate factors based on surveys of insurance company group annuity purchase rates. As shown in table 1, each alternative has characteristics that affect its likelihood of approximating group annuity purchase rates over time and its potential vulnerability to manipulation. For example, the closer an alternative’s interest rate levels match the net return on investment of insurance companies offering group annuities, the more likely that alternative will match group annuity purchase rates. Similarly, the closer the underlying credit rating of an alternative matches that of an insurance company offering group annuities, the more likely that alternative will match group annuity purchase rates. Various calculations can be applied to any interest rate to make it more suitable for its intended use. For example, each of the alternatives could be specified as: (1) a single monthly interest rate, which is currently the case for lump-sum calculations; (2) a corridor of interest rates around the 4-year weighted average of a monthly rate, which is currently the case for current liability calculations; or (3) a yield curve. According to several actuaries and others, specifying the alternative as a yield curve, instead of a single rate or corridor of rates around a weighted average rate, would have advantages and disadvantages. For example, specifying a yield curve might enable each plan to more closely approximate its group annuity purchase rate, but doing so might increase the difficulty of plan calculations and could prove relatively costly for small plans. The Department of the Treasury continues to construct rates for long-term bonds that could be used as a basis for selecting interest rates for current liability and lump-sum calculations. For example, the Treasury Department constructs a rate, called the long-term applicable federal rate, which approximates Treasury’s borrowing costs for securities with maturities exceeding 9 years. IRS publishes applicable federal rates. Figure 2 compares the long-term applicable federal and 30-year Treasury bond rates from 1987 to 2002. As can be seen, the differences between the two rates are generally less than 50 basis points. According to actuaries, insurance companies typically place group annuity premiums in fixed-income investments that have a higher rate of return than 30-year Treasury bonds. Treasury rates are lower than rates for other fixed-income investments of the same maturity because Treasury bonds have a lower credit risk. The proximity of Treasury bond rates to group annuity purchase rates may vary with changes in investor attitudes about credit risk. During periods of financial uncertainty, for example, investors may have a sharply heightened desire for safety, often referred to as a “flight to quality,” which could cause Treasury rates to decline relative to rates for other securities. Some investment analysts believe that one such period began toward the end of the 1990s. Despite concerns that long-term Treasury bond rates may not track closely with group annuity purchase rates during periods of financial uncertainty, Treasury bond rates retain some characteristics that may continue to make them a desirable interest rate. The government constructs the rates, and they are based on trades in large, active, and highly visible markets. For example, debt securities markets have shifted to the 10-year Treasury note to serve some of the same long-term benchmark functions as the 30-year Treasury bond has served in the past. Various financial investment firms construct indices of interest rates for long-term, high-quality corporate bonds, which are debt securities with maturity of 10 years or more issued by companies with relatively low credit risk. Figure 3 compares interest rates for the highest-quality corporate debt (bonds rated Aaa by Moody’s Investor Services), high- quality corporate debt (bonds rated Aa), and 30-year Treasury bonds for the period 1987 to 2002. As can be seen, corporate bonds with a Aa rating have higher interest rates than corporate bonds with a Aaa rating and 30-year Treasury bonds. Several actuaries and plan sponsor groups have suggested using one or more indices for long-term, high-quality corporate bond rates as the basis of an interest rate, while others suggest that these indices require adjustments before they can be used. Because insurance companies tend to invest in long-term corporate debt, these rates may track changes in group annuity purchase rates. An industry representative said that an unadjusted average of the indices would reflect insurance company expenses and other group annuity pricing factors because insurance companies typically achieve a higher rate of return on investment than is indicated by high-quality corporate bond rates. For example, investing in lower-quality bonds and private loans might achieve a higher rate of return than investing in high-quality corporate bonds. According to some actuaries, however, the indices would need to be adjusted for insurance company expenses and other factors before they would reflect the level of group annuity purchase rates. For example, a study for the Society of Actuaries said that a long-term corporate bond index rate minus 70 basis points would reasonably approximate group annuity purchase rates. However, the ERISA Industry Committee recommended using an average of corporate bond indices published by four firms as the interest rate without such an adjustment. Some actuaries and other pension experts have suggested that rates on some corporate bond indices might also need to be adjusted to make allowances for certain options before the rates would reflect the level of group annuity purchase rates. For example, corporate bonds are typically “callable,” meaning that the issuer can recall a bond before its maturity date. Because this creates some uncertainty to the holder of a corporate bond, this may also increase corporate bond rates relative to group annuity purchase rates. Corporate bond indices have properties that make them difficult to manipulate, but the corporate bond market may not be as liquid and transparent as the Treasury bond market. While the investment-grade corporate bond market is very large overall, with over $700 billion in issuance in 2001 and an estimated $4 trillion in outstanding value as of the third quarter of 2002, the market is segmented by differences in credit quality and issuer characteristics and, therefore, is less liquid than a large unsegmented market such as the market for Treasury securities. Additionally, interest rates for specific corporate bonds are based on quotes by traders, who usually estimate the current trading value of a bond and quote a rate based on its spread versus a comparable Treasury security. However, information on which to base corporate bond quotes is expected to become more widely available through a National Association of Security Dealer’s reporting system, which was launched in July 2002 and reports many large recent transactions. The new system may not alleviate all transparency concerns. Some financial experts said that corporate bonds are not as highly traded as other debt securities, which means that recent trades are often not available to verify current market conditions and rates. Certain corporate bond indices also have unique characteristics and complexities that could affect their suitability as an interest rate. Corporate bond indices are put together by private financial companies, which then compute an interest rate for the index based on underlying interest rates of the component bonds. Financial companies differ in how publicly they share information on which bonds they include in an index, how they weight component interest rates, and other factors and calculations that influence the published rate. Further, the reliability of the corporate indices can be affected by the reliability of the data source— actual transactions, quotes, or estimates of values or yields—on which they are based. Thirty-year rates on securities issued by GSEs are rates on bonds used to finance home ownership and other public policy goals. GSEs are private corporations, such as Federal National Mortgage Association (also known as Fannie Mae), that have the implicit backing of the U.S. government. In 1998, Fannie Mae began issuing debt through its benchmark program, which is intended to be high-quality, noncallable, actively traded debt. Fannie Mae attempts to issue benchmark debt periodically and in large amounts, similar to how Treasury issued 30-year bonds in the past. Several pension experts have suggested using 30-year Fannie Mae bond rates as the basis for the interest rate. Because GSE securities have received a credit rating comparable to, or higher than, the credit rating of the insurance companies that offer group annuities, GSE rates may approximate group annuity purchase rates. GSE-issued debt is generally of the highest credit quality but not considered credit-risk free like Treasury securities. Therefore, GSE rates would typically be expected to fall between Treasury rates and high-quality corporate rates of comparable maturity. Fannie Mae benchmark 30-year bond rates have properties that indicate a low likelihood that interested parties could manipulate them, but the securities have a relatively small market and relatively low trading activity compared with the Treasury and corporate bond markets. Outstanding volume of 30-year Fannie Mae benchmark debt was $14.9 billion as of December 2002, which was significantly less than the $589 billion in outstanding Treasury bonds as of November 30, 2002, and $4 trillion in outstanding long-term corporate bonds. According to Federal Reserve data of market transactions by primary dealers, trading in long-term GSE debt, which includes securities besides Fannie Mae benchmark debt, has been approximately $1.1 billion per day in 2002, which is much less than long- term Treasury securities. According to some experts, GSE debt is expected to continue to grow. With regard to transparency, Fannie Mae has also recently increased the availability of information on trades underlying the rates on its securities, which should increase rate transparency. Thirty-year interest rate swap rates are fixed rates in a contract between two parties, one of whom agrees to make fixed interest payments based on a specified amount of money in exchange for interest payments based on variable short-term rates on the same specified amount of money for the duration of the contract. For example, one party might agree to pay a 5 percent annual fixed rate on $1 million every year for the next 30 years in exchange for receiving a published 3-month interest rate that changes periodically for the next 30 years on the same $1 million. The 30-year swap rate in this case would equal 5 percent, and the predominant 30-year swap rate should move up and down with the expected level of short-term interest rates over the next 30 years. The “notional” amount of money ($1 million in the example) does not typically change hands between the counter parties in a swaps contract, and unlike most other fixed-income markets, interest-rate swaps do not involve the issuance of debt. By entering into a swap contract, the party that agreed to make fixed interest rate payments can help offset potential risk from variable-rate debt that it issues by making fixed interest payments in exchange for variable-rate payments. The variable-rate payments that it receives under the agreement can then be used to pay its debt holders. If interest rates go up, the debt issuer pays higher debt service payments but also receives higher interest payments from the swap agreement. Several pension experts have considered using 30-year interest rate swap rates as the basis for current liability and lump-sum calculations. Interest- rate swaps contracts are generally perceived to contain low credit risk for two reasons. First, the two parties involved in the contract typically have high credit ratings. Second, swap contracts typically use the London Interbank Offer Rate (LIBOR) as the floating rate, and the LIBOR has a low credit risk. The overall credit quality underlying LIBOR-based, interest-rate swap rates is likely comparable to that of high-quality corporate bonds. However, unlike some corporate bonds, swaps are not callable, so their rates would not need to be adjusted for such options and typically would be expected to fall below those on high-quality corporate bonds of similar maturity. The credit rating of insurance companies in the group annuity market is generally Aa or better. Interest rate swaps might give an accurate indication of an insurance company’s cost of borrowing funds. The interest rate swap market has characteristics that likely protect rates from potential manipulation. The swap market is considered to be very active, although the trading volume and amount outstanding for longer maturity interest rate swaps are believed to be low, relative to shorter maturities. The Federal Reserve Board publishes 30-year interest rate swap rates daily based on a private survey of quotes on new contracts offered by 16 large swaps dealers, and quotes on swaps contracts are updated throughout the day and visible via subscription services. A unique advantage of using swaps as an interest rate is that swaps do not require the issuance of debt; rather, swap rates reflect contracts between two parties. Because new contracts are produced every day, it is easier to update 30-year swap rates than other rates involving the issuing of debt, which happens only periodically. The international swaps market represents the largest of the alternatives considered, with an outstanding dollar-denominated value of swaps contracts estimated at approximately $20 trillion, with many new transactions conducted between parties every day. However, some experts have expressed concern about using the 30-year interest rate swaps because the swaps market is relatively new and the outstanding trading volume of 30-year interest rate swaps is believed to be much lower than for shorter maturity contracts. Of all the alternative rates, PBGC’s interest rate factors have the most direct connection to group annuity purchase rates. Figure 4 shows that the proximity of PBGC interest rate factors to 30-year Treasury bond rates varied from 1987 through 2002. PBGC interest rate factors are based on surveys of insurance companies conducted by the American Council of Life Insurers (ACLI) for PBGC and IRS. The survey asks insurers to provide the net annuity price for annuity contracts for plan terminations. PBGC develops interest rate factors, similar to interest rates, from the survey results, which are adjusted to the end of the year using an average of the Moody’s Corporate Bond Indices for Aa and A-rated corporate bonds for the last 5 trading days of the month. The adjusted interest rate factors are published in mid-December for use in January. The interest rate factors are then further adjusted each subsequent month of the year on the basis of the average of the Moody’s bond indices. According to PBGC, the interest rate factors, when used along with the mortality table specified in PBGC regulations, reflect the rate at which pension sponsors could have settled their liabilities, not including administrative expenses, in the market for single-premium nonparticipating group annuities issued by private insurers. Although PBGC interest rate factors do not consider the insurers’ administrative expenses, a May 2000 American Academy of Actuaries study of the PBGC interest rate factors found that they overstated termination liability by a relatively small amount, averaging 3 percent to 4 percent. The study characterized PBGC factors as mildly conservative. Despite its seeming desirability as a statutory rate because of its direct connection to group annuity purchase rates, PBGC’s interest rate factors may be more vulnerable to manipulation than other alternatives because they are not based on interest rates determined by the credit market and are less transparent. The identity of insurance companies surveyed and included in PBGC factors is not known, raising ambiguity about the extent to which the PBGC interest rate factors reflect the current broad market for group annuities. Additionally, PBGC calculations are not reported or independently reviewed. However, an insurance company representative said that insurance companies participating in the survey would likely agree to have that participation reported, and a PBGC official said that PBGC would not object to an independent review of its methodology for developing the interest rates. If the alternative results immediately in a higher allowable interest rate, which is likely for the alternatives we reviewed, using the higher rate would generally decrease minimum allowable lump-sum amounts and increase the number of participants whose benefit could potentially be distributed as a lump sum without their consent, decrease minimum and maximum employer contributions, and decrease PBGC revenue. The present value of a participant's benefit and related contribution and premium requirements would decrease because a higher interest rate increases the value of today’s dollars, relative to future dollars, and therefore fewer of today’s dollars should be needed to pay benefits in the future. However, if the alternative produces a lower interest rate, plan participants would receive larger lump sums, employers would need to increase contributions to their plans, and PBGC may experience an increase in revenue. The magnitude of these effects on lump sums, plan funding, and PBGC premiums would depend on the characteristics of the plan and its participants and how the rate is specified in the law. Additionally, if the Congress specifies the interest rate differently for current liability and lump-sum calculations, as is currently the case, the magnitude of the impact on each could differ. Furthermore, the effect on current liability and lump-sum calculations could be phased in over a period of time. In 1994, for example, the law phased in the reduction in the upper limit on interest rates for current liability calculations from 110 percent to 105 percent over a 5-year period. Additionally, requiring the use of an updated mortality table for current liability calculations might partially offset the effect that a higher interest rate would have on current liability calculations. During the period from January 1994 to July 2002, the monthly long-term corporate bond rates, GSE rates, and 30-year interest rate swap rates, were generally greater than the 30-year Treasury bond rate; the PBGC estimated rate was below the 30-year Treasury bond rate in the mid-1990s but was higher than the 30-year Treasury bond rate after 1998. As shown in figure 5, each rate’s relationship to the 30-year Treasury rate has changed over time. Figure 6 shows that the effect of a change in the interest rate used to calculate lump sums is greater for participants further away from retirement than for participants near retirement. The figure shows, for example, that a 1-percentage point increase in the interest rate from 5 percent to 6 percent would result in an 8 percent decrease in the lump sums of participants expected to retire almost immediately. On the other hand, that same 1-percentage point increase in the interest rate would result in a 36 percent decrease in the lump sums of participants expected to retire in 40 years. Reducing the dollar amount of each lump-sum distribution by using a higher interest rate may affect the number of employers that offer a lump- sum distribution and the number of participants electing to take a lump- sum distribution. Many employers already offer a lump-sum provision in their plans; however, if the rate used to calculate lump-sum distribution amounts were to increase, reducing the amount of each distribution, more employers may adopt lump-sum provisions in their plans in order to reduce costs. However, fewer participants might elect a lump-sum distribution if the value of such payments were to decline relative to the participant’s annuity benefit. Reducing the calculated present value of each participant’s benefit would also increase the number of participants whose benefit may be distributed by the plan as a lump sum without their consent. An increase in the assumed interest rate would cause the present values of some benefits, which are currently above the $5,000 limit for nondiscretionary distribution as a lump sum, to be reduced to the point that they fall below that limit. Because a higher interest rate would make plans appear better funded relative to current liabilities than they were before, employer contributions and PBGC revenue may decrease. For each 1-percentage point change in the interest rate, estimated current liabilities of a pension plan would change by 12 percent to 15 percent. Such a change may lower or eliminate the minimum employer contribution, referred to as the deficit reduction contribution, required by the IRC. Therefore, plans with a typical distribution of participants would see their liabilities reduced by 12 percent to 15 percent from a 1-percentage point increase in the interest rate. Figure 7 shows plans that were 80 percent funded would become more than 90 percent funded and would no longer have to make a deficit reduction contribution. A higher interest rate would also decrease allowable employer contributions for plans at the full funding limit. The IRC imposes full funding limitations that limit tax-deductible contributions under certain circumstances in order to prevent employers from contributing more to their plan than is necessary to cover promised future benefits. The full funding limitations established in 1987 and 1994, also known respectively as the 150-percent current liability limitation and the 90-percent current liability limitation, are required to be computed using the 30-year Treasury rate. If the rate with which they are required to be computed were to increase, more plans would be subject to the full funding limitation and, therefore, fewer would be allowed to make additional contributions. Employer premium payments to PBGC would decrease with the use of a higher interest rate because their plans’ current liabilities would become better funded. Generally, ERISA requires plans with assets that are less than the value of their accrued vested benefits to pay an additional premium, termed the variable-rate premium. Assuming an increase in the interest rate, some plans would no longer be subject to the variable-rate premium because the reduction in their current liabilities would cause them to reach the full funding limit and therefore become exempt from the payment. Plans still subject to the variable-rate premium would pay less because their current liabilities would become better funded. The choice of an interest rate has important implications for federal revenue, employer cash flow, and participant retirement income. A single percentage point increase in the interest rate would reduce a typical pension plan’s current liabilities by 12 percent to 15 percent, depending on participant demographics. Rules for using current liability calculations to determine minimum contributions, full funding limits, and PBGC premiums are extremely complex. However, in general, with an increase in the interest rate, some under-funded plans would become adequately funded, some plans would reach full funding limits, and additional plans would avoid variable-rate premiums. Additionally, the minimum allowable value of the lump-sum equivalent of a participant’s annuity benefit would decline. The magnitude of the decline would depend on the participant’s age and proximity to the plan’s normal retirement age. Each alternative has characteristics that may make it more or less appropriate as an interest rate. To the extent that policymakers continue to want the interest rate tied to group annuity purchase rates, the PBGC interest rate factors have the most direct connection to the group annuity market. Other than the survey conducted for PBGC, no mechanism exists to collect information on actual group annuity purchase rates. Although the PBGC interest rate factors may track group annuity purchase rates more closely than other rates do, the PBGC interest rate factors are less transparent than market-determined alternatives. Long-term market rates, such as corporate bond indices, may track changes in group annuity rates over time, but they are less directly connected to group annuity rates and their proximity to group annuity rates is uncertain. In addition, an interest rate based on some long-term market rates, such as corporate bond indices, may need to be adjusted downward to better reflect the level of group annuity purchase rates. Finally, the suitability of any interest rate used is likely to change over time and, unless some entity is given the responsibility for monitoring its relationship to group annuity purchase rates, the Congress and pension plans regulatory agencies will have difficulty determining when changes are needed. The Congress has made several ad hoc adjustments to the mandatory interest rate for pension calculations and can continue to make changes to the rate through the legislative process. Given the significant technical issues associated with such decisions as well as the time it takes to enact such a legislative change, the Congress could decide to delegate this authority to the executive branch and establish a process to monitor the mandatory rate. This would provide an opportunity for needed adjustments to the rate to occur in a timelier manner. We are offering suggestions to the Congress on a possible process for adjusting the mandatory rate as well as a way to periodically monitor the rate over time. To improve the timeliness of adjustments to the mandatory interest rate for pension calculations, the Congress should consider establishing a process for regulatory adjustments of the rate. The Congress should consider providing the cognizant regulatory agencies—Labor, Treasury, and PBGC—the authority under ERISA to jointly adjust the rate within certain boundaries as specified under the law. This could be done by the Congress establishing an interagency committee to adjust, with the input of key stakeholders, including plan sponsors, labor unions, actuaries and others, the mandatory interest rate. This could be a transparent process consistent with the Administrative Procedures Act. Under this option, the Congress could either require that the Committee’s adjustments to the mandated interest rate obtain congressional approval and be enacted into law or it could provide for congressional review and disapproval. The disapproval role could be similar to the role the Congress provides for itself under the Congressional Review Act. Under the act, federal regulations are held for 60 days to give the Congress the opportunity to pass a resolution of disapproval. This process provides the advantages of allowing for more timely adjustments to the interest rate if needed and providing the Congress with the opportunity to intervene if it so chooses without requiring direct congressional involvement for the adjustments to take effect. Whether the Congress decides to maintain its current role in setting and adjusting the mandatory interest rate or delegates this authority to the executive branch, it should consider establishing a process to better monitor changes to the rate in relation to group annuity purchase rates. If the Congress selects one of the market-based rates as the new mandatory rate, it should consider amending ERISA to require the cognizant regulatory agencies to (1) periodically evaluate the relationship between the rate and the group annuity purchase rates and report to the Congress and (2) provide comments about how any changes to the mandated interest rate they would recommend would likely affect federal revenue, employer pension contributions, plan funding levels, and participants’ lump-sum benefits. This would provide the Congress and the regulatory agencies an opportunity to respond in a timely manner to changes that might affect the relationship between the market-based rate and the group annuity purchase rate. Alternatively, if the Congress decides to select the PBGC interest rate factors as the mandatory interest rate, it should consider requiring an independent review to validate PBGC’s methodology and calculations for developing the factors and require PBGC to publish its methodology, both before they are selected as the mandated interest rate and periodically thereafter. We provided a draft of this report to Labor, Treasury, and PBGC. The agencies jointly provided written comments, which appear in appendix III. They generally agreed with our findings and conclusions and noted that our report will help interested parties better evaluate possible alternatives to the 30-year Treasury rate. They also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Labor, the Secretary of the Treasury, the Secretary of Commerce, and the Executive Director of the Pension Benefit Guaranty Corporation, 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 GAO’s Web site at http://www.gao.gov. If you have any questions concerning this report, please contact me at (202) 512-7215 or George A. Scott at (202) 512-5932. Other major contributors include Daniel F. Alspaugh, Joseph Applebaum, Kenneth J. Bombara, Mark M. Glickman, Michael P. Morris, Corinna Nicolaou, John M. Schaefer, and Roger J. Thomas. To determine the characteristics of a suitable interest rate, we reviewed pension laws and their legislative history with respect to the calculation of current liability and lump-sum amounts. We also interviewed officials at the Pension Benefit Guaranty Corporation (PBGC) and other policymakers who played a role in assessing alternative interest rates. We obtained information about group annuity pricing, and the availability of information about group annuity purchase rates, from representatives of the American Academy of Actuaries, the American Council of Life Insurers, the National Association of Insurance Commissioners, and insurance companies. To identify and examine the advantages and disadvantages of potential alternative interest rates, we interviewed representatives and reviewed documents from a number of government, pension plan sponsor, and investment entities, including PBGC, the Department of the Treasury, and Department of Labor. We also compared rates and other market statistics for suggested alternative debt securities with rates for 30-year Treasury bonds from 1987 to 2002. We discussed transparency, rate construction, and liquidity issues for the alternatives with economists at the Department of the Treasury and the Federal Reserve and with financial experts at the Bond Market Association, Federal National Mortgage Association, and pension plan consultants. To determine how alternative rates might affect employers, plan participants, and PBGC, we created hypothetical examples in which we tested the effect of changes in rate levels on current liabilities and lump- sum payments. We designed the hypothetical examples based on discussions with several actuaries and pension consultants, including PBGC and the American Society of Pension Actuaries. Additionally, in order to better understand the possible effects of a rate change on employers and plan participants, we spoke with several organizations that represent their interests. In order to better understand the implications of a change in the interest rate on PBGC, we spoke with PBGC, Department of Labor, Internal Revenue Service, and the Department of the Treasury. Group annuity purchase rates would vary among plans depending on the pattern of each plan's projected cash flows over time and the yield curve at the time the plan is terminated. Figure 8 shows the projected cash flow over a 40-year period for a sample plan at termination. The figure shows that, in the early years, payments to inactive participants of the sample plan, primarily current retirees, constitute a majority of total cash flow. In later years, however, payments to active participants make up the majority of total cash flow as current employees retire. All else being equal, the projected cash flows of plans with a larger percentage of retirees at termination than the sample plan would be more heavily weighted toward the early years, and the cash flows of plans with a larger percentage of active participants at termination would be more heavily weighted toward the later years. Surveys of insurance company group annuity pricing practices performed as part of two studies for the Society of Actuaries indicate that insurance companies use different methods to price group annuity products. In general, these methods may be described with respect to yield curves, which may be constructed for various types of securities, including Treasury securities, corporate bonds, and mortgages. Figure 9 shows, for example, two of the better know yield curves, the yield curves for on-the- run Treasury securities and zero-coupon Treasury securities, as of February 6, 2003. The yield for on-the-run securities reflects interest rates for securities that make semiannual interest payments before they mature, followed by a final payment of interest and principal at maturity. The yield for zero-coupon securities reflects interest rates, called spot rates, for securities that make a single payment at maturity. In figure 9, interest rates for the on-the-run securities that make coupon payments are lower than rates for zero-coupon securities, at the same maturity. This reflects the fact that coupon yields are a blend of zero- coupon spot rates, and the term structure of spot rates on February 6, 2003, was upward sloping. To determine the present value of plan cash flows using a zero-coupon yield curve, the spot rates at various maturities may be used as the interest rates for calculating the present value of cash flows at the corresponding points in time. For example, the spot rate at a 10-year maturity might be used to calculate the present value of a cash flow at 10 years because the timing of the single payment from the security would match the timing of the cash flow by the plan. In using a yield curve based on securities that make payments prior to maturity, maturity is inadequate for deciding which interest rate should be used to calculate the present value of a given cash flow because the security's interim interest payments must be considered. In these cases, a concept called “duration” may be used to select a single interest rate for all cash flows in the present value calculation. Duration measures the average time that it takes for a security to make all interest and principal payments, or a pension plan to make all benefit payments, with the time until each payment weighted by its present value as a percentage of the total present value of all payments. The total present value of a security's payments is its market price and the total present value of a plan's benefit payments is its current liabilities. An interest rate is selected for plan present value calculations from the yield curve that results in the same duration for the security and plan's cash flow. Duration is a measure of the sensitivity of a security's price, a lump sum, or a pension plan's current liability to changes in the interest rates used to calculate them. For example, actuaries estimate that the duration of the liabilities for pension plans with a “typical” distribution of participants is between 12 years and 15 years. Durations of 12 years and 15 years indicate that a 1-percentage point increase in the interest rate used to calculate a plan's liabilities would decrease those liabilities by roughly 12 percent and 15 percent, respectively. In February 2003, the duration of the 30-year Treasury bond issued in February 2001 was about 15 years. | Employers with defined benefit plans have expressed concern that low interest rates were affecting the reasonableness of their pension calculations used to determine funding requirements under the Employee Retirement and Income Security Act of 1974 (ERISA). ERISA requires employers to use a variation of the 30-year Treasury bond rate for these calculations; however, in 2001 Treasury stopped issuing the 30-year bond. This report provides information on (1) what characteristics of an interest rate make it suitable for determining current liability and lump-sum amounts; (2) what alternatives to the current rate might be considered; and (3) how using an alternative rate might affect plan participants, employers, and the Pension Benefit Guaranty Corporation (PBGC). GAO analysis indicates the Congress intended that the interest rates used in current liability and lump-sum calculations should reflect the interest rate underlying group annuity prices and not be vulnerable to manipulation by interested parties. In 1987, 30-year Treasury bond rates appeared to have both of these characteristics. However, the Department of the Treasury stopped issuing new 30-year Treasury bonds in 2001. Actuaries and other pension experts have proposed a number of alternative interest rates, including alternatives based on interest rates set in various credit markets--including composite rates for long-term Treasury securities, long-term high-quality corporate bond indices, 30-year rates on securities issued by government-sponsored enterprises, such as Fannie Mae, 30-year interest rate swap rates--and PBGC interest rate factors based on surveys of insurance company group annuity purchase rates. Each alternative has attributes that may make it more or less suitable as an interest rate for the calculation of current liabilities, PBGC premiums, and lump-sum amounts. Additionally, the relationship of any interest rate to the underlying group annuity purchase rates may change over time and, unless the relationship is periodically evaluated, the Congress may be unable to appropriately respond to those changes. If the alternative interest rate selected to replace the current statutory rate immediately results in a higher interest rate level, which is likely, it would generally lower participant lump-sum amounts, lower minimum employer funding requirements, and reduce PBGC premium revenue. However, if the alternative interest rate produces a lower interest rate level, plan participants would generally receive larger lump sums, some employers would need to increase contributions to their plans, and PBGC may experience an increase in revenue. |
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In December 1991, after more than 70 years of Communist rule, the Soviet Union came to an abrupt end, and the 12 new independent states emerging from the breakup started their transition to market-based democracies (see fig. 1 for a map of the 12 states). According to a 1993 study prepared for the U.S. Agency for International Development, and legal experts, these countries inherited legal systems that were, in many respects, the antitheses of the rule of law. According to this study, under the Soviet Union, law was created by an elite without general participation and was designed to further the power of the state, not to limit it. In addition, the law was applied on an ad hoc basis to achieve political goals. Private economic activity was discouraged, and the Soviet Union lacked the basic legal framework needed to facilitate and regulate private enterprise. All the actors in the legal system were, to one degree or another, under the control of the Communist party and at the service of the state. The state procuracy (prosecutor) oversaw criminal investigations and prosecutions in a heavy-handed manner, affording defendants few, if any, rights. Law enforcement agencies were inexperienced in addressing many types of crimes that would come to plague the region and threaten other countries, such as organized crime and drug trafficking. The government and the Communist party controlled both access to legal education and the licensing of lawyers. With its tradition of unpublished and secret administrative regulation, the state also limited public access to the legal system and legal information; as a result, citizens regarded the legal system with suspicion and questioned its legitimacy, according to the USAID-sponsored study. According to legal experts, courts in the Soviet Union were weak, lacked independence, and enjoyed little public respect.Administration of justice was poorly funded, facilities were not well maintained, and judges were poorly paid and received very little, if any, training. For fiscal years 1992 through 2000, the United States has obligated at least $216 million in assistance to help establish the rule of law in the new independent states of the former Soviet Union. For fiscal years 1998 through 2000, U.S. assistance under this program has averaged about $29 million per year. Table 1 illustrates the estimated distribution of this funding among these countries. Over half of the funding has been devoted to four countries where USAID has designated rule of law development as a strategic objective: Russia, Ukraine, Georgia, and Armenia. While the remaining countries have received some rule of law assistance, USAID has not made rule of law development a strategic objective in these countries. According to USAID and State, the U.S. rule of law assistance program, along with other programs of U.S. assistance to Central and Eastern Europe and the new independent states, was envisioned by the U.S. government to be a short-term program to jump-start the countries of this strategically critical region on their way to political and economic transition. Many other foreign and U.S.-based donors have provided rule of law assistance to the new independent states. For example, the World Bank has a program to lend Russia $58 million for legal system reform. Many Western European countries, the European Union, and private international donors, such as the Ford Foundation and the Soros Foundation, have also financed projects similar to those funded by the United States. Funding data for these activities were not readily available, and we did not attempt to determine the value of all of this assistance, given the difficulty involved in identifying the many different efforts and their costs. Fostering sustainable results through U.S. assistance projects is critical to the impact and ultimate success of this program. According to USAID’s strategic plan, promoting sustainable development among developing and transitional countries contributes to U.S. national interests and is a necessary and critical component of America’s role as a world leader. Strengthening the rule of law is a key component of USAID’s strategic goal of building sustainable democracies. The right conditions for development can only be created by the people and governments of developing and transitional countries, according to USAID. In the right settings, however, American resources, including its ideas and values, can be powerful catalysts enabling sustainable development. Achieving sustainable project results is especially important in areas where development is likely to be a difficult and long-term process, such as establishing the rule of law in this region. Almost all U.S. funding for rule of law assistance in the new independent states of the former Soviet Union, authorized under the Freedom Support Act of 1992, is appropriated to USAID and the Department of State. However, a significant amount of assistance has been allocated to the Departments of Justice and Treasury through interagency fund transfers from USAID and State. As shown in figure 2, from fiscal years 1992 through 2000, USAID has administered about 49 percent of program funding for rule of law activities in this region, while the Departments of Justice, State, and the Treasury have administered about 51 percent. These agencies provide assistance under this program through a variety of means, primarily in the form of goods and services to governmental and nongovernmental organizations and individuals. For some projects, such as law enforcement training, U.S. government agencies provide the assistance directly. For other projects, such as institutional development projects, the agencies distribute aid to beneficiaries through contracts, cooperative agreements, and grants to nongovernmental organizations, private voluntary organizations, and firms located in the United States or overseas. Assistance is generally not provided directly to foreign governments through cash disbursements. The United States has taken a broad approach to providing rule of law assistance. The assistance approach generally incorporates five elements: (1) developing a legal foundation for reform, (2) strengthening the judiciary, (3) modernizing legal education, (4) improving law enforcement practices, and (5) increasing civil society’s access to justice. (See fig. 3 for an illustration of these elements.) Developing a legal foundation for reform: Projects under this element have focused on assisting governments in passing legislation that would provide the legal basis for a transparent and predictable administration of justice system, including a post-communist constitution, a law establishing an independent judiciary, and post-Soviet-era civil and criminal codes and procedures. This element also includes efforts to strengthen the legislative process. Strengthening the judiciary: Projects under this element involve strengthening the independence of the judiciary and the efficiency and effectiveness of the courts, including increasing the expertise and status of judges and supporting the development of judicial institutions. Modernizing legal education: Projects under this component have concentrated on improving legal education available to both students and practitioners of the law, including modernizing law school curricula, establishing legal clinics for law students, and developing indigenous continuing legal education opportunities for practicing lawyers and other legal professionals. Improving law enforcement practices: Projects under this component have been aimed at improving law enforcement practices by training procurators and other law enforcement personnel in modern techniques of criminal investigation and prosecution that are effective yet respectful of citizens’ civil rights. Increasing civil society’s access to justice: Projects under this component have targeted the participation of nongovernmental organizations and the general population in the judicial sector to make legal information and access to justice affordable and realizable. In general, USAID implements assistance projects primarily aimed at development of the judiciary, legislative reform, legal education, and civil society. The Departments of State, Justice, and the Treasury provide assistance for criminal law reform and law enforcement projects. Though the program has generally included these elements throughout its existence, it has evolved over the years in response to lessons learned about effectiveness and to adapt to emerging constraints. For example, in the earlier years of the program, the United States emphasized promotion of western methods and models for reform. As it became clear that host country officials often did not consider these to be appropriate to their local contexts, USAID projects began to foster the development of more “home-grown” reforms. Also, in Russia, the United States has placed increasing emphasis on regional projects outside of Moscow instead of projects aimed at the central government, as regional officials were often more receptive to reform. Establishing the rule of law in the new independent states of the former Soviet Union has proven to be an extremely complex and challenging task that is likely to take many years to accomplish. U.S. assistance has had limited results, and the sustainability of those results is uncertain. In each of the five elements of the rule of law assistance program, the United States has succeeded in exposing these countries to innovative legal concepts and practices that could lead to a stronger rule of law in the future. However, we could not find evidence that many of these concepts and practices have been widely adopted. At this point, many of the U.S.- assisted reforms are dependent on continued donor funding in order to be sustained. Despite some positive developments, the reform movement has proceeded slowly overall, and the establishment of the rule of law in the new independent states remains elusive. A key focus of the U.S. rule of law assistance programs has been the development of a legal foundation for reform of the justice system in the new independent states. (See fig. 4 for activities involving the legislative foundation of the rule of law assistance program.) The United States has helped several of these countries adopt new constitutions and pass legislation establishing independent judiciaries and post-communist civil and criminal codes and procedures, as well as other legislation that supports democratic and market-oriented reform. Despite considerable progress in a few countries, major gaps persist in the legal foundation for reform, particularly in such countries as Ukraine, a major beneficiary of U.S. rule of law assistance, according to U.S. and foreign government officials we interviewed. U.S. projects in legislative assistance have been fruitful in Russia, Georgia, and Armenia, according to several evaluations of this assistance, which point to progress in passing key new laws. For example, according to a 1996 independent evaluation of the legal reform assistance program, major advances in Russian legal reform occurred in areas that USAID programs had targeted for support, including the passage of a new civil code and a series of commercial laws. This legislation included the 1996 Russian Federation Constitutional Law on the Judicial System and the 1998 Law on the Judicial Department, creating a more independent judicial branch within the Russian government. The Department of Justice provided technical assistance and advice to lawmakers in the passage of Russia’s new criminal code as well, which, according to Justice, formally eliminated the Soviet laws against private economic activity, free speech, and political dissent. Georgia has also passed many key pieces of legislation with U.S. assistance in the areas of improving the judiciary, the procuracy (the prosecutor), the media, and the criminal justice process, according to another evaluation we reviewed. In Armenia, as well, according to a 2000 USAID-sponsored evaluation, important legislation was adopted as a result of U.S. government assistance, including a new civil code, criminal procedure code, Law on the Judiciary, Law on the Status of Judges, Law on the Execution of Court Judgments, Law on Advocates, and a universal electoral code. The results of assistance in this area are not easy to discern in all cases. For example, a 1999 USAID- sponsored evaluation of a portion of the legislative assistance and policy advice provided to Russia in the mid- to late 1990s indicates that the impact of this aid could not be independently verified. U.S. projects to help countries achieve passage of critical legal reform legislation have not always been successful, and key legislation is lacking in several new independent states. Despite providing assistance to reform legislation, Ukraine has not yet passed any new laws on the judiciary or new criminal, civil, administrative, or procedure codes since a new constitution was passed in 1996. In Russia, a revised criminal procedure code, a key component of the overall judicial reform effort, has still not been adopted by the government, despite extensive assistance from the Department of Justice in developing legislative proposals. Furthermore, a major project in Ukraine to establish sustainable mechanisms for developing reform-oriented legislation in the future has not yet been successful. One component of the USAID assistance program in Ukraine has been advancing parliamentary expertise and institutions to provide public policy analysis that will result in a more active, informed, and transparent parliament. However, according to U.S., foreign government, and private sector officials we interviewed, parliamentary committees are still weak, and parliamentary procedures for conducting hearings and related oversight activities have not been institutionalized. The vast majority of reforms still stem from the executive, which holds a disproportionate share of power and influence over the judicial and legislative branches of government. The second key element in the U.S. government’s rule of law program has been to foster an independent judiciary with strong judicial institutions and well-trained judges and court officers who administer decisions fairly and efficiently. (See fig. 5 for activities under the judicial pillar of the rule of law assistance program.) The United States has contributed to greater independence and integrity of the judiciary by supporting key new judicial institutions and innovations in the administration of justice and by helping to train or retrain many judges and court officials. However, U.S. efforts we reviewed to help retool the judiciary have had limited impact so far. Judicial training programs have not yet been developed by the governments with adequate capacity to reach the huge numbers of judges and court officials who operate the judiciaries in these nations, and courts still lack full independence, efficiency, and effectiveness. The United States has provided technical support and equipment to help establish and strengthen a variety of national judicial institutions. Though we could not verify the impact of this assistance on the effectiveness of their operations, representatives of the following institutions in Russia credit U.S. support for helping them enhance the independence and integrity of the judiciary. A Supreme Qualifying Collegium in Russia: With the help of training, information, and equipment provided by USAID, this institution, comprised solely of judges, is better equipped to oversee the qualification and discipline of judges, providing greater independence from political influence in court affairs. Judicial Department of the Supreme Court in Russia: USAID provided training, educational materials, and other technical assistance to strengthen this new independent institution, created in 1998 to assume the administrative and financial responsibility for court management previously held by the Ministry of Justice. The United States has also helped support the following innovations in the administration of the judiciary that appear to help increase the judiciary’s integrity and independence. Qualifying examinations in Georgia: With extensive U.S. assistance by USAID contractors, an objective judicial qualifying examination system was introduced in 1998. This step has resulted in the replacement of some poorly qualified judges with certified ones. Georgia has repeated the exam several times with decreasing amounts of technical assistance from the United States. Jury trials in Russia: With training and educational material on trial advocacy, judges are now presiding over jury trials in 9 of Russia’s 89 regions for the first time since 1917. Although the jury trial system has not expanded beyond a pilot phase, administration of criminal justice has been transformed in these regions—acquittals, unheard of during the Soviet era, are increasing under this system (up to 16.5 percent of all jury trials by the most recent count). At a broader level, the United States has attempted to strengthen the integrity of the judiciary by supporting a variety of educational projects for legal professionals within the court system. In particular, USAID has sponsored training and conferences and has provided educational materials for judges, bailiffs, and administrators, raising their understanding of new and existing laws and improving their knowledge and skills in operating efficient and effective court systems. According to a major aid contractor, training on the bail law in Ukraine sponsored by the Department of Justice has increased awareness among courts of the alternatives to lengthy pretrial detention for criminal defendants. The United States has also helped develop manuals that provide practical information for judges and bailiffs on how to conduct their jobs. Historically, few books like these have been widely available, which has seriously limited the development of professionalism in these legal careers. New teaching methods were introduced through U.S.-sponsored conferences. For example, according to training officials in the Russian Commercial Court, whereas conferences for their judges had traditionally been based mostly on lectures, U.S.-sponsored conferences stimulated discussions and were more interactive, included more probing questioning of the concepts presented, and provided a greater exchange of ideas. By all accounts, the information that the United States has provided on modern legal concepts and practices has been highly valued by its recipients. However, efforts to foster sustainable new methods for training judges have had limited results, and the long-term viability of U.S.-sponsored improvements is questionable. In Ukraine, projects aimed at establishing modern judicial training centers have had very limited success. The two centers we visited that had been established with USAID assistance were functioning at far below capacity. One was only used for official judicial training for half a year and later for training classes financed by international donors. The other center had been dismantled, and the training equipment provided by USAID was dispersed to regional courts. In Russia, although training facilities have been in place for some time, their capacity for training judges is extremely limited. For example, with its current facilities, the Russian Court of General Jurisdiction can train each of its 15,000 judges only about once every 10 years. Plans for the development of a major new judicial training academy have not yet been implemented. Where training centers were already in place, some innovative training techniques introduced through U.S. assistance have not been institutionalized. For example, the training organizations we visited in Russia praised the new practical manuals developed with U.S. assistance, but they did not plan to print subsequent editions. Also, although videotape-based training had been piloted with U.S. assistance for the Russian Commercial Court to train judges in far-flung regions, no further videotaped courses have been produced by the court. Despite progress in recent years, fully independent, efficient, and effective judiciaries have not yet been established. For example, according to a senior U.S. official responsible for Department of Justice programs in Russia, much of the former structure that enabled the Soviet government to control judges’ decisions still exists, and Russians remain suspicious of the judiciary. Furthermore, according to the State Department’s 1999 Human Rights Report, the courts are still subject to undue influence from the central and local governments and are burdened by large case backlogs and trial delays. Also, according to a 2000 USAID program document, serious problems with the court system in Russia continue to include the lack of adequate funding, poor enforcement of court judgments, and negative public attitudes toward the judiciary. In Ukraine, according to Freedom House, a U.S. research organization that tracks political developments around the world, and U.S. and Ukrainian officials and experts we interviewed, relatively little judicial reform has taken place, other than the adoption of a new constitution in 1996 and the establishment of a Constitutional Court for its interpretation. To a large extent, the ethos and practices of the Soviet political/legal system remain in the Ukrainian legal community, according to a 1999 USAID-sponsored assessment. The justice system, in which an estimated 70 percent of sitting judges in Ukraine were appointed during the Soviet era, continues to be marked by corruption and inefficiency and limited protection of criminal defendants’ rights. Freedom House recently reported that the judiciary is not yet operating as an independent branch of government. Furthermore, according to Freedom House, local judges are subject to influence and requests for particular rulings from government officials who financially support court operations. According to the USAID- sponsored assessment, courts suffer from poor administrative procedures, which nurture corruption, inappropriate influence of judges, a lack of transparency, and waste. Moreover, the courts are unable to enforce their decisions, particularly in civil cases. This is a key constraint to the development of the rule of law in Ukraine, as it results in a loss of public confidence in the courts, according to the assessment report. Human rights advocates told us that legislated mandates for timely trials and set standards for prison conditions are often violated and result in extended detentions under poor conditions. USAID documents we reviewed indicate that significant judicial reform is still needed in other countries as well. In Georgia, where the judicial reform process is perceived by USAID as being more advanced, most criminal trials continue to follow the Soviet model and, in many cases, prosecutors continue to wield disproportionate influence over outcomes, according to the State Department’s Human Rights Report. Also, local human rights observers report widespread judicial incompetence and corruption, according to the report. In Armenia, State reports that although the judiciary is nominally independent, in practice courts are subject to pressure from the executive branch and to corruption, and prosecutors still greatly overshadow defense lawyers and judges during trials. According to USAID, a 1999 opinion poll showed that in Armenia only 20 percent of the population believe that court decisions are rendered fairly and in keeping with the law. The third element of the U.S. assistance program has been to modernize the system of legal education in the new independent states to make it more practical and relevant. (See fig. 6 for activities under the legal education pillar of the rule of law assistance program.) The United States has sponsored a variety of special efforts to introduce new legal educational methods and topics for both law students and existing lawyers. However, the impact and sustainability of these initiatives are in doubt, as indigenous institutions have not yet demonstrated the ability or inclination to support the efforts after U.S. and other donor funding has ceased. The United States has provided some opportunities for law students and practicing lawyers to obtain useful new types of training. For instance, in an effort to supplement the traditionally theoretical approach to legal education in the new independent states of the former Soviet Union, USAID has introduced legal clinics into several law schools throughout Russia and Ukraine. These clinics allow law students to get practical training in helping clients exercise their legal rights. They also provide a service to the community by facilitating access to the legal system by the poor and disadvantaged. With the training, encouragement, and financing provided by USAID, there are about 30 legal clinics in law schools in Russia and about 20 in Ukraine. USAID has also provided a great deal of continuing education for legal professionals, particularly in the emerging field of commercial law. This training was highly regarded by the participants, according to a 1999 USAID-sponsored evaluation of this project in Russia. Traditionally, little of this type of training was available to lawyers in the former Soviet Union. USAID has included some design features in its projects intended to make them sustainable. Indigenous experts are increasingly used to provide the training as a way of making it more applicable in the local context and thus more sustainable, as trainers would remain in the country. Also, sustainability is enhanced by USAID’s approach of training other trainers to perpetuate the teaching of trial advocacy skills and commercial law. According to the 1999 USAID-sponsored evaluation and an aid contractor we spoke to, materials on trial advocacy developed with U.S. assistance continue to be used in indigenous educational programs in Russia. The United States, through long-term exchanges and partnership activities administered initially by the U.S. Information Agency and then by the Bureau of Educational and Cultural Affairs at the State Department, also brought young students, professionals, and faculty members to the United States to study U.S. law and legal education in depth. University partnerships also paired law schools in the United States and the new independent states to promote curriculum development and reform. We have observed some results from exchanges such as these: for example, the dean of the St. Petersburg State University Law School told us that his U.S.-funded visit to the United States inspired him to undertake major reforms at his institution, including the introduction of more practical teaching methods. Despite the introduction of some positive innovations, however, U.S. assistance in this area has fallen far short of reforming legal education in the new independent states on a large scale. According to USAID- sponsored evaluations and project officials we spoke to, U.S. assistance has not been successful in stimulating reform in formerly Soviet law schools. Most law schools have not adopted the new, practice-oriented curricula that USAID has advocated and instead continue the traditional emphasis on legal theory. For example, in Ukraine, the emphasis in law school curricula continues to be on public rather than private law, and law students are taught little on subjects such as enterprises, contracts, real and personal property, consumer law, intellectual property, banking law, or commercial law. Also ignored are subjects relating to government regulation of businesses. As a result, students are not taught many skills important to the practice of law, including advocacy, interviewing, case investigation, negotiation techniques, and legal writing. In the area of using legal clinics to provide practical education, the impact of USAID assistance has been minor and sustainability is not yet secure. Due to the small number of faculty advisers willing to supervise the students’ work, these clinics can only provide practical experience to a fraction of the law student population. While clinics appear to be increasing in popularity, not all universities routinely fund them or give course credit to participating students. In Ukraine, the United States has helped fund the establishment of a Ukrainian Law School Association to press for reforms in the Ukrainian legal education system, but this organization has remained relatively inactive, according to a major USAID contractor involved in this program. Also, a 2000 USAID-sponsored evaluation of rule of law projects in Armenia concluded that the considerable investment in that country’s largest law school has not resulted in the intended upgrading and modernizing of curricula and teaching methodology. In the area of continuing legal education as well, it is unclear whether the new learning opportunities that the United States has been providing to legal professionals are sustainable over the long term. We could identify few organizations that routinely sponsor the types of training and conferences and print the published materials that the United States had initially provided. In Russia, a major aid contractor we met with involved in developing legal texts and manuals for USAID in Russia could not identify any organizations that were engaged in reprinting these publications without U.S. or other donor financing. The private Ukrainian organization that has provided most of Ukraine’s continuing legal education is dependent primarily on U.S. funding to operate. The United States has largely been unsuccessful at fostering the development of legal associations, such as bar associations, national judges associations, and law school associations, to carry on this educational work. U.S. officials had viewed the development of such associations as key to institutionalizing modern legal principles and practices and professional standards on a national scale as well as serving as conduits for continuing legal education for their members. But they have not become the active, influential institutions that the United States had hoped. In Armenia, according to a 2000 USAID-sponsored study, none of the nongovernmental organizations that had been supported by USAID were financially viable in carrying out their continuing legal education goals. Sustainability is “not in the picture for the immediate future,” as the organizations were dependent on international donor assistance, according to the study. The fourth component of the U.S. government’s rule of law program involves introducing modern criminal justice techniques to local law enforcement organizations. (See fig. 7 for activities under the law enforcement pillar of rule of law assistance programs.) As part of this effort, the United States has provided many training courses to law enforcement officials throughout the new independent states of the former Soviet Union, shared professional experiences through international exchanges and study tours, implemented several model law enforcement projects, and funded scholarly research into organized crime. These programs have fostered international cooperation among law enforcement officials, according to the Department of Justice. However, we found little evidence that the new information disseminated through these activities has been routinely applied in the practice of law enforcement in the new independent states. Thus the impact and sustainability of these projects are unclear. U.S. law enforcement agencies, such as the Federal Bureau of Investigation, the U.S. Customs Service, and the Drug Enforcement Administration, have sent dozens of teams of experts to train their counterparts in the new independent states of the former Soviet Union on techniques for combating a wide variety of domestic and international crimes. The United States has also sponsored the attendance of their counterparts at U.S. training academies and the International Law Enforcement Academy in Budapest, Hungary. According to State and Justice, this training is intended not only to strengthen the law enforcement capabilities and, hence, the rule of law in these countries, but also to increase cooperation between law enforcement agencies in the United States and the new independent states in investigating and prosecuting transnational crimes. U.S. law enforcement officials we spoke to have reported that, as a result of these training courses, there is a greater appreciation among Russians and Ukrainians of criminal legal issues for international crimes of great concern in the United States, such as organized crime, money laundering, and narcotics and human trafficking. They have also reported a greater willingness of law enforcement officials to work with their U.S. and other foreign counterparts on solving international crimes. According to a senior researcher conducting a State Department-funded study on the effects of law enforcement training, students participating in international police training funded in part by the U.S. government are significantly more willing to share information on criminal investigations with U.S. or other national law enforcement agencies than law enforcement officials that have not participated. Furthermore, according to Justice, there has been an increasing number of requests from the new independent states for bilateral law enforcement cooperation with the United States and a number of joint investigations of organized crime, kidnapping, and baby adoption scams. However, the impact and sustainability of this training in building the law enforcement capabilities of the new independent states are unclear. We found little evidence in our discussions with senior law enforcement officials in Russia and Ukraine that U.S. techniques taught in these training courses were being routinely applied by their organizations. In some cases, training officials cited the use of U.S.-provided training materials by some instructors or as reference materials in their libraries, yet none identified a full-scale effort to replicate or adapt the training for routine application in their training institutions. Furthermore, we identified only two studies providing data on the application of U.S. law enforcement training, neither of which conclusively demonstrates that U.S. techniques have been widely embraced by training participants. According to a researcher we interviewed who has been evaluating U.S.-sponsored training programs under a grant from State, techniques taught at the International Law Enforcement Academy, which is partially funded by State, have had limited application in day-to-day policing activities of participants. About 20 percent of training participants surveyed reported that they frequently use the techniques they learned in academy training courses in their work, according to his research. According to an evaluation of U.S. law enforcement training conducted by the Russian Ministry of Internal Affairs, about 14 percent of Russian law enforcement officials surveyed indicated they have used the American experience introduced in this training in their practical work. According to Justice, this level of application of U.S. techniques suggests significant impact from U.S. training, and application and impact are likely to grow in time as the merit of these techniques become evident with use. However, due to limitations in the data available from these studies we were unable to validate or dispute Justice’s assertions about the efficacy of this training. The United States has funded several model law enforcement projects in Russia and Ukraine to help communities and law enforcement authorities establish community policing programs and to address the problems of domestic violence and human trafficking more effectively. Some of these projects appear to have had some impact in the local communities where they have been implemented. For example, according to the State Department, in one Russian city, the number of arrests for domestic violence has more than doubled in one year as a result of a U.S.-funded model project. However, such projects are still in the early stages of implementation, and we could not find evidence that the new practices introduced by the United States have yet been adopted on a wider scale in Russia or Ukraine. Research on organized crime in Russia and Ukraine, sponsored by USAID and Justice, has provided some information that may potentially serve as a foundation for developing new methods for fighting this type of crime. Officials at U.S.-funded research centers told us that their researchers helped develop a methodology for investigating and prosecuting corruption and organized crime that has been incorporated into some law school curricula. However, although project officials we spoke to asserted that the knowledge and analysis produced by the centers were being used, they could not determine how this research had actually been applied by law enforcement organizations in the new independent states. To date we found no evidence that these programs have led to sustainable and meaningful innovations in fighting organized crime in Russia and Ukraine. The fifth element of rule of law assistance program is the expansion of access by the general population to the system of justice. (See fig. 8 for activities conducted under the civil society pillar of the rule of law assistance program.) In both Russia and Ukraine, the United States has fostered the development of a number of nongovernmental organizations that have been active in promoting the interests of groups, increasing citizens’ awareness of their legal rights, and helping poor and traditionally disadvantaged people gain access to the courts to resolve their problems. While these projects have contributed to a greater demand for justice, for the foreseeable future many will continue to rely on donor support, since they face difficulties in obtaining adequate funds domestically to continue operations. U.S. projects have led to greater access by citizens to the courts. The United States has supported a variety of organizations devoted to protecting the legal rights of many different segments of society, including small business owners, the handicapped, victims of domestic violence, labor unions and individual workers, poor and displaced people, and homeowners and tenants. In Russia, the proliferation of such groups may have contributed, at least in small part, to the significant increase in the use of the courts—the number of civil cases in Russian courts increased by about 112 percent between 1993 and 1997, according to the statistics of the Russian Supreme Court. For example, in Russia, USAID has sponsored a project that has helped improve access to the legal system for trade unions and their members. According to the project manager, Russian lawyers supported by this project brought litigation in the Russian Constitutional and Supreme Courts on behalf of workers, which has led to changes to three national laws, bolstering the legal rights of millions of workers. In addition, in Ukraine, private citizens are increasingly taking their disputes on environmental matters to the courts and prevailing in their causes with the help of USAID-funded organizations. At least three active environmental advocacy organizations have emerged with the sponsorship of USAID and other donors to provide legal advice and representation. Some of these organizations have brought important lawsuits on behalf of citizens, resulting in legal decisions with far-reaching legal implications. For example, a group of more than 100 residents in one local community obtained a judgment against the Ukrainian government for violating zoning laws on the location of a city dump and won demands that the dump be constructed at a different location in accordance with zoning laws, according to USAID. Despite their high level of activity in recent years, these organizations still face questionable long-term viability. Most nongovernmental organizations we visited were dependent upon foreign donor contributions to operate. While some continued to function even after U.S. funding ceased, they often operated at a significantly reduced level of service. Some organizations received office space from the government, collected membership fees, and relied on the work of volunteers, but very few indicated that they received a large portion of their funding from domestic sources. Thus, sustainability of even some of the most accomplished organizations, such as the Ukrainian environmental advocacy organizations, remains to be seen. These organizations had been largely supported by USAID for several years and have only recently been forced to operate more independently. In Armenia, according to a 2000 USAID- sponsored evaluation, none of the nongovernmental organizations that had been supported by USAID were financially viable in carrying out their public awareness goals. The evaluation found that these organizations’ activities were not sustainable in the long term since they were dependent on international donor assistance. Despite nearly a decade of work to reform the systems of justice in the new independent states of the former Soviet Union, progress in establishing the rule of law in the region has been slow overall, and serious obstacles remain. As shown in table 2, according to Freedom House, the new independent states score poorly in the development of the rule of law, and, as a whole, are growing worse over time. These data, among others, have been used by USAID and the State Department to measure the results of U.S. development assistance in this region. In the two new independent states where the United States has devoted the largest amount of rule of law funding—Russia and Ukraine—the rule of law is slightly better than average for the region, according to Freedom House scores. However, the scores show that the reform process remains slow and the rule of law, as defined by these indicators, has deteriorated in recent years. The scores have improved in only one of the four countries (Georgia) in which USAID has made the development of the rule of law one of its strategic objectives and the United States has devoted a large portion of its rule of law assistance funding. Three factors have constrained the impact and sustainability of U.S. rule of law assistance: (1) a limited political consensus on the need to reform law and institutions, (2) a shortage of domestic resources to finance many of the reforms on a large scale, and (3) a number of shortcomings in U.S. program management. The first two factors, in particular, have created a very challenging climate for U.S. programs to have major, long-term impact in these states, but have also underscored the importance of effective management of U.S. programs. In key areas in need of legal reform, U.S. advocates have met some steep political resistance to change. In Ukraine and Russia, lawmakers have not been able to agree to pass critical legal codes upon which reform of the judiciary must be based. In particular, Ukrainian government officials are deadlocked on legislation reforming the judiciary, despite a provision in the country’s constitution to do so by June 2001. Numerous versions of this legislation have been drafted by parties in the parliament, the executive branch, and the judiciary with various political and other agendas. Lack of progress for this legislation has stymied reforms throughout the justice system. In Russia’s Duma (parliament), where the civil and the criminal codes were passed in the mid-1990s, the criminal procedure code remains in draft form. According to a senior Justice official, Russia is still using the autocratic 1963 version of the procedure code that violates fundamental human rights. This official told us that the Russian prosecutor’s office is reluctant to support major reforms, since many would require that institution to relinquish a significant amount of the power it has had in the operation of the criminal justice system. While U.S. officials help Russian groups to lobby for legislative reforms in various ways, adoption of such reforms remain in the sovereign domain of the host country. In the legal education system as well, resistance to institutional reform has thwarted U.S. assistance efforts. While some legal education officials we spoke with advocate more modern and practical teaching methods, legal education remains rigidly theoretical and outmoded by western standards. USAID officials in Russia told us that Russian law professors and other university officials are often the most conservative in the legal community and the slowest to reform. A USAID-sponsored assessment of legal education in Ukraine found that there was little likelihood for reform in the short term due to entrenched interests among the school administration and faculty who were resisting change. Georgia also suffers from deeply seated barriers to legal education reform, such as systemic corruption in admissions and grading, according to the 1999 USAID-sponsored evaluation. Furthermore, little consensus could be reached among legal professionals to overcome cultural, regional, and professional barriers to form effective national associations, according to U.S. officials and contractors we spoke with. For example, according to one law school dean we interviewed, efforts to establish a national law school association in Russia were met with resistance from state legal educational institutions in Moscow, which insisted on forming an alternative local association. Policymakers have not reached political consensus on how or whether to address the legal impediments to the development of sustainable nongovernmental organizations. This would include passing laws that would make it easier for these organizations to raise domestic funds and thus gain independence from foreign donors. For example, in Ukraine, according to a 1999 USAID report and Ukrainian officials we interviewed, the most important issues for nongovernmental organization development that need to be addressed by new legislation are granting nongovernmental organizations special tax status to enable them to raise funds for their activities and to provide tax incentives for private organizations or individuals to donate funds. Moreover, administrative acts by government agencies in Ukraine allow the government to decrease the scope of nongovernmental organizations, and some nongovernmental organizations, particularly those involved in citizen advocacy efforts, face numerous obstacles from tax authorities and other administrative agencies. In Russia, according to the USAID report, taxes are collected without distinguishing between nonprofit and profit-making enterprises, and legislation that promotes significant tax incentives is unlikely to be passed in the near future because of the government’s critical need to raise revenues. Historically slow economic growth in the new independent states has meant limited government budgets and low wages for legal professionals and thus limited resources available to fund new initiatives. While Russia has enjoyed a recent improvement in its public finances stemming largely from increases in the prices of energy exports, public funds in the new independent states have been constrained. Continuation or expansion of legal programs initially financed by the United States and other donors has not been provided for in government budgets, as illustrated by the following examples. In Ukraine, according to officials of the Supreme Court, the government could only afford to fund operations of the court’s judicial training center for 6 months in the year 2000. In the Russian Commercial Court, administrators explained to us that although the donated computer network funded by USAID was very helpful, the court did not have the funds to extend it to judges outside of the court’s headquarters building in Moscow. The system of jury trials in Russia could not be broadened beyond 9 initial regions, according to a senior judiciary official, because it was considered too expensive to administer in the other 89 regions. According to a senior police official we spoke to in Ukraine, police forces often lack funds for equipment, such as vehicles, computers, and communications equipment, needed to implement some of the law enforcement techniques that were presented in the U.S.-sponsored training. In addition, government ability or commitment to funding innovative new training and other improvements for the judiciary also appeared weak in Georgia, where the government has not been able to pay judges their promised salaries in a timely manner. Nongovernmental organizations we visited said that it was difficult to raise funds from domestic sources to continue the advocacy, educational, and legal services programs that had initially been financed by the United States and other donors. For example, they indicated that while lawyers and other legal professionals valued the educational materials and opportunities offered through U.S. assistance, they generally could not afford to pay for the courses and materials privately. U.S. agencies implementing the rule of law assistance program have not always managed their projects with an explicit focus on achieving sustainable results. Our review of project documentation and our discussions with senior U.S. government officials indicate limited efforts were made to (1) develop and implement strategies to achieve sustainable results and (2) monitor projects results over time to ensure that sustainable impact was being achieved. These are important steps in designing and implementing development assistance projects, according to guidance developed by USAID. According to USAID guidance for planning assistance projects, project descriptions should define the strategies and processes necessary to achieve specific results, both in terms of immediate outputs and longer- term outcomes. We found that, in general, USAID projects were designed with strategies for achieving sustainability, including assistance activities intended to develop new and existing indigenous institutions to adopt the concepts and practices USAID was promoting. However, at the Departments of State, Justice, and the Treasury, rule of law projects we reviewed often did not establish specific strategies for achieving sustainable development results. In particular, the law enforcement- related training efforts we reviewed were generally focused on achieving short-term objectives, such as conducting training courses or providing equipment and educational materials; they did not include an explicit approach for meeting longer-term objectives, such as promoting sustainable institutional changes and reform of national law enforcement practices. According to senior U.S. embassy officials in Russia and Ukraine, these projects rarely included follow-up activities to help ensure that the concepts taught were being institutionalized or otherwise having long-term impact. For example, according to the U.S. Resident Legal Advisor in Russia, U.S. agencies’ training efforts were intended to introduce new law enforcement techniques, but no effort was made to reform the law enforcement training curriculum so that the techniques would continue to be taught after the U.S. trainers left the country. Federal Bureau of Investigation officials we spoke to indicated that their training courses in the new independent states rarely took a “train the trainer” approach aimed at providing training that is likely to be replicated by indigenous law enforcement staff. One senior Justice official described the training as “lobbying” to convince key law enforcement officers of the importance or utility of the techniques being taught in hopes that they would someday be adopted. USAID guidance also calls for establishing a system for monitoring and evaluating performance and for reporting and using performance information. Developing and monitoring performance indicators is important for making programmatic decisions and learning from past experience, according to USAID. However, we did not find clear evidence that U.S. agencies systematically monitor and evaluate the impact and sustainability of the projects they implemented under the rule of law assistance program. We found that the Departments of State, Justice, and the Treasury have not routinely assessed the results of their rule of law projects. In particular, according to U.S. agency and embassy officials we spoke to, there was usually little monitoring or evaluation of the law enforcement training courses after they were conducted to determine their impact. U.S. law enforcement agencies that have implemented training programs report to State on each training course but do not assess the extent to which the techniques and concepts they taught have had a broader impact on law enforcement in the countries where they conduct training. To date, State has funded only one independent evaluation of the law enforcement training activities. According to Justice, it evaluates the course curriculum at the International Law Enforcement Academy on a regular basis to help ensure that it is relevant to its participants and of high quality. In addition, Justice conducts some indirect measurement of long-term effectiveness by discussing the usefulness of training with selected participants months or years after they have completed the course. However, these evaluations do not systematically assess the longer-term impact and sustainability of the training and do not cover a large portion of the training that Justice conducts. Although USAID has a more extensive process for assessing its programs, we found that the results of its rule of law projects in the new independent states of the former Soviet Union were not always apparent. The results of most USAID projects we reviewed were reported in terms of project outputs instead of impact and sustainability. For 6 of the 11 major projects we reviewed in Russia and Ukraine, available project documentation indicated that project implementers reported project results almost exclusively in terms of outputs. These outputs include the number of USAID-sponsored conferences or training courses held, the number and types of publications produced with project funding, or the amount of computer and other equipment provided to courts. Short-term measures and indicators alone do not enable USAID to monitor and evaluate the sustainability and overall impact of the projects. Project documentation we reviewed, including work plans, progress reports, and post-completion reports, rarely addressed the longer-term impact of the assistance achieved or expected or indicated how impact could be measured into the future. Other measures or indicators that capture the productivity of U.S.- assisted organizations or the extent to which U.S.-sponsored innovations are adopted in the country shed more light on the long-term impact and sustainability. Examples of such measures would be the percentage of judges or bailiffs that a government itself has trained annually using new methods introduced by U.S.-assistance or the percentage of law schools that sponsor legal clinics or include new practical courses in their curriculum. Although USAID has reported broad, national-level indicators for its rule of law programs, without indicators or measures of the results of its individual projects, it is difficult to draw connections between the outputs produced and the national-level outcomes reported. Furthermore, only 2 of the 11 USAID projects we reviewed in Russia and Ukraine have been independently evaluated to assess their impact and sustainability. State has recently recognized the shortcomings of its training-oriented approach to law enforcement reforms. As a result, it has mandated a new approach for implementing agencies to focus more on sustainable projects. Instead of administering discrete training courses, for example, agencies and embassies will be expected to develop longer-term projects. Justice has also developed new guidelines for the planning and evaluation of some of its projects to better ensure that these projects are aimed at achieving concrete and sustainable results. These reform initiatives are still in very early stages of implementation. It remains to be seen whether projects in the future will be more explicitly designed and carried out to achieve verifiably sustainable results. One factor that may delay the implementation of these new approaches is a significant backlog in training courses that State has already approved under this program. As of February 2001, about $30 million in funding for fiscal years 1995 through 2000 has been obligated for law enforcement training that has not yet been conducted. U.S. law enforcement agencies, principally the Departments of Justice and the Treasury, plan to continue to use these funds for a number of years to pay for their training activities, even though many of these activities have the same management weaknesses as the earlier ones we reviewed. Unless these funds are reprogrammed for other purposes or the projects are redesigned to reflect the program reforms that State and Justice are putting in place, their results may have limited impact and sustainability. The U.S. government’s rule of law assistance program is a key element of the U.S. foreign policy objectives of fostering democratic and open market systems in the new independent states of the former Soviet Union. However, establishing the rule of law is a complex and long-term undertaking. After nearly a decade of effort and more than $200 million worth of assistance, the program has had difficulty fostering the sustainable institutions and traditions necessary to establish the rule of law in this region. Consequently, many of the elements of the Soviet-style legal system are still in place in the new independent states. Though this program was originally envisioned by the U.S. government as a short-term effort, achieving more significant progress is likely to take many more years. Progress is likely to remain elusive unless the new independent states make legal system reform a higher public policy and funding priority and U.S. agencies address the program management weaknesses we have identified in developing strategies for achieving impact and sustainability and conducting performance monitoring and evaluation. Although the United States has very limited influence over the political will and domestic resources of these countries, it could better design and implement its assistance projects, both those currently funded and those that it may fund in the future, with a greater emphasis on measuring impact and achieving sustainability. To help improve the impact and sustainability of the U.S. rule of law assistance program in the new independent states of the former Soviet Union, we recommend that the Secretary of State, the Attorney General, the Secretary of the Treasury, and the USAID Administrator, who together control almost all of the program’s funding, require that each new project funded under this program be designed with (1) specific strategies for achieving defined long-term outcomes that are sustainable beyond U.S. funding; and (2) a provision for monitoring and evaluating the project results, using verifiable outcome indicators and measures, to determine whether the desired outcomes have been achieved and are likely to be sustainable. Furthermore, to improve the likelihood that project funds currently budgeted but not yet spent achieve sustainable results, the Secretary of State, the Attorney General, and the Secretary of the Treasury should jointly review the pipeline of projects and develop a plan for ensuring that all projects meet the above criteria, including reprogramming of unspent assistance funds, as necessary. We received written comments on a draft of this report from USAID and the Departments of State and Justice, which are reprinted in appendixes II- IV. The Department of the Treasury had no comment on the report. State, Justice, and USAID generally agreed with us that the program management improvements we recommended are needed. State indicated that it had already begun to undertake management actions consistent with these recommendations. State also suggested that we encourage the U.S. law enforcement agencies to cooperate in its ongoing efforts to reprogram or reschedule assistance funds that have been budgeted but not yet spent. Justice agreed that improved planning and evaluation of its assistance activities are needed. USAID agreed that improvement is needed in measuring project results and that greater emphasis could be given to reviewing long-term sustainability issues. We have modified our recommendation to emphasize the importance of cooperation among the agencies in resolving management weaknesses we identified. USAID and State expressed concern that our assessment set too high a standard for program success. These agencies noted that we did not adequately recognize the complex and long-term nature of this development process. They also noted that the funding for rule of law development has been relatively meager compared to the total amount of assistance provided to the new independent states and considering the magnitude of the challenge. Furthermore, the agencies stated that achievement of a fully functioning rule of law system could not have been expected in the 8 years that the program has been in existence. We agree that establishing the rule of law in the new independent states is a complex and long-term undertaking, and we have made this observation more prominent in the report. We did not use the full development of a rule of law system as the benchmark of success for this program, however. Instead we looked for sustainable progress in each of the key elements of the U.S. assistance program as well as in the overall development of the rule of law. We found limited sustainable impact from U.S.-funded projects in the various elements of the program that we reviewed. Furthermore, we found that by the one measure, the Freedom House rule of law score, which USAID and State used to measure overall rule of law development, the situation in the new independent states is relatively poor and has actually been deteriorating in some states. We do not agree that the program funding levels were necessarily a significant factor limiting the impact and sustainability of the program; rather, we believe that better results could have been achieved with a more conducive political and economic environment and with better planning and monitoring efforts. The agencies also indicated that we did not adequately recognize some significant program activities and achievements. These include the development of a more independent judiciary in Russia and adoption of a number of reforms in the criminal justice system. USAID also stated that its encouragement and support of legal system reforms have been a valuable accomplishment, though not always resulting in the creation of a sustainable entity to promote reforms into the future. In addition, Justice stated that its training courses have been more successful than we have given them credit for, both by helping to establish valuable working relationships between law enforcement agencies in the United States and the new independent states and by fostering the application of modern law enforcement techniques. Hence, Justice indicated that our assessment was overly pessimistic about the prospects for achieving sustainable results from its programs. State indicated that we failed to acknowledge a major educational exchange component of the program. Where appropriate, we included additional information or amplified existing information on program results and activities. In most cases, however, our analysis showed that there was insufficient evidence to draw a link between the outcomes the agencies cited and U.S. assistance efforts. USAID and Justice indicated that we did not adequately acknowledge the monitoring and evaluation systems that they currently employ in this program. USAID indicated that while it agrees that a better project-level results measurement is needed, it currently employs a system of program monitoring that allows it to manage the program effectively. Justice pointed to training curriculum evaluation that it undertakes to help ensure that its training programs are relevant and useful. We reviewed the information that both provided and have included additional information about them in our report. However, we believe that none of the agencies employed a monitoring and evaluation process to systematically assess the direct impact of its rule of law projects in the new independent states of the former Soviet Union and measure progress toward the projects’ long- term objectives and desired outcomes. State and USAID expressed concern that we did not rank the three factors that have limited the impact and sustainability of the program in order of importance. They believe that program management weaknesses are the least important factor and the lack of political consensus is the most important. Furthermore, USAID stated that any limitations in the effectiveness of the rule of law assistance program should not be attributed to its monitoring and evaluation shortcomings. We agree that the political and economic conditions in this region have created a difficult environment for U.S. assistance efforts and have revised the report to emphasize this point. However, we believe that improved management practices could enhance the impact and sustainability of the program, and we discuss program management weaknesses in detail in the report because the U.S. government has more control over this factor than the other two. Furthermore, insofar as project results are not routinely monitored and evaluated, the agencies’ ability to manage for results is impaired. As arranged with your office, we plan no further distribution of this report for 30 days from the date of the report unless you publicly announce its contents earlier. At that time, we will send copies to interested congressional Committees and to the Honorable Colin Powell, Secretary of State; the Honorable Paul O’Neill, Secretary of the Treasury; the Honorable John Ashcroft, Attorney General; the Honorable Donald Pressley, Acting Administrator, U.S. Agency for International Development; and other interested parties. We will make copies available to others upon request. If you or your staff have any questions about this report, please contact me on (202) 512-4128. Other GAO contacts and staff acknowledgments are listed in appendix V. To (1) assess the impact and sustainability of the U.S. government’s rule of law program and to (2) identify factors that constrained impact and sustainability, we analyzed project documentation, interviewed knowledgeable officials, and reviewed assistance activities in the field. We obtained and analyzed information on the results of the U.S. rule of law assistance efforts funded between 1992 and 2000 in the new independent states of the former Soviet Union. However, we focused our review on four specific countries—Armenia, Georgia, Russia, and Ukraine. We selected these countries because they received the bulk of U.S. assistance, because the U.S. Agency for International Development (USAID) had designated rule of law development as a strategic objective in these countries, and because significantly more relevant information was readily available about the assistance activities in these countries than the other eight new independent states. Furthermore, based on our discussions with USAID and State staff and our review of relevant documentation, we concluded that the U.S. rule of law assistance efforts in these countries were typical of the assistance provided throughout the region. Thus, we believe that our report findings about the impact and sustainability of the U.S. assistance program are applicable to the entire region. To obtain detailed information on the impact and sustainability of specific rule of law assistance efforts, we examined projects funded in Russia and Ukraine since 1995, including 11 major USAID-managed projects and a variety of assistance activities managed by State. We selected these countries based on congressional interest and because they have received at least about half of the assistance provided under this program. We selected these projects because they were the most likely to have been substantially completed and thus have a track record that would allow us to assess whether they have begun to achieve significant results. We did not include projects initiated in 1999 or thereafter. Specifically, we conducted the following work. In Washington, D. C., we interviewed headquarters officials at the departments and agencies implementing rule of law projects in these new independent states, including the Departments of State, Justice, and the Treasury, and the U.S. Agency for International Development. We also met with individuals with expertise in criminal justice system reforms. For Russia and Ukraine, we reviewed Mission Performance Plans; USAID country planning documents; Department of Justice country work plans; and other reporting documents, funding agreements, contracts, and project evaluations. We obtained program funding information for fiscal years 1999 and 2000 from USAID and the Departments of State, Justice, and the Treasury, which we combined and analyzed with similar information we had obtained for earlier fiscal years in the course of previous work. We conducted fieldwork in Russia and Ukraine in August and October 2000. In each of these countries, we met with the Deputy Chief of Mission, senior U.S. officials representing agencies with rule of law programs in each country; and numerous program staff, including contractors responsible for implementing the projects. We interviewed host country officials at the supreme, constitutional, general jurisdiction, and commercial courts; justice and interior ministries; law enforcement organizations; and the Judicial Department in Russia. We visited training schools for judges and prosecutors, law schools, and several demonstration projects. We also met with numerous representatives from nongovernmental organizations and other groups representing a broad spectrum of civil society in Moscow, St. Petersburg, Petrozavodsk, and Yekaterinburg in Russia; and in Kiev, Lviv, and Kharkiv in Ukraine. Though we did not travel to the 10 other new independent states of the former Soviet Union or review specific projects in these states in depth, we obtained and reviewed all available evaluations of these projects to determine whether they have met their major objectives and to identify the factors affecting their success or failure. We also reviewed our prior reports on rule of law assistance, and reports on foreign assistance to Russia and Ukraine. Rule of law is a component of democracy building, and although a close relationship exists between activities, we did not evaluate other projects under the democracy program. We performed our work from July through December 2000 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of State’s letter dated March 16, 2001. 1. State indicated that it is working with law enforcement agencies to ensure that the pipeline of law enforcement training funds are used to achieve the maximum impact and sustainability. State suggested that we recommend that the U.S. law enforcement agencies cooperate with State in its ongoing efforts to reschedule or reprogram undelivered assistance. Based on our discussions with State officials, increased and continued attention and cooperation among the agencies will be needed before this issue is fully resolved. As suggested by State, we have highlighted the need for this interagency cooperation in our recommendation to the agencies. 2. State pointed out that our report failed to address the long-term exchange and partnership activities of the U.S. Information Agency and its successor, State’s Bureau of Educational and Cultural Affairs. We inadvertently omitted the financial data provided by State on these exchanges from our initial calculation of program funding, but we did include the exchanges in the scope of our review, insofar as time and resources allowed and as results were observable. We have revised the financial data to include the data on exchanges and also included specific mention of these exchanges in our discussion of the legal education element of the Rule of Law Assistance Program. 3. State noted that the community of nongovernmental agencies in the region was not as dependent on western funding as our report suggested, as evidenced by the large number of such organizations that receive no U.S. funding. The observations in our report did not pertain to the development of nongovernmental organizations overall. We noted questionable sustainability among those nongovernmental organizations in the rule of law field that have received a significant amount of U.S. funding under this program. The following is GAO’s comment on the Department of Justice’s letter dated March 23, 2001. Justice disagreed with out characterization of the extent to which law enforcement techniques taught in U.S.-sponsored training courses were being applied by training recipients. Justice stated that the data we cited supported the conclusion that its training has had significant impact and that greater application is likely to ensue as the efficacy of these techniques is validated through their use. Justice also questioned whether some additional data were available on the use of training techniques. We revised the report to include Justice’s interpretation of the available data, but we also indicated that, due to data limitations, we could not validate or dispute this interpretation. No further data were available for us to elaborate on the extent of the application of the U.S.-taught techniques. The following are GAO’s comments on USAID’s letter dated March 23, 2001. 1. USAID disagreed with our analytical approach to assessing sustainability and the emphasis we placed on sustainability in evaluating program success. USAID pointed out that certain organizations can have significant impact on rule of law development even though they may not be sustainable over the long term. We believe that our approach to assessing sustainability of the program is sound. In addition to reviewing the sustainability of the program’s component activities, we also reviewed the overall sustainability of rule of law development as reflected in the Freedom House scores. Both approaches raise concerns about sustainability. Furthermore, we assessed both the impact and sustainability of the projects we reviewed and have cited examples in the report where organizations supported by USAID have had some impact regardless of whether they were sustainable. However, given the long-term nature of rule of law development and the many competing demands for limited assistance funds, we believe that sustainability of program results is critical to program success and was an appropriate emphasis for our analysis. 2. USAID indicated that we did not adequately acknowledge significant program results in the area of commercial law. In general, as we had discussed with USAID, due to time and resource constraints, we did not assess the impact of USAID assistance in the area of commercial law. However, insofar as available evaluations provided information on accomplishments in this area, we included this information in our report. 3. USAID criticized the report’s use of references and quotes from evaluations as inappropriately taken out of context. We reviewed each reference to an evaluation and do not believe that we have distorted the meaning of the information cited, as USAID suggested. However, where appropriate, we have revised the language or used additional or alternative references in our report to avoid potential misinterpretation. In addition to those named above, E. Jeanette Espinola, Mary E. Moutsos, Maria Z. Oliver, Rona H. Mendelsohn, and Jeffery Goebel also made key contributions to this report. | For fiscal years 1992 through 2000, the U.S. government provided assistance to help the 12 newly independent states of the former Soviet Union develop the sustainable institutions, traditions, and legal foundations that ensure a strong rule of law. This report (1) assesses the extent to which the program has had an impact on the development of the rule of law and whether the program results are sustainable and (2) analyzes the factors that may have affected the program's impact and sustainability. GAO found that the U.S. government's rule of law assistance program has had limited impact so far, and results may not be sustainable in many cases. The impact and sustainability of the U.S. rule of law assistance programs have been constrained by several factors, including limited political consensus on reforms, a shortage of domestic resources for many of the more expensive innovations, and weaknesses in the design and management of assistance programs by U.S. agencies. |
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The Implementing Recommendations of the 9/11 Commission Act of 2007 (9/11 Commission Act) directed DHS to create a plan for sharing transportation security–related information among public and private entities that have a stake in protecting the nation’s transportation system, including passenger and freight rail. This plan—first issued in July 2008— is now called the Transportation Security Information Sharing Environment (TSISE). The TSISE describes, among other things, the information–sharing process. TSA disseminates security information through several information products, including reports, assessments, and briefings, among others. These products are distributed through mechanisms including the Homeland Security Information Network and mechanisms sponsored by industry, such as the Association of American Railroads’ Railway Alert Network, among others. TSA is also specifically responsible for receiving, assessing, and distributing intelligence information related to potential threats and significant security concerns (rail security incidents) related to the nation’s rail system. Specifically, in 2008, TSA issued a regulation requiring U.S. rail systems to report all rail security incidents to TSA’s Transportation Security Operations Center (TSOC), among other things. The TSOC is an operations center open 24 hours a day, 7 days a week, that serves as TSA’s main point of contact for monitoring security–related incidents or crises in all modes of transportation. The regulation also authorizes TSA officials to view, inspect, and copy rail agencies’ records as necessary to enforce the rail security incident reporting requirements. This regulation is supported by TSA policies and guidance, including the Transportation Security Inspector Inspections Handbook, the National Investigations and Enforcement Manual, and the Compliance Work Plan for Transportation Security Inspectors. TSA’s regulation is intended to provide the agency with essential information on rail security incidents so that TSA can conduct comprehensive intelligence analysis, threat assessment, and allocation of security resources, among other things. According to the regulation, potential threats and significant security concerns that must be reported to the TSOC include bomb threats, suspicious items, or indications of tampering with rail cars, among others. Within TSA, different offices are responsible for sharing transportation security–related information and for implementing and enforcing the rail security incident reporting requirement. For instance, TSA’s Office of Security Policy and Industry Engagement (OSPIE) is the primary point of contact for sharing information with private sector stakeholders, and is responsible for using incident reports and analyses, among other things, to develop strategies, policies, and programs for rail security, including operational security activities, training exercises, public awareness, and technology. TSA’s Office of Intelligence and Analysis (OIA) receives intelligence information regarding threats to transportation and designs intelligence products intended for officials in TSA, other parts of the federal government, state and local officials, and industry officials, including rail agency security coordinators and law enforcement officials. The TSOC, managed by TSA’s Office of Law Enforcement/Federal Air Marshal Service, is the TSA entity primarily responsible for collecting and disseminating information about rail security incidents. Once notified of a rail security incident, TSOC officials are responsible for inputting the incident information into their incident management database known as WebEOC, and for disseminating incident reports that they deem high priority or significant to selected TSA officials; other federal, state, and local government officials; and selected rail agencies’ law enforcement officials. Figure 1 shows the intended steps and responsibilities of TSA components involved in the rail security incident reporting process. TSA’s Office of Security Operations (OSO) is responsible for overseeing and enforcing the incident reporting requirement. Responsible for managing TSA’s inspection program for the aviation and surface modes of transportation, the Office of Security Operations’ Surface Compliance Branch deploys approximately 270 transportation security inspectors– surface (TSI-S) nationwide. The TSI-Ss are responsible for, among other things, providing clarification to rail agencies regarding the incident reporting process and for overseeing rail agencies’ compliance with the reporting requirement by conducting inspections to ensure that incidents were properly reported to the TSOC. Six regional security inspectors– surface (RSI-S) within the Compliance Programs Division are responsible for providing national oversight of local surface inspection, assessment, and operational activities. In June 2014, we found that TSA had some mechanisms in place to collect stakeholder feedback on the products it disseminates containing security-related information and had initiated efforts to improve how it obtains customer feedback, but had not developed a systematic process for collecting and integrating such feedback. Specifically, in February 2014, TSA reconvened its Information Sharing Integrated Project Team (IPT), whose charter included, among other things, milestones and time frames for developing a centralized management framework to capture stakeholder satisfaction survey data on all of TSA’s security-related products and the systems used to distribute these products. However, at the time of our June 2014 report, the IPT Charter did not specify how TSA planned to systematically collect, document, and incorporate informal feedback—a key mechanism used by the majority of the stakeholders we surveyed, and a mechanism TSA officials told us they utilize to improve information sharing. For instance, the rail industry provided TSA with a list of areas for emphasis in intelligence analysis in December 2012, and TSA subsequently initiated a product line focusing on indications and warnings associated with disrupted or successful terrorist attacks. TSA officials stated that they further refined one of the products as a result of a stakeholder requesting information on tactics used in foreign rail attacks. In 2013, one TSA component built a system to track informal information sharing with stakeholders at meetings and conferences, and through e-mail, but TSA officials stated that the data were not used for operational purposes, and TSA had no plans to incorporate this system into its centralized management framework because the IPT had decided to focus its initial efforts on developing a survey mechanism. According to our June 2014 survey results, surface transportation stakeholders were generally satisfied with TSA’s security-related products and the mechanisms used to disseminate them. In particular, 63 percent of rail stakeholders (70 of 111) reported that they were satisfied with the products they received in 2013, and 54 percent (59 of 110) reported that they were satisfied with security-related information sharing mechanisms. However, because TSA lacked specific plans and documentation related to improving its efforts to incorporate all of its stakeholder feedback, it was unclear how, or if, TSA planned to use stakeholder feedback to improve information sharing. As a result of these findings, we recommended that TSA include in its planned customer feedback framework a systematic process to document informal feedback, and how it incorporates all of the feedback TSA receives, both formal and informal. TSA concurred, and in response, by April 2015, had taken actions to develop these processes. Specifically, TSA developed a standard operating procedure to organize how its offices solicit, receive, respond to, and document both formal and informal customer feedback on its information-sharing efforts, which delineates a systematic process for doing so. TSA also developed a TSA-wide standard survey for its offices to use to obtain formal and informal feedback on specific products, and created an information-sharing e-mail inbox to which all survey responses will be sent, evaluated, and distributed to the appropriate office for action. We have not evaluated these actions, but if implemented effectively, we believe that TSA will now be better positioned to meet stakeholder needs for security-related information. In December 2012, we found TSA had made limited use of the rail security incident information it had collected from rail agencies, in part because it did not have a systematic process for conducting trend analysis. TSA’s stated purpose for collecting rail security incident information was to allow TSA to “connect the dots” by conducting trend analysis that could help TSA and rail agencies develop targeted security measures. However, the incident information provided to rail agencies by TSA was generally limited to descriptions of specific incidents with minimal accompanying analysis. As a result, officials from passenger rail agencies we spoke with generally found little value in TSA’s incident reporting process, because it was unclear to them how, if at all, the information was being used by TSA to identify trends or threats that could help TSA and rail agencies develop appropriate security measures. However, as we reported in December 2012, opportunities for more sophisticated trend analysis existed. For example, the freight industry, through the Railway Alert Network—which is managed by the Association of American Railroads, a rail industry group—identified a trend where individuals were reportedly impersonating federal officials. In coordination with TSA, the Railway Alert Network subsequently issued guidance to its member organizations designed to increase awareness of this trend among freight rail employees and provide descriptive information on steps to take in response. The Railway Alert Network identified this trend through analysis of incident reporting from multiple freight railroads. In each case, the incident had been reported by a railroad employee and was contained in TSA’s incident management system, WebEOC. On the basis of these findings, in December 2012, we recommended that TSA establish a systematic process for regularly conducting trend analysis of the rail security incident data, in an effort to identify potential security trends that could help the agency anticipate or prevent an attack against passenger rail and develop recommended security measures. TSA concurred with this recommendation and by August 2013 had developed a new capability for identifying trends in the rail security incident data, known as the Surface Compliance Trend Analysis Network (SCAN). SCAN is designed to identify linkages between incidents captured in various sources of data, assemble detailed information about these incidents, and accurately analyze the data to enhance the agency’s ability to detect impending threats. According to TSA officials, SCAN consists of three elements: two OSO surface detailees located at TSOC, enhanced IT capabilities, and a new rail security incident analysis product for stakeholders. According to TSA, one of the key functions of the surface detailees is to continuously look for trends and patterns in the rail security incident data that are reported to TSOC, and to coordinate with OSPIE and OIA to conduct further investigations into potential trends. As I will discuss later in this statement, TSA has also made improvements to WebEOC, including steps to improve the completeness and accuracy of the data and the ability to produce basic summary reports, which we believe should facilitate this type of continuous trend analysis. TSA generates a Trend Analysis Report for any potential security trends the surface detailees identify from the rail security incident data. The Trend Analysis Report integrates incident information from WebEOC with information from multiple other sources, including TSA’s compliance database and media reports, and provides rail agencies and other stakeholders with analysis of possible security issues that could affect operations as a result of these trends. According to TSA officials, since SCAN was established, approximately 13 Trend Analysis Reports have been produced and disseminated to local TSA inspection officials and rail agencies. Although we have not assessed the effectiveness of these efforts to better utilize rail security information, we believe these actions address the intent of our recommendation. Further, if implemented effectively, they should better position TSA to provide valuable analysis on rail security incidents and to develop recommended security measures for rail agencies, as appropriate. In December 2012, we found that TSA had not provided consistent oversight of the implementation of the rail security reporting requirement, which led to considerable variation in the types and number of passenger rail security incidents reported. Specifically, we found that TSA headquarters had not provided guidance to local TSA inspection officials, the primary TSA points of contact for rail agencies, about the types of rail security incidents that must be reported, a fact that contributed to inconsistent interpretation of the regulation by local TSA inspection officials. While some variation was expected in the number of rail security incidents that rail agencies reported because of differences in agency size, geographic location, and ridership, passenger rail agencies we spoke with at the time reported receiving inconsistent feedback from their local TSA officials regarding certain types of incidents, such as those involving weapons. As a result, we found that, for 7 of the 19 passenger rail agencies included in our review, the number of incidents reported per million riders ranged from 0.25 to 23.15. This variation we identified was compounded by inconsistencies in compliance inspections and enforcement actions, in part because of limited utilization of oversight mechanisms at the headquarters level. For example, in December 2012, we found that TSA established the RSI-S position as a primary oversight mechanism at the headquarters level for monitoring rail security compliance inspections and enforcement actions to help ensure consistency across field offices. However, at the time of our report, the RSI-S was not part of the formal inspection process and had no authority to ensure that inspections were conducted consistently. We also found that the RSI-S had limited visibility over when and where inspections were completed or enforcement actions were taken because TSA lacked a process to systematically provide the RSI-S with this information during the course of normal operations. As a result, our analysis of inspection data from January 1, 2011, through June 30, 2012, showed that average monthly inspections for the 19 rail agencies in our review ranged from about eight inspections to no inspections, and there was variation in the regularity with which inspections occurred. We also found that TSA inconsistently applied enforcement actions against passenger rail agencies for not complying with the reporting requirement. For example, TSA took enforcement action against an agency for not reporting an incident involving a knife, but did not take action against another agency for not reporting similar incidents, despite having been inspected. On the basis of these findings, in December 2012, we recommended that TSA: (1) develop and disseminate written guidance for local TSA inspection officials and rail agencies that clarifies the types of incidents that should be reported to the TSOC and (2) enhance and utilize existing oversight mechanisms at the headquarters level, as intended, to provide management oversight of local compliance inspections and enforcement actions. TSA concurred with both of these recommendations and has taken actions to implement them. Specifically, in September 2013, TSA disseminated written guidance to local TSA inspection officials and passenger and freight rail agencies that provides clarification about the requirements of the rail security incident reporting process. This guidance includes examples and descriptions of the types of incidents that should be reported under the regulatory criteria, as well as details about the type of information that should be included in the incident report provided to the TSOC. Further, as of August 2013, TSA had established an RSI- dashboard report that provides weekly, monthly, and quarterly information about the number of inspection reports that have been reviewed, accepted, and rejected. According to TSA officials, this helps ensure that rail agencies are inspected regularly, by providing the RSI-Ss with greater insight into inspection activities. TSA has also enhanced the utilization of the RSI-Ss by providing them with the ability to review both passenger and freight rail inspections before the inspection reports are finalized and enforcement action is taken. According to TSA officials, this allows the RSI-Ss to ensure that enforcement actions are applied consistently by local TSA inspection officials. TSA also developed a mechanism for tracking the recommendations RSI-Ss make to local TSA inspection officials regarding changes to local compliance inspections, as well as any actions that are taken in response. Collectively, we believe that these changes should allow the RSI-Ss to provide better management oversight of passenger and freight rail regulatory inspections and enforcement actions, though we have not assessed whether they have done so. We also believe these actions, if implemented effectively, will help ensure that the rail security incident reporting process is consistently implemented and enforced, and will address the intent of our recommendations. In December 2012, we also found that TSA’s incident management data system, known as WebEOC, had incomplete information, was prone to data entry errors, and had other limitations that inhibited TSA’s ability to search and extract basic information. These weaknesses in WebEOC hindered TSA’s ability to use rail security incident data to identify security trends or potential threats. Specifically, at the time of our 2012 report, TSA did not have an established process for ensuring that WebEOC was updated to include information about rail security incidents that had not been properly reported to the TSOC. As a result, of the 18 findings of noncompliance we reviewed that were a result of failure to report an incident, 13 were never entered into WebEOC, and consequently could not be used by TSA to identify potential security trends. In addition, in December 2012, we found that TSA’s guidance for officials responsible for entering incident data was insufficient, a fact that may have contributed to data entry errors in key fields, including the incident type and the mode of transportation (such as mass transit or freight rail). At the time of our report, because of data errors and technical limitations in WebEOC, TSA also could not provide us with basic summary information about the rail security incident data contained in WebEOC, such as the number of incidents reported by incident type (e.g., suspicious item or bomb threat), by a particular rail agency, or the total number of rail security incidents that have been reported to the TSOC. Without the ability to identify this information on the number of incidents by type or the total number of incidents, we concluded that TSA faced challenges determining if patterns or trends exist in the data, as the reporting system was intended to do. On the basis of these findings, in December 2012 we recommended that TSA (1) establish a process for updating WebEOC when incidents that had not previously been reported are discovered through compliance activities, and (2) develop guidance for TSOC officials that includes definitions of data entry options to reduce errors resulting from data entry problems. TSA concurred with both of these recommendations and has taken actions to implement them. Specifically, in March 2013, TSA established a process for the surface detailee position, discussed earlier in this statement, to update WebEOC when previously unreported incidents are discovered through compliance activities. Additionally, in October 2014, TSA officials reported they have updated the guidance used by TSOC officials responsible for entering incident data into WebEOC to include definitions of incident types. TSA has also made changes to WebEOC that will allow for officials to search for basic information, such as the total number of certain types of incidents, required to facilitate analysis. We have not reevaluated the data contained in WebEOC, but we believe that the changes TSA has made should allow the agency to conduct continuous analysis of the rail security incident data to identify potential trends. We believe these actions address the intent of our recommendations and, if implemented effectively, should improve the accuracy and completeness of the incident data in WebEOC. This should provide TSA with a more comprehensive picture of security incidents as well as allow it to better identify any trends or patterns. Chairmen Katko and King, Ranking Members Rice and Higgins, and members of the subcommittees this concludes my prepared statement. I would be happy to respond to any questions you may have at this time. For questions about this statement, please contact Jennifer Grover at (202) 512-7141 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Chris Ferencik (Assistant Director), Michele Fejfar, Paul Hobart, Adam Hoffman, Tracey King, Elizabeth Kowalewski, Brendan Kretzschmar, Kelly Rubin, and Christopher Yun. Key contributors to the previous work that this testimony is based on are listed in those reports. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The U.S. surface transportation system's size and importance to the country's safety, security, and economic well-being make it an attractive target for terrorists. Within the federal government, TSA–a component of the Department of Homeland Security–is the primary federal agency responsible for overseeing and enhancing the security of the surface transportation system. A key component of this responsibility is ensuring that security-related information is collected, analyzed, and shared effectively across all modes, including rail. In 2008, TSA issued a regulation requiring U.S. passenger rail agencies to report all potential threats and significant security concerns to TSA, among other things. This testimony addresses the extent to which TSA has (1) developed systematic processes for integrating stakeholder feedback about security-related information it provides and analyzing trends in reported rail security incidents and (2) ensured consistent implementation of rail security incident reporting requirements. This statement is based on related GAO reports issued in June 2014 and December 2012, including selected updates on TSA's efforts to implement GAO's prior recommendations related to rail security and information sharing. For the selected updates, GAO reviewed related documentation, including tools TSA developed to provide oversight. GAO also interviewed TSA officials. In June 2014, GAO found that the Transportation Security Administration (TSA) did not have a systematic process for incorporating stakeholder feedback to improve security-related information sharing and recommended that TSA systematically document and incorporate stakeholder feedback. TSA concurred with this recommendation and, in April 2015, TSA developed a standard operating procedure to help ensure proper evaluation and consideration of all feedback TSA receives. In December 2012, GAO found TSA had made limited use of the rail security incident information it had collected from rail agencies, in part because it did not have a systematic process for conducting trend analysis. TSA's purpose for collecting this information was to allow TSA to "connect the dots" through trend analysis. However, the incident information provided to rail agencies by TSA was generally limited to descriptions of specific incidents. As a result, officials from passenger rail agencies GAO spoke with reported that they generally found little value in TSA's incident reporting requirement. On the basis of these findings, GAO recommended that TSA establish a systematic process for regularly conducting trend analysis of the rail security incident data. Although GAO has not assessed the effectiveness of TSA's efforts, by August 2013, TSA had developed a new analysis capability that, among other things, produces Trend Analysis Reports from the incident data. In December 2012, GAO found that TSA had not provided consistent oversight of its rail security reporting requirement, which led to variation in the types and number of passenger rail security incidents reported. Specifically, GAO found that TSA headquarters had not provided guidance to local TSA inspection officials, the primary TSA points of contact for rail agencies, about the types of rail security incidents that must be reported, which contributed to inconsistent interpretation of the regulation. The variation in reporting was compounded by inconsistencies in compliance inspections and enforcement actions, in part because of limited utilization of oversight mechanisms at the headquarters level. GAO also found that TSA's incident management data system, WebEOC, had incomplete information, was prone to data entry errors, and had other limitations that inhibited TSA's ability to search and extract basic information. On the basis of these findings, GAO recommended that TSA (1) develop and disseminate written guidance on the types of incidents that should be reported, (2) enhance existing oversight mechanisms for compliance inspections and enforcement actions, (3) establish a process for updating WebEOC with previously unreported incidents, and (4) develop guidance to reduce data entry errors. TSA concurred with these recommendations and has taken actions to implement them. Specifically, in September 2013, TSA disseminated written guidance to local TSA inspection officials and passenger and freight rail agencies that provides clarification about the rail security incident reporting requirement. In August 2013, TSA enhanced existing oversight mechanisms by creating an inspection review mechanism, among other things. TSA also established a process for updating WebEOC in March 2013, and in October 2014, officials reported that they have updated the guidance used by officials responsible for entering incident data to reduce data entry errors associated with incident types. Although GAO has not assessed the effectiveness of these efforts, they address the intent of the recommendations. GAO is making no new recommendations in this statement. |
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Since it was launched in 1990, the Hubble Space Telescope has sent back images of space that have made a significant contribution to our understanding of the universe. The telescope uses pointing precision, powerful optics, and state-of-the-art instruments to explore the visible, ultraviolet, and near-infrared regions of the electromagnetic spectrum. To keep it at the forefront of astronomical research and extend its operational life, Hubble’s instruments have been upgraded through a series of shuttle servicing missions. The fifth and final planned servicing mission was intended to install new science instruments, replace the telescope’s insulation, and replace the batteries and gyroscopes. According to NASA, the lifetime of the observatory on orbit is ultimately limited by battery life, which may extend into the 2007-2008 time frame, but scientific operations are limited by the gyroscopes that stabilize the telescope—whose lifetimes are more difficult to predict. NASA forecasts that the Hubble will likely have fewer than three operating gyroscopes by mid-2006, and fewer than two by mid-2007. In response to congressional concerns about NASA’s decision to cancel the servicing mission, NASA requested that the National Research Council conduct an independent assessment of options for extending the life of the Hubble Space Telescope. In May 2004, the Council established a committee to assess the viability of a shuttle servicing mission, evaluate robotic and ground operations to extend the life of the telescope as a valuable scientific tool, assess telescope component failures and their impact, and provide an overall risk-benefit assessment of servicing options. In an interim report issued in July 2004, the committee urged NASA to commit to a Hubble servicing mission that accomplishes the objectives of the canceled servicing mission and to take no actions that would preclude using a space shuttle to carry out this mission. According to a NASA official, the agency is not actively pursuing the shuttle servicing option but is not precluding it. NASA is currently evaluating the feasibility of performing robotic servicing of the Hubble Telescope. To facilitate the evaluation, the agency has formulated a robotic mission concept, which includes a vehicle comprised of a robotic servicing module and another module that can be used to eventually de-orbit the telescope. The potential task list of activities for robotic servicing includes replacing the gyroscopes and batteries, installing new science instruments, and de-orbiting the observatory at the end of its life. According to a NASA official, contracts to facilitate the robotic mission were recently awarded for work to begin on October 1, 2004. The CAIB concluded that the Columbia accident was caused by both physical and organizational failures. The Board’s 15 return to flight recommendations necessary to implement before the shuttle fleet can return to flight primarily address the physical causes of the accident and include eliminating external tank debris shedding and developing a capability to inspect and make emergency repairs to the orbiter’s thermal protection system. NASA publishes periodic updates to its plan for returning the shuttle to flight to demonstrate the agency’s progress in implementing the CAIB recommendations. The most recent update is dated August 27, 2004. This update identifies the first shuttle flight as occurring in spring 2005. NASA does not currently have a definitive cost estimate for servicing the Hubble Telescope using the shuttle. The agency focused on safety concerns related to a servicing mission by the space shuttle in deciding not to proceed, and did not develop a cost estimate. At our request NASA prepared an estimate of the funding needed for a Hubble servicing mission by the space shuttle. NASA could not provide documented support for its estimate. The agency recognizes that there are many uncertainties that could change the estimate. NASA has now begun to explore the costs and benefits of various servicing alternatives, including robotic servicing, which should enable NASA to make a more informed decision regarding Hubble’s future. At our request NASA began development of an estimate of the funding needed for a shuttle servicing mission to the Hubble. The estimate provided captures additional funds over and above NASA’s fiscal year 2005 budget request that would be required to reinsert the mission in the shuttle flight manifest for launch in March 2007. The estimate does not include funding already expended to support the canceled servicing mission and develop the science instruments. NASA has determined that the additional funds needed to perform a shuttle servicing mission for Hubble would be in the range of $1.7 billion to $2.4 billion. According to NASA, this estimate is based on what it might cost, but it does not take into account the technical, safety, and schedule risks that could increase the cost and/or undermine the viability of the mission. For example, NASA cites uncertainties related to two safety-related requirements: inspection and repair and crew rescue mission capabilities that would be autonomous of the International Space Station and for which NASA currently has not formulated a design solution. In addition, NASA cautions that it did not examine whether design solutions could be accomplished in time to service Hubble before it ceases operations. Table 1 shows NASA’s budget estimate phased by fiscal year (FY) for shuttle servicing of the Hubble Space Telescope, including ranges for some of the estimates. While we did not independently verify each component of NASA’s estimate, we requested that NASA provide the analytical basis and documentary support for selected portions of the estimate, primarily those with large dollar values. NASA could not provide the requested information. For example, NASA officials told us that the Hubble project’s sustaining engineering costs run $9 to10 million per month, but they were unable to produce a calculation or documents to support the estimate because they do not track these costs by servicing mission. We also requested the basis of estimate for the costs to delay shuttle phase-out and for tools development for vehicle inspection and repair without the International Space Station (a component of extravehicular activity above). In response, NASA provided the assumptions upon which the estimates were based and stated that the estimates were based on information provided by Johnson Space Center and Kennedy Space Center subject matter experts. NASA also added that rigorous cost estimating techniques could not be applied to the tools development estimate because a rescue mission currently is only a concept. No analytical or documentary support was provided. In estimating the cost for the autonomous inspection and repair and rescue mission capabilities, NASA used a 30 to 50 percent uncertainty factor because of the very high uncertainty in the cost of developing and conducting a mission that is not adequately defined—i.e., NASA’s estimate of $425 million plus 50 percent equals the $638 million upper range shown in the table above for these two items added together. As with the other estimates for which we requested analytical and documentary support, NASA was not able to provide it because the agency could not do a risk analysis without a design solution, according to a NASA official. The lack of documented support for portions of NASA’s estimate increases the risk of variation to the estimate. Further, NASA recognizes that there are many uncertainties that could change the current estimate. The 2004 NASA Cost Estimating Handbook states that cost analysts should document the results of cost estimates during the entire cost estimating process and that the documentation should provide sufficient information on how the estimate was developed so that independent cost analysts could reproduce the estimate. According to the handbook, the value of the documentation and analysis is in providing an understanding of the cost elements so that decision-makers can make informed decisions. Recently, we also reported that dependable cost estimates are essential for establishing priorities and making informed investment decisions in the face of limited budgets. Without this knowledge, a program’s estimated cost could be understated and thereby subject to underfunding and cost overruns, putting programs at risk of being reduced in scope or requiring additional funding to meet their objectives. Since we began our review, attention has focused on alternatives to a shuttle mission, such as robotic servicing of Hubble. NASA has formed a team to evaluate Hubble servicing alternatives, including cost information. This analysis should enable NASA to make a more informed decision about Hubble’s future and facilitate NASA’s evaluation of the feasibility of robotic servicing options. Currently, NASA has developed budget estimates for implementing the CAIB recommendations required to return the space shuttle to flight but not for all of the CAIB recommendations. NASA provided us with documentary support for portions of the return to flight estimate, but we found it to be insufficient. According to NASA, the agency’s cost for returning the shuttle to flight, which is slightly over $2 billion, will remain uncertain until the completion of the first shuttle missions to the International Space Station in fiscal year 2005. NASA’s return to flight activities involve enhancing the shuttle’s external tank, thermal protection system, solid rocket boosters, and imagery system to address the physical cause of the Columbia accident—a piece of insulating foam that separated from the external tank and struck a reinforced carbon-carbon panel on the leading edge of the orbiter’s left wing. To address this cause, NASA is working to eliminate all external tank debris shedding. Efforts are also in place to improve the orbiter’s thermal protection system, which includes heat resistant tiles, blankets, and reinforced carbon-carbon panels on the leading edge of the wing and nose cap of the shuttle, to increase the orbiter’s ability to sustain minor debris damage. NASA is also redesigning the method for catching bolts that break apart when the external tank and solid rocket boosters separate as well as providing the capability to obtain and downlink images after the separation. NASA and the United States Air Force are working to improve the use of ground cameras for viewing launch activities. Table 2 shows NASA’s budget estimates for return-to-flight activities. However, the majority of NASA’s budget estimates for returning the shuttle to flight are not fully developed—including those for fiscal year 2005—as indicated by the agency’s internal approval process. The Program Requirements Control Board (PRCB) is responsible for directing studies of identified problems, formulating alternative solutions, selecting the best solution, and developing overall estimates. According to NASA, actions approved with PRCB directives have mature estimates, while those with control board actions in process—that is currently under review but with no issued directives yet—are less mature. Both the content and estimates for return to flight work that have not yet been reviewed by the control board are very preliminary and subject to considerable variation. Table 3 shows the status of control board review of NASA return to flight budget estimates and the percent of the total estimate at each level of review. NASA provided us with the PRCB directives and in some cases, attachments which the agency believes support the estimate. However, we did not find this support to be sufficient. According to NASA’s cost estimating handbook, estimates should be documented with sufficient detail to be reproducible by an independent analyst. Nevertheless, in many cases, there were no documents attached to the directive, and in cases where documents were attached to the directives, the documents generally provided high-level estimates with little detail and no documentation to show how NASA arrived at the estimate. For example, a request for $1.8 million to fund the network to support external tank camera transmissions indicated that $1.516 million of the amount would be needed for Goddard Space Flight Center to provide the necessary equipment at receiving stations, labor, subcontractor costs, and travel and that the remaining $290,000 would be needed for improvements to the receiving antennas ($104,000) and recurring costs ($62,000 per flight) for three trucks and the associated transponder time. However, the documents did not show how the requester for the $1.8 million arrived at the estimates. NASA officials told us that the reason for this was that the managers approving the directives trusted their employees to accurately calculate the estimate and maintain the support. In addition, our review of the documents indicated and NASA confirmed that quite a few of the estimates were based on undefinitized contract actions (UCA)—that is, unnegotiated contract changes. Under these actions, NASA officials can authorize work to begin before NASA and the contractor agree on a final estimated cost and fee. As we have stated in our high-risk series, relying on unnegotiated changes is risky because it increases the potential for unanticipated cost growth. This, in turn, may force the agency to divert scarce budget resources intended for other important programs. As of July 31, 2004, NASA records showed 17 UCAs related to return to flight with not-to-exceed amounts totaling $147.5 million. NASA’s estimate for the entire effort under these UCAs totals about $325 million, or 15 percent of NASA’s current $2.2 billion return to flight estimate. In June 2004, NASA established additional requirements for funding requests submitted to the PRCB. Under the new policy, an independent cost estimate must be developed for requests greater than $25 million, and a program-level cost evaluation must be completed for requests over $1 million. The program-level evaluation consists of a set of standard questions to document the rationale and background for cost-related questions. The responses to the questions are initially assessed by a cost analyst but are reviewed by the Space Shuttle Program Business Manager before submission to the PRCB. NASA provided us with two examples of requests falling under the new requirements. Both of the examples had better support than those with PRCB directives, but documentary support was still not apparent. For example, the funding request for a debris radar indicated that the estimate was based on a partnering agreement with the Navy and the Navy’s use of the technology. However, the program-level evaluation pointed out that no detailed cost backup was provided. The other example, which was a funding request to change the processes currently in place for the Space Shuttle Program’s problem reporting and corrective action system, was very well supported in terms of analysis, as the requester prepared detailed spreadsheets calculating the funding requirements according to a breakdown of the work to be performed, cited sources for labor rates, and provided assumptions underlying the calculations. However, as pointed out in the program evaluation of the request, there was no support provided for the estimate other than the initiator’s knowledge of the change. We believe that future compliance with NASA’s new policy establishing additional requirements for funding requests and the inclusion of documentary support could potentially result in more credible return to flight budget estimates. According to NASA, estimates for fiscal year 2005 and beyond will be refined as the Space Shuttle Program comes to closure on return to flight technical solutions and the return to flight plan is finalized. NASA expects that by late fall of 2004, a better understanding of the fiscal year 2005 financial situation will be developed. However, NASA cautions that the total cost of returning the shuttle to flight will remain uncertain until completion of the first shuttle missions to the space station, scheduled to begin in spring 2005. In written comments on a draft of this report, the NASA Deputy Administrator stated that the agency believes that both the estimate and methodology used in the calculation of costs for reinstating the Hubble Space Telescope servicing mission are sound and accurate, given the level of definition at this point in time. Notwithstanding that belief, the agency agreed that portions of the servicing mission activities lacked the design maturity required to estimate the costs according to accepted and established NASA procedures. Specifically, NASA agrees that the Hubble Space Telescope work breakdown structure was not constructed to collect program costs. At the same time, NASA believes it is erroneous to suggest that NASA has no valid basis for the numbers provided, citing the “Servicing Mission 4 Resources Management Plan,” which describes the effort required for completion of a servicing mission. According to NASA, although the program’s accounting system does not capture sustaining engineering costs in GAO’s preferred format, the Servicing Mission 4 Resources Management Plan details mission schedules and staffing, and applying contractor and civil service rates to that staffing level can accurately reflect the effort required to execute a servicing mission. We requested this type of analysis and documentary support, but NASA representatives did not offer such a calculation. Rather, the officials stated that the sustaining engineering costs were based on management’s assessment of contractor financial data and in-house service pool charges and that these activities could not be traced back to source documentation. Without adequate supporting data, we cannot assess the accuracy and reliability of such information. NASA acknowledged that the agency does not have a technical design from which to derive the cost for the on-orbit inspection and repair of the shuttle independent of support from the International Space Station. In the case of the unsupported cost estimate for delaying the phase out of the space shuttle in order to complete a manned Hubble servicing mission, NASA stated that it used approved budget projections for the operating years affected by the insertion of the Hubble servicing mission and prorated the extension of the service life. According to NASA, a range was added to the estimate to account for uncertainties and retention of critical skills. The estimates were presented as a rough order of magnitude. NASA stated that it provided its assumptions to demonstrate the reasonableness of the estimates. Nevertheless, in spite of the uncertainties in the estimate, which we recognized in our report, NASA guidance states that cost estimates should be documented during the entire cost estimating process and that the documentation should provide sufficient information on how an estimate was developed to be reproducible by independent cost analysts. NASA did not provide us with this type of documentation. Without adequate supporting data, we cannot assess the accuracy and reliability of such information. We do not agree that the use of approved budget projections is a reliable cost estimating methodology, particularly given the long-term budget implications of the extension of the space shuttle’s service life. NASA believes that the examples it provided of the actions to implement several of the CAIB recommendations attest to the rigor of the process and approved procedures NASA utilized to validate the costs. According to NASA, the estimates will mature as the technical solutions mature, but the estimates were not refined at the time of our review. The agency believes the outstanding technical issues necessary to return to flight are beginning to be resolved. However, the examples that NASA provided were in support of estimates that the agency considers mature. We requested support for high dollar portions of NASA’s estimate, which the agency did not provide. However, NASA selectively provided examples of what it considered to be mature estimates. We reviewed the examples but found that most of them contained insufficient documentation to assess the reliability of the estimates. In many cases, there were no documents in the approval packages to support the estimates, and in cases where there were documents, they generally provided high-level estimates with little detail and no documentation to show how NASA arrived at the estimates. We believe that because of its difficulty providing reliable cost estimates, NASA cannot provide the Congress assurance that its budget request for the shuttle program for fiscal year 2006 will be sufficient and that shortfalls would not need to be met through reductions in other NASA programs. NASA stated that it believes the use of UCAs is both reasonable and necessary for return to flight activities. We agree that UCAs may be justified to facilitate work outside the scope of existing contracts to expedite the return to flight activities. However, the use of UCAs appears to be a growing trend and is a risky contract management practice because it increases the potential for unanticipated cost growth. In the past, we cited the agency’s use of UCAs as one of the reasons we retained contract management as a high-risk designation for NASA to focus management attention on problem areas that involve substantial resources. Finally, NASA agrees that cost estimates for significant development activities should be appropriately documented. According to NASA, additional requirements for cost estimates and internal controls recently established by the program represent a step in ensuring the appropriate documentation is developed as solutions are identified. As stated in our report, we believe that future compliance with this new policy could potentially result in more credible budget estimates. In a broader context, reliable and supportable cost estimating processes are important tools for managing programs. Without this knowledge, a program’s estimated cost could be understated and thereby subject to underfunding and cost overruns, putting programs at risk of being reduced in scope or requiring additional funding to meet their objectives. Further, without adequate financial and nonfinancial data, programs cannot easily track an acquisition’s progress and assess actions to be taken before it incurs significant cost increases and schedule delays. As agreed with your offices, unless you announce its contents earlier, we will not distribute this report further until 30 days from its date. At that time, we will send copies to the NASA Administrator and interested congressional committees. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Key contributors to this report are acknowledged in appendix III. To assess the basis for NASA’s Hubble servicing mission cost estimate, we analyzed NASA’s estimate of the funding needed for a shuttle servicing mission and supporting documentation, and we reviewed NASA documents explaining the rationale for the decision and identifying alternatives to shuttle servicing. We interviewed program and project officials to clarify our understanding of the available cost information and NASA’s rationale for the decision. To test the sufficiency of the support for the estimates provided by NASA, we requested the analytical basis and documentary support for selected portions of the estimates, primarily those with large dollar values. In addition, we compared NASA’s decision- making process with relevant Office of Management and Budget and NASA guidance on information and analyses recommended to enable decision- makers to select the best alternative. To determine the basis for NASA’s cost estimate for implementing all of the CAIB recommendations, we reviewed the CAIB report (volume 1), NASA’s return to flight implementation plan and budget estimates, and agency documentation discussing the return to flight budget estimate. We interviewed program officials to obtain a better understanding of NASA’s plans for returning the space shuttle to flight, the status of that effort, and the estimated cost. To test the sufficiency of the support for NASA’s return to flight estimate, we requested the analytical basis and documentary support for selected high dollar portions of the estimate. To accomplish our work, we visited NASA Headquarters, Washington, D.C.; and Goddard Space Flight Center, Maryland. We performed our review from March through September 2004 in accordance with generally accepted government auditing standards. Staff making key contributions to this report were Jerry Herley, Erin Schoening, Karen Sloan, and Jonathan Watkins. | Hubble's continued operation has been dependent on manned servicing missions using the National Aeronautics and Space Administration's (NASA) shuttle fleet. The fleet was grounded in early 2003 following the loss of the Space Shuttle Columbia, as NASA focused its efforts on responding to recommendations made by the Columbia Accident Investigation Board (CAIB). In January 2004, NASA announced its decision to cancel the final planned Hubble servicing mission, primarily because of safety concerns. Without some type of servicing mission, NASA anticipates that Hubble will cease to support scientific investigations by the end of the decade. NASA's decision not to service the Hubble prompted debate about potential alternatives to prolong Hubble's mission and the respective costs of these alternatives. This report addresses the basis of NASA's cost estimates to (1) service Hubble using the shuttle and (2) implement recommendations made by the CAIB. GAO is continuing its work on the Congressional request that GAO examine the potential cost of a robotic servicing mission to the Hubble Telescope. Although a shuttle servicing mission is one of the options for servicing the Hubble Space Telescope, to date, NASA does not have a definitive estimate of the potential cost. At our request, NASA prepared an estimate of the funding needed for a shuttle servicing mission to the Hubble. NASA estimates the cost at between $1.7 billion to $2.4 billion. However, documentary support for portions of the estimate is insufficient. For example, NASA officials told us that the Hubble project's sustaining engineering costs run $9 to 10 million per month, but they were unable to produce a calculation or documents to support the estimate because they do not track these costs by servicing mission. Additionally, the agency has acknowledged that many uncertainties, such as the lack of a design solution for autonomous inspection and repair of the shuttle, could change the estimate. A t the same time, NASA has yet to develop a definitive cost estimate for implementing all of the CAIB's recommendations but has developed a budget estimate for safely returning the shuttle to flight--a subset of activities recommended by the CAIB as needed to return the shuttle to full operations. NASA currently estimates return to flight costs will exceed $2 billion, but that estimate will likely be refined as the agency continues to define technical concepts. NASA provided support for portions of the estimate, but we found the support to be insufficient--either because key documents were missing or the estimates lacked sufficient detail. Further, NASA cautions that return to flight costs will remain uncertain until the first return to flight shuttle mission, which is scheduled to go to the International Space Station in spring 2005. |
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Our analysis of initial estimates of Recovery Act spending provided by the Congressional Budget Office (CBO) suggested that about $49 billion would be outlayed to states and localities by the federal government in fiscal year 2009, which ran through September 30, 2009. Actual federal Recovery Act outlays reported on www.recovery.gov (Recovery.gov) show that about $53 billion was outlayed to states and localities in fiscal year 2009, about $4 billion more than estimated. Nonetheless, a greater amount of Recovery Act funding is estimated to be outlayed in fiscal year 2010. For fiscal year 2010, as of November 27, 2009, the federal Treasury had paid out approximately $16.2 billion to states and localities. Figure 2 shows the original estimate of federal outlays to states and localities under the Recovery Act compared with actual federal outlays as reported by federal agencies on Recovery.gov. As of November 27, 2009, the federal government had outlayed $69.1 billion in Recovery Act funds to state and local governments. As in figure 3, health, and education and training accounted for almost 85 percent of Recovery Act outlays for programs administered by states and localities. The largest programs within these areas were the FMAP, SFSF, and highway spending. The distribution of total federal outlays to states and localities by program is shown in figure 3. As we reported on November 19, 2009, recipients GAO contacted appear to have made good-faith efforts to ensure complete and accurate reporting. However, GAO’s fieldwork and initial review and analysis of recipient data from Recovery.gov indicate that there are a range of significant reporting and quality issues that need to be addressed. Even if the data quality issues are resolved, it is important to recognize that the full-time equivalents (FTE) in recipient reports alone do not reflect the total employment effects of the Recovery Act. As noted, these reports solely reflect direct employment arising from the expenditure of less than one third of Recovery Act funds. Therefore, both the data reported by recipients and other macroeconomic data and methods are necessary to gauge the overall employment effects of the stimulus. The Recovery Act includes entitlements and tax provisions, which also have employment effects. The employment effects in any state will vary with labor market stress and fiscal condition. Medicaid is a joint federal-state program that finances health care for certain categories of low-income individuals, including children, families, persons with disabilities, and persons who are elderly. The federal government matches state spending for Medicaid services according to a formula based on each state’s per capita income in relation to the national average per capita income. The rate at which states are reimbursed for Medicaid service expenditures is known as the Federal Medical Assistance Percentage (FMAP), which may range from 50 percent to no more than 83 percent. The Recovery Act provides eligible states with an increased FMAP for 27 months from October 1, 2008, to December 31, 2010. On February 25, 2009, the Centers for Medicare & Medicaid Services (CMS) made increased FMAP grant awards to states, and states may retroactively claim reimbursement for expenditures that occurred prior to the effective date of the Recovery Act. Generally, for fiscal year 2009 through the first quarter of fiscal year 2011, the increased FMAP, which is calculated on a quarterly basis, provides for (1) the maintenance of states’ prior year FMAPs, (2) a general across-the-board increase of 6.2 percentage points in states’ FMAPs, and (3) a further increase to the FMAPs for those states that have a qualifying increase in unemployment rates. For states to qualify for the increased FMAP available under the Recovery Act, they must meet a number of requirements, including the following: States generally may not apply eligibility standards, methodologies, or procedures that are more restrictive than those in effect under their state Medicaid programs on July 1, 2008. States must comply with prompt payment requirements. States cannot deposit or credit amounts attributable (either directly or indirectly) to certain elements of the increased FMAP into any reserve or rainy-day fund of the state. States with political subdivisions—such as cities and counties—that contribute to the nonfederal share of Medicaid spending cannot require the subdivisions to pay a greater percentage of the nonfederal share than would have been required on September 30, 2008. We previously reported that by the end of fiscal year 2009, the Recovery Act had provided increased FMAP rates in the 16 states and the District that averaged 10.57 percentage points higher than the original 2009 rates established by the Department of Health and Human Services (HHS). For the first quarter of federal fiscal year 2010, qualifying increases in unemployment rates or increases in base FMAP rates contributed to higher increased FMAP rates for half of the sample states when compared to the fourth quarter of fiscal year 2009. The increased FMAP for the first quarter of fiscal year 2010 averaged 11.07 percentage points higher than the original 2009 rate, with increases ranging from 9.02 percentage points in Mississippi to 13 percentage points in Michigan. (See table 1.) As in the first half of federal fiscal year 2009, overall Medicaid enrollment for our sample of 16 states and the District continued to grow. For the third and fourth quarters of federal fiscal year 2009, overall Medicaid enrollment for our sample further increased by more than 3 percent. While nearly all of the sample states and the District reported an enrollment increase from April 2009 to September 2009—with the highest number of programs experiencing an increase of 3 percent to 6 percent— the percentage change in enrollment varied widely, ranging from less than 1 percent in three states to about 10 percent in Arizona. (See figure 4.) Similar to prior time periods, most of the enrollment increase was attributable to children, a population group that is sensitive to economic downturns. States can continue to draw from their increased FMAP grant awards for third and fourth quarter fiscal year 2009 expenditures until CMS finalizes the grant awards for these quarters, a process the agency has not yet completed. As of November 30, 2009, the 16 sample states and the District had drawn down more than $22.26 billion from increased FMAP grant awards, or nearly 97 percent of funds available for federal fiscal year 2009. (See table 2.) Nationally, the 50 states, the District, and several of the largest U.S. insular areas combined have drawn down about $32.6 billion, which represents just over 96 percent of the increased FMAP grants awarded in fiscal year 2009. In addition, with the exception of Pennsylvania, all of the sample states and the District have begun to draw down funds from their increased FMAP grant awards for the first quarter of federal fiscal year 2010. As of November 30, 2009, they have drawn down about $3.58 billion, or almost 54 percent of funds available. While the increased FMAP available under the Recovery Act is for state expenditures for Medicaid services, the receipt of these funds may reduce the funds that states would otherwise have to use for their Medicaid programs, and states have reported using these freed-up funds for a variety of purposes. Similar to their reported uses in fiscal year 2009, states and the District most commonly reported using or planning to use these freed- up funds in fiscal year 2010 to cover increased Medicaid caseloads, maintain Medicaid eligibility levels, and finance general state budget needs. In addition, more than half of the states and the District reported using these funds to maintain benefits and services and to maintain payment rates for practitioners and institutional providers. Five states reported using these funds to meet prompt pay requirements, and two states and the District also reported using these funds to help finance their State Children’s Health Insurance Program or other local or state public health insurance programs. Although virtually all of the sample states and the District reported using these funds for multiple purposes, two states— North Carolina and Ohio—reported that they plan to continue using freed- up funds exclusively to finance general state budget needs. As we previously reported, 12 states indicated they made adjustments to their Medicaid programs in order to comply with Recovery Act requirements, including rescinding prior program changes or canceling planned changes that conflicted with requirements. In our most recent survey, three states reported making additional adjustments to comply specifically with the act’s prompt pay requirement. For example, Florida and Michigan reported making systems changes that allow them to track their compliance with aspects of the prompt pay requirement. The sample states previously identified the prompt pay requirement as the most difficult for them in terms of compliance with the Recovery Act, and in the most recent survey, four states reported they did not comply with this requirement for 1 day. Nonetheless, most sample states and the District indicated in the recent survey that CMS’s July 30, 2009, State Medicaid Director’s letter provided them with sufficient information to facilitate compliance. Responses from the sample states and the District were more varied when asked about whether the increased FMAP funds were sufficient to protect and maintain their Medicaid programs during the economic downturn or to provide fiscal relief to the state. While two states reported that the amount of increased FMAP funds was sufficient to meet these purposes in fiscal year 2010, six states reported that the amount of increased FMAP was not sufficient. The remaining eight states and the District reported that the funds were only somewhat sufficient to meet these purposes during fiscal year 2010. Among the states that reported the amount of increased FMAP was not sufficient or only somewhat sufficient, some reported taking actions to reduce their Medicaid program spending. For example, California cut certain optional Medicaid benefits, including adult dental services, though an official said the state would have made additional program reductions without the increased FMAP. Pennsylvania reported reducing disproportionate share hospital payments and eliminating pay-for-performance funds for some Medicaid managed care organizations. As for the longer term outlook for their Medicaid programs, the District and all but one of the sample states reiterated their concerns about the sustainability of their Medicaid programs after the increased FMAP funds are no longer available, beginning in January 2011. When asked about the factors driving their concerns, virtually all of the states and the District cited the size of the increase in the state’s share of Medicaid payments when the regular FMAP rate goes back into effect in January 2011—an increase we estimate will range from 28 percent to 66.9 percent (an average of 36.4 percent) compared with the first quarter 2010 increased FMAP. (See table 3.) In addition, most of the sample states and the District reported that projected enrollment increases and further declines in economic conditions and tax revenues have also contributed to their concerns about the longer-term sustainability of their programs. Ultimately, the effect of states’ increased share in Medicaid payments will vary depending on the extent of change in Medicaid enrollment within their individual programs. Due to these concerns, 11 states and the District reported that they were considering reducing eligibility, benefits and services, or provider rates in fiscal year 2011. Specifically, 5 states and the District reported they were considering eligibility reductions; 8 states and the District reported considering reductions to benefits and services; and 10 states and the District reported considering reductions to provider payment rates. In terms of federal action that would best address their concerns about program sustainability, nearly all states and the District identified an extension in the availability of the increased FMAP beyond December 2010. In addition, most states and the District identified greater flexibility in the Recovery Act’s maintenance of eligibility requirement or prompt payment requirement as actions that would also help address their concerns. The majority of the approximately $35 billion that the Recovery Act provided for highway infrastructure projects and public transportation has been obligated nationwide and in the 16 states and the District of Columbia (District) that are the focus of our review. For example, as of November 16, 2009, $20.4 billion of the funds had been obligated for just over 8,800 projects nationwide and $4.2 billion had been reimbursed. In the 16 states and the District, $11.9 billion had been obligated for nearly 4,600 projects and $1.9 billion had been reimbursed. Almost half of Recovery Act highway obligations nationally and in the 16 states and the District have been for pavement improvements—including resurfacing, rehabilitating, and reconstructing roadways. For Recovery Act transit funds, we focused our review on the Transit Capital Assistance Program and the Fixed Guideway Infrastructure Investment program, which received approximately 91 percent of the Recovery Act transit funds, and on seven selected states that received funds from these programs. As of November 5, 2009, about $6.7 billion of the Recovery Act’s Transit Capital Assistance Program and the Fixed Guideway Infrastructure Investment program funds had been obligated nationwide. Almost 88 percent of Recovery Act Transit Capital Assistance Program obligations are being used for upgrading transi facilities, improving bus fleets, and conducting preventive main tenance. The Recovery Act provides funding to states for restoration, repair, and construction of highways and other activities allowed under the Federal- Aid Highway Surface Transportation Program and for other eligible surface transportation projects. The Recovery Act requires that 30 percent of these funds be suballocated, primarily based on population, for metropolitan, regional, and local use. Highway funds are apportioned to states through federal-aid highway program mechanisms, and states must follow existing program requirements, which include ensuring the project meets all environmental requirements associated with the National Environmental Policy Act (NEPA), paying a prevailing wage consistent with federal Davis-Bacon Act requirements, complying with goals to ensure disadvantaged businesses are not discriminated against in the awarding of construction contracts, and using American-made iron and steel in accordance with Buy America program requirements. While the maximum federal fund share of highway infrastructure investment projects under the existing federal-aid highway program is generally 80 percent, under the Recovery Act, it is 100 percent. In March 2009, $26.7 billion was apportioned to all 50 states and the District for highway infrastructure and other eligible projects. Table 4 shows the funds apportioned and obligated nationwide and in selected states as of November 16, 2009. As of November 16, 2009, $4.2 billion had been reimbursed nationwide by Federal Highway Administration (FHWA), including $1.9 billion reimbursed to the 16 states and the District. These amounts represent 20 percent of the Recovery Act highway funding obligated nationwide and 16 percent of the funding obligated in the 16 states and the District. As we reported in our September report, because it can take 2 or more months for a state to bid and award the work to a contractor and have work begin after funds have been obligated for specific projects, it may take months before states request reimbursement from FHWA. However reimbursements have increased considerably over time, from $10 million in April to $4.2 billion in mid-November. Reimbursements have also increased considerably since we last reported in September when $604 million had been reimbursed to the 16 states and the District and $1.4 the District and $1.4 billion had been reimbursed nationwide. This is shown in figure 5. billion had been reimbursed nationwide. This is shown in figure 5. While reimbursement rates have been increasing, wide differences exist across states. Some differences we observed among the states were related to the complexity of the types of projects states were undertaking and the extent to which projects were being administered by local governments. For example, Illinois and Iowa have the highest reimbursement rates—36 percent and 53 percent of obligations, respectively—far above the national average. Illinois and Iowa also have a far larger percentage of funds devoted to resurfacing projects than other states—as discussed in the next section, resurfacing projects can be quickly obligated and bid. Florida and California have among the lowest reimbursement rates, less than 2 percent and 4 percent of obligations, respectively. As discussed in the next section, Florida is using Recovery Act funds for more complex projects, such as constructing new roads and bridges and adding lanes to existing highways. Florida officials also told us that the pace of awarding contracts has been generally slower in areas where large numbers of projects are being administered by local agencies (see GAO-10-232SP). In California, state officials said that projects administered by local agencies may take longer to reach the reimbursement phase than state projects due to additional steps required to approve local highway projects. For example, highway construction contracts administrated by local agencies in California call for a local public notice and review period, which can add nearly 6 weeks to the process. In addition, California state officials stated that localities tend to seek reimbursement in one lump sum at the end of a project, which can contribute to reimbursement rates not matching levels of ongoing construction. Almost half of Recovery Act highway obligations nationally have been for pavement improvements—including resurfacing, rehabilitating, and reconstructing roadways—consistent with the use of Recovery Act funds in our previous reports. Specifically, $4.5 billion, or 22 percent, is being used for road resurfacing projects, while $5.2 billion, or 26 percent, is being used for reconstructing or rehabilitating deteriorated roads. As we have reported, many state officials told us they selected a large percentage of resurfacing and other pavement improvement projects because those projects did not require extensive environmental clearances, were quick to design, could be quickly obligated and bid, could employ people quickly, and could be completed within 3 years. In addition to pavement improvement, other projects that have significant funds obligated include pavement widening (reconstruction that includes new capacity to existing roads), with $3 billion (15 percent) obligated, and bridge replacement and improvements, with $2 billion (10 percent) obligated. Construction of new roads and bridges accounted for 6 percent and 3 percent of funds obligated, respectively. Figure 6 shows obligations by the types of road and bridge improvements being made. The total distribution of project funds by improvement type among the 16 states and the District closely mirrors the distribution nationally— however, we noted wide differences in how funds were used in these states. States have considerable latitude to select projects under both the Recovery Act and the regular Federal-Aid Highway Program, and as a result, states have adopted different strategies to use Recovery Act funding to meet the states’ transportation goals and needs and promote long-term investment in infrastructure. The following are some examples: Illinois and Iowa have had a significant portion of their Recovery Act funds obligated for resurfacing projects—63 percent and 59 percent of funds, respectively, compared with 10 percent and 12 percent of funds in Pennsylvania and Florida, respectively (the national average is 22 percent). Iowa officials told us that focusing on pavement projects allowed them to advance a significant number of needed projects, which will reduce the demand for these types of projects and free up federal and state funding for larger, more complex projects in the near future. According to California officials, under a state law enacted in March 2009, 62.5 percent of funds went directly to local governments for projects of their selection, while the remaining 37.5 percent is being used mainly for state highway rehabilitation and maintenance projects that, due to significant funding limitations, would not have otherwise been funded. According to California officials, distributing a majority of funds to localities allow a number of locally important projects to be funded. Mississippi used over half its Recovery Act funds for pavement improvement projects and around 14 percent of funds for pavement widening. The Executive Director of the state transportation department told us the Recovery Act allowed Mississippi to undertake needed projects and to enhance the safety and performance of the state’s highway system. However, the Executive Director also said that the act’s requirements that priority be given to projects that could be completed in 3 years resulted in missed opportunities to address long term needs, such as upgrading a state roadway to interstate highway standards that would have likely had a more lasting impact on Mississippi’s infrastructure and economic development. In Florida, 36 percent of funds have been obligated for pavement- widening projects (compared with 15 percent nationally) and 23 percent for construction of new roads and bridges (compared with 9 percent nationally), while in Ohio, 32 percent of funds have been obligated for new road and bridge construction. Pennsylvania targeted Recovery Act funds to reduce the number of structurally deficient bridges in the state. As of October 2009, 31 percent of funds in Pennsylvania were obligated for bridge improvement and replacement (compared with 10 percent nationally), in part because a significant percentage (about 26 percent, as of 2008) of the state’s bridges are structurally deficient. Massachusetts has used most of its Recovery Act funds to date for pavement improvement projects, including 30 percent of funds for resurfacing projects and 43 percent of funds for reconstructing or rehabilitating deteriorated roads. Massachusetts officials told us that the focus of its projects for reconstructing and rehabilitating roads, as well as the focus of future project selections, is to select projects that promote the state’s broader long-term economic development goals. For example, according to Massachusetts officials, the Fall River development park project supports an economic development project and includes construction of a new highway interchange and new access roadways to a proposed executive park. FHWA officials expressed concern that Massachusetts may be pursuing ambitious projects that run the risk of not meeting Recovery Act requirements that all funds be obligated by March 2010. Recovery Act highway funding is apportioned under the rules governing the Federal-Aid Highway Program generally and its Surface Transportation Program in particular, and states have wide latitude and flexibility in which projects are selected for federal funding. However, the Recovery Act tempers that latitude with requirements that do not exist in the regular program, including the following requirements: States are required to ensure that all apportioned Recovery Act funds—including suballocated funds—are obligated within 1 year (before Mar. 2, 2010). The Secretary of Transportation is to withdraw and redistribute to eligible states any amount that is not obligated within this time frame. Any Recovery Act funds that are withdrawn and redistributed are available for obligation until September 30, 2010. Give priority to projects that can be completed within 3 years and to projects located in economically distressed areas. Distressed areas are defined by the Public Works and Economic Development Act of 1965, as amended. According to this act, to qualify as an economically distressed area, the area must (1) have a per capita income of 80 percent or less of the national average; (2) have an unemployment rate that is, for the most recent 24-month period for which data are available, at least 1 percent greater than the national average unemployment rate; or (3) be an area the Secretary of Commerce determines has experienced or is about to experience a “special need” arising from actual or threatened severe unemployment or economic adjustment problems resulting from severe short-or long-term changes in economic conditions. In response to our recommendation, FHWA, in consultation with the Department of Commerce, issued guidance on August 24, 2009, that provided criteria for states to use for designating special needs areas for the purpose of Recovery Act funding. Certify that the state will maintain the level of spending for the types of transportation projects funded by the Recovery Act that it planned to spend the day the Recovery Act was enacted. As part of this certification, the governor of each state is required to identify the amount of funds the state plans to expend from state sources from February 17, 2009, through September 30, 2010. The first Recovery Act requirement is that states have to ensure that all apportioned Recovery Act funds—including suballocated funds—are obligated within 1 year. Over seventy-five percent of apportioned Recovery Act highway funds had been obligated as of November 16, 2009, both nationwide and among the 16 states and the District. Nine states and the District have higher obligation rates than the national average, including Iowa and the District—for which FHWA has obligated 96 percent and 86 percent of funds, respectively. Conversely, Arizona, Massachusetts, Ohio, and Texas have obligation rates of between 52 percent and 62 percent of apportioned funds. Officials at FHWA and state department of transportation officials in the states we reviewed generally believe that these states are on track to meet the March 2010 1-year deadline. However, two factors may affect some states’ ability to meet the 1-year requirement. First, many state and local governments are awarding contracts for less than the original estimated cost. This allows states to use the savings from lower contract awards for other projects, but additional projects funded with deobligated funds must be identified quickly. In order to use the savings resulting from the lower contract awards, a state must request FHWA to deobligate the difference between the official estimate and the contract award amount and then obligate funds for a new project. Our analysis of contract award data shows that for the 10 states and the District, the majority of contracts are being awarded for less than the original cost estimates. While there is a variation in the number of contracts being awarded for lower than their original estimates, every state we collected information from awarded at least half of its contracts for less than the original cost estimates. Some states had an extremely high number of contracts awarded at lower amounts. For example, California, Georgia, and Texas awarded more than 90 percent of their contracts for less than their cost estimates. We also found a significant variation in both the average amount and the range of the savings from contracts awarded at lower amounts. For example, in the District and Georgia, such contracts averaged more than 30 percent less than original state estimates, while in Colorado and Massachusetts, such contracts averaged under 15 percent less than original state estimates. In addition, there is also a significant range in individual projects, with the savings ranging from less then 1 percent under estimates in a number of states to almost 55 percent under estimates in New York and over 90 percent under in Illinois. Federal regulations require states to promptly review and adjust project cost estimates on an ongoing basis and at key decision points, such as when the bid is approved. Many state officials told us that their state has already started the process of ensuring funds are deobligated and obligated to other highway programs and projects by the 1-year deadline. For example, in Colorado, officials are planning to use Recovery Act funds that are being deobligated by FHWA for 5 new projects, while in California, FHWA deobligated approximately $108.5 million and the state has identified 16 new state projects for Recovery Act funding. FHWA officials told us they recognize the need to develop a process to monitor and ensure deobligation of Recovery Act funds from known savings before the 1-year deadline. A second factor that may affect some states’ ability to meet the 1-year requirement is that obligations for projects in suballocated areas, while increasing, are generally lagging behind obligations for statewide projects in most states and lagging considerably behind in a few states. In the 16 states and the District, 79 percent of apportioned statewide funds had been obligated as of October 31, 2009, while 65 percent of suballocated funds had been obligated. Figure 7 shows obligations for statewide and suballocated areas in the 16 states and the District. As shown in figure 7, and as we reported in September 2009, FHWA has obligated substantially fewer funds suballocated for metropolitan and local areas in three states. While the national average for obligations of Recovery Act funds for suballocated areas is 63 percent, as of October 31, New Jersey, Massachusetts, and Arizona had obligation rates of 34 percent, 31 percent, and 18 percent of these funds, respectively. Officials in these three states cited a number of reasons for this—including lack of familiarity by local officials with federal requirements and increased staff workload associated with Recovery Act projects—and reported they were taking a number of actions to increase obligations, such as imposing internal deadlines on local governments to identify and submit projects. As of October 2009, Arizona had awarded four contracts (one more than it had as of September 2009) representing $29 million of the $157 million of suballocated funds. This represents 18 percent of suballocated funds—–a decline from the 21 percent of suballocated funds that had been obligated when we reported in September 2009. Arizona Department of Transportation officials told us that although one new contract had been awarded, the state’s total obligation of suballocated funds had declined because some suballocated funds were deobligated after more contracts were awarded for less than the estimated amount. Officials also told us that if local governments are not able to advertise contracts for construction in suballocated areas prior to the March 2010 deadline, the state would use Recovery Act funds on “ready-to-go” statewide highway projects in those areas. Similarly, officials in two localities told us that if projects intended for Recovery Act funds were in danger of not having funds obligated by the deadline, they would use those funds on projects now slated to be funded with state dollars and use state funding for other projects. Although states are working to have all of their suballocated funds obligated before March 2010, failure to do so will not prohibit them from participating in the redistribution of Recovery Act funds after March 2, 2010. The Secretary of Transportation is to withdraw highway funds, including suballocated funds, which are not obligated before March 2, 2010. States that have obligated all of the funds that were apportioned for use by the state (those that were not suballocated) are eligible to participate in this redistribution, regardless of whether all of the state’s suballocated funds have been obligated. FHWA is in the process of developing guidance on the redistribution of any Recovery Act funding that remains unobligated one year after apportionment. According to DOT officials, consistent with the Recovery Act, FHWA currently plans to model this redistribution after the process used each year in the regular federal-aid highway program to redistribute obligation authority, allowing Recovery Act funds redistributed to the states to be available for any qualified project in a state. The second Recovery Act requirement is to give priority to projects that are project to be completed in three years or are located in economically distressed areas. In July and September 2009, we identified substantial variation in the extent to which states prioritized projects in economically distressed areas and how they identified these areas. For example, we found instances of states developing their own eligibility requirements for economically distressed areas using data or criteria not specified in the Public Works and Economic Development Act. State officials told us they did so to respond to rapidly changing economic conditions. In response to our recommendation, FHWA, in consultation with the Department of Commerce, issued guidance to the states in August 2009 on identifying and giving priority to economically distressed areas and criteria to identify “special need” economically distressed areas that do not meet the statutory criteria in the Public Works Act. In its guidance, FHWA directed states to maintain information as to how they identified, vetted, examined, and selected projects located in economically distressed areas and to provide FHWA’s division offices with documentation that demonstrates satisfaction of the “special need” criteria. FHWA issued additional questions and answers relating to economically distressed areas in November 2009. Widespread designations of special needs areas give added preference to highway projects for Recovery Act funding; however, they also make it more difficult to target Recovery Act highway funding to areas that have been the most severely impacted by the economic downturn. Three of the states we reviewed—Arizona, California, and Illinois—had each developed and applied its own criteria for identifying economically distressed areas, and in two of the three states, applying the new criteria increased the number of areas considered distressed. In California, the number of counties considered distressed rose from 49 to all 58 counties, while in Illinois, the number of distressed areas increased from 74 to 92 of the state’s 102 counties. All 15 counties in Arizona were considered distressed under the state’s original determination and remained so when the state applied the revised criteria. FHWA officials told us they expected the number of “special needs” distressed areas to increase when the new guidance was applied. We plan to continue to monitor the states’ implementation of DOT’s economically distressed area guidance. The third Recovery Act requirement is for states to certify that they will maintain the level of state effort for programs covered by the Recovery Act. As we reported in September 2009, most states revised the initial explanatory or conditional certifications they submitted to DOT after DOT’s April 22, 2009, guidance required states to recertify without conditions. All states that submitted conditional certifications submitted a second maintenance of effort certification to DOT without conditions, and DOT concluded that the form of each state certification was consistent with its April guidance. In June 2009, FHWA began to review each state’s maintenance of effort calculation to determine whether the method of calculation was consistent with DOT guidance and the amounts reported by the states for planned expenditures for highway investment was reasonable. For example, FHWA division offices evaluated, among other things, whether the amount certified (1) covered the period from February 17, 2009, through September 30, 2010, and (2) included in-kind contributions. FHWA division staff then determined whether the state certification needed (1) no further action, (2) further assessment, or (3) additional information. In addition, according to FHWA officials, their assessments indicated that FHWA needed to clarify the types of projects funded by the appropriations and the types of state expenditures that should be included in the maintenance of effort certifications. As a result of these findings, DOT issued guidance in June, July, and September 2009 and plans to issue additional guidance on these issues. In August 2009, FHWA staff in headquarters reviewed the FHWA division staff findings for each sate and proceeded to work with each FHWA division office to make sure their states submit revised certifications that will include the correct planned expenditures for highway investment— including aid to local agencies. FHWA officials said that of the 16 states and the District that we reviewed for this study, they currently expect to have 12 states submit revised certifications for state highway spending, while an additional 2 states are currently under review and may have to revise their certifications. DOT officials stated they have not determined when they will require the states to submit their revised consolidated certification. According to these officials, they want to ensure that the states have enough guidance to ensure that all programs covered by the Recovery Act maintenance of effort provisions have completed their maintenance of effort assessments and that the states have enough guidance to ensure that this is the last time that states have to amend their certifications. Most state officials we spoke with are committed to trying to meet their maintenance of effort requirements, but some are concerned about meeting the requirements. As we have previously reported, states face drastic fiscal challenges. States’ fiscal year 2009 revenue collections fell below fiscal year 2008 collections and revenue collections are expected to continue their decline in fiscal 2010. Although the state officials we spoke with are committed to trying to meet the maintenance of effort requirements, officials from seven state departments of transportation told us the current decline in state revenues creates major challenges in doing so. For example, Iowa, North Carolina, and Pennsylvania transportation officials said their departments may be more difficult to maintain their levels of transportation spending if state gas tax and other revenues, which are used to fund state highway and state-funded transportation projects, decline. In addition, Georgia officials also stated that reduced state gas tax revenues pose a challenge to meeting its certified level of effort. Lastly, Mississippi and Ohio transportation officials stated that if their state legislatures reduce their respective department’s budget for fiscal year 2010 or 2011, the department may have difficulty maintaining its certified spending levels. The Recovery Act appropriated $8.4 billion to fund public transit throughout the country mainly through three existing Federal Transit Administration (FTA) grant programs, including the Transit Capital Assistance Program and the Fixed Guideway Infrastructure Investment program. The majority of the public transit funds—$6.9 billion (82 percent)—was apportioned for the Transit Capital Assistance Program, with $6 billion designated for the urbanized area formula grant program and $766 million designated for the nonurbanized area formula grant program. Under the urbanized area formula grant program, Recovery Act funds were apportioned to large and medium urbanized areas—which in some cases include a metropolitan area that spans multiple states— throughout the country according to existing program formulas. Recovery Act funds were also apportioned to states for small urbanized areas and nonurbanized areas under the formula grant programs using the program’s existing formula. Transit Capital Assistance Program funds may be used for such activities as facilities renovation or construction, vehicle replacements, preventive maintenance, and paratransit services. Up to 10 percent of apportioned Recovery Act Transit Capital Assistance funds may also be used for operating expenses. The Fixed Guideway Infrastructure Investment program was appropriated $750 million, of which $742.5 million was apportioned by formula directly to qualifying urbanized areas. The funds may be used for any capital projects to maintain, modernize, or improve fixed guideway systems. The maximum federal fund share for projects under the Recovery Act’s Transit Capital Assistance Program and the Fixed Guideway Infrastructure Investment program is 100 percent; the federal share under the existing programs is generally 80 percent. As they work through the state and regional transportation planning process, designated recipients of the apportioned funds—typically public transit agencies and metropolitan planning organizations (MPO)—develop a list of transit projects that project sponsors (typically transit agencies) submit to FTA for Recovery Act funding. FTA reviews the project sponsors’ grant applications to ensure that projects meet eligibility requirements and then obligates Recovery Act funds by approving the grant application. Project sponsors must follow the requirements of the existing programs, which include ensuring the projects funded meet all regulations and guidance pertaining to the Americans with Disabilities Act (ADA), pay a prevailing wage consistent with federal Davis-Bacon Act requirements, and comply with goals to ensure disadvantaged businesses are not discriminated against in the awarding of contracts. In March 2009, $6.9 billion was apportioned to states and urbanized areas in all 50 states, the District, and five territories for transit projects and eligible transit expenses under the Recovery Act’s Transit Capital Assistance Program and $750 million was apportioned to qualifying urbanized areas under the Recovery Act’s Fixed Guideway Infrastructure Investment program. As of November 5, 2009, almost $6 billion of the Transit Capital Assistance Program funds had been obligated nationwide and $738 million of the Fixed Guideway Infrastructure Investment program funds has been obligated nationwide. Almost 88 percent of Recovery Act Transit Capital Assistance Program obligations are being used for upgrading transit facilities, improving bus fleets, and conducting preventive maintenance. As we reported in September 2009, many transit agency officials told us they decided to use Recovery Act funding for these types of projects since they are high- priority projects that support their agencies short- and long-term goals, can be started quickly, improve safety, or would otherwise not have been funded. This continues to be the case. In particular: Transit infrastructure facilities: $2.8 billion, or 47 percent, of these funds obligated nationally have been for transit infrastructure construction projects and related activities, which range from large- scale projects, such as upgrading power substations, to a series of smaller projects, such as installing enhanced bus shelters. For example, in Pennsylvania, the Lehigh and Northampton Transportation Authority will implement a new passenger information technology system, install enhanced bus shelters and signage, and fund a new maintenance facility. Elsewhere, in North Carolina, the Charlotte Area Transit System will renovate its bus operating and maintenance facilities. In addition, in California, the San Diego Association of Governments plans to upgrade stations on a light-rail line and replace a section of a railroad trestle bridge. Bus fleets: $2 billion, or 33 percent, of Recovery Act Funds obligated nationally have been for bus purchases or rehabilitation to replace aging vehicles or expand an agency’s fleet. For example, in Pennsylvania, the Lehigh and Northampton Transportation Authority plans to purchase 5 heavy-duty hybrid buses and the Southeastern Pennsylvania Transportation Authority plans to purchase 40 hybrid buses. In Iowa, the state’s smaller transit agencies are combining bus orders through the state’s department of transportation for 160 replacement buses and 20 buses to expand bus fleets in areas of growth around the state. In Colorado, both the Regional Transportation District in Denver and the Fort Collins-Transfort agency plan to purchase 6 buses each. Preventive maintenance: Another $515 million, or 9 percent, has been obligated for preventive maintenance. FTA considers preventive maintenance projects eligible capital expenditures under the Transit Capital Assistance Program. The remaining funds have been used for rail car purchases and rehabilitation, leases, training, financing costs, and, in some limited cases, operating expenses—all of which are eligible expenditures. In particular, transit agencies reported using $5.2 million, or less than 1 percent, of the Transit Capital Assistance Program funds obligated by FTA for operating expenses. For example, the Des Moines transit agency has proposed to use approximately $788,800 for operating expenses, such as costs associated with personnel, facilities, and fuel. Funds from the Recovery Act Fixed Guideway Infrastructure Investment program may also be used for transit improvement projects, which could include fixed guideway transit facilities and equipment. Recipients may use the funding on any capital purpose to include purchasing of rolling stock, improvements to rail tracks, signals and communications, and preventive maintenance. For example, in New York, FTA approved a $254.4 million grant from Recovery Act Fixed Guideway Infrastructure Investment funds to Metropolitan Transportation Authority for a variety of maintenance and safety improvement projects, including the Jackson Avenue Vent Plant Rehabilitation project in Long Island City. In addition, the northeastern Illinois’s Regional Transportation Authority is planning on using $95.5 million that was obligated from the Fixed Guideway Infrastructure Investment program to provide capital assistance for the modernization of existing fixed guideway systems. Metra (a regional commuter rail system that is part of the authority) plans to use these funds, in part, to repair tracks and rehabilitate stations. As we reported in September, recipients of transit Recovery Act funds, such as state departments of transportation and transit agencies, are subject to multiple reporting requirements. First, under section 1201(c) of the Recovery Act, recipients of transportation funds must submit periodic reports to DOT on the amount of federal funds appropriated, allocated, obligated, and reimbursed; the number of projects put out to bid, awarded, or for which work has begun or been completed; and the number of direct and indirect jobs created or sustained, among other things. DOT is required to collect and compile this information for Congress, and it issued its first report to Congress in May 2009. Second, under section 1512, recipients of Recovery Act funds, including but not limited to transportation funds, are to report quarterly on a number of measures, such as the use of funds and the number of jobs created or retained. To help recipients meet these reporting requirements, DOT and OMB have provided training and guidance. For example, DOT, through FTA, conducted a training session consisting of six webinars to provide information on the 1201(c) reporting requirements, such as who should submit these reports and what information is required. In addition, FTA issued guidance in September 2009 that provided a variety of information, including definitions of data elements. OMB also issued implementing guidance for section 1512 recipient reporting. For example, on June 22, 2009, OMB issued guidance to dispel some confusion related to reporting on jobs created and retained by providing, among other information, additional detail on how to calculate the relevant numbers. Despite this guidance, we reported in September that transit officials expressed concerns and confusion about the reporting requirement, and therefore we recommended that DOT continue its outreach to transit agencies to identify common problems in accurately fulfilling reporting requirements and provided additional guidance, as appropriate. In responding to our recommendation, DOT said that it had conducted outreach, including providing technical assistance, training and guidance, to recipients and will continue to assess the need to provide additional information. Through our ongoing audit work, we continued to find confusion among recipients about how to calculate the numbers of jobs created and saved that is required by DOT and OMB for their reporting requirements. First, a number of transit agencies continue to express confusion about calculating the number of jobs resulting from Recovery Act funding, especially with regard to using Recovery Act funds for purchasing equipment, such as new buses. For the section 1201(c) reporting requirement, transit agencies are not to report any jobs created or sustained from the purchase of buses. However, for the section 1512 recipient reporting requirement, transit agencies were required to report jobs created or retained from bus purchases, as long as these purchases were directly from the bus manufacturers and not from dealer lots. FTA held an outreach session in September 2009 with representatives from bus manufacturers and the American Public Transportation Association in an effort to standardize 1512 reporting methods and clarify recipient responsibilities under the federal recipient reporting requirements. FTA, the represented manufacturers, and American Public Transportation Association discussed a standardized methodology that was established by the Office of Management and Budget for calculating the number of jobs created or retained by a bus purchase with Recovery Act funds. Under the agreed-upon methodology, bus manufacturers are to divide their total U.S. employment by their total U.S. production to determine a standard “full- time equivalents” (FTE)-to-production ratio. The bus manufactures would then multiple that FTE-to-production ratio by a standard full-time schedule in order to provide transit agencies with a standard ‘direct job hours”-to- production ratio. This ratio is to include hours worked by administrative and support staff, so that the ratio reflects total employment. Bus manufacturers are to provide this ratio to the grantees, usually transit agencies, which then the grantee can use to calculate the number of jobs created or retained by a bus purchase. FTA officials told us that the selected group of bus manufacturers and FTA agreed that this methodology—which allows manufacturers to report on all purchases, regardless of size—simplifies the job reporting process. According to guidance, it is the responsibility of the transit agency to contact the manufacturer and ask how many jobs were related to that order. The manufacturers, in turn, are responsible for providing the transit agencies with information on the jobs per bus ratio at the time when buses are delivered. If the manufacturers cannot give the agencies a jobs estimate, the transit agencies must develop their own estimate. While representatives from the bus manufacturers we interviewed were using the agreed-upon methodology, there were a number of different issues that were highlighted. Representatives from two bus manufacturers reported not knowing about the FTA methodology and used their own measures for jobs created or retained. For example, representatives from two manufacturers told us that the labor-hours required to produce a bus formed the basis for their calculation of FTEs and was then pro-rated based upon the amount of production taking place in the United States and the purchase amount funded by Recovery Act dollars. One bus manufacturer representative said it was difficult to pro-rate the jobs calculation by the proportion funded by the Recovery Act, as the agreed-upon methodology requires, since they did not always receive this information from the transit agencies. According to FTA officials, the manufacturer is only responsible for reporting the ratio of jobs created or retained per bus produced; the purchasing transit agencies are responsible for the pro-rating and final calculation of jobs created or retained. However, even bus manufacturers that were otherwise aware of FTA guidance and following FTA’s methodology would sometimes calculate the total number of jobs created or retained by a purchase. The second area of confusion we found involved the methodology recipients were using to calculate full-time equivalents for the recipient reporting requirements. As we reported in our November 2009 report on recipient reporting, the data element on jobs created or retained expressed in FTEs raised questions and concerns for some recipients. In section 5.2 of the June 22 guidance, OMB states that “the estimate of the number of jobs required by the Recovery Act should be expressed as FTE, which is calculated as the total hours worked in jobs retained divided by the number of hours in a full-time schedule, as defined by the recipient.” Further, “the FTE estimates must be reported cumulatively each calendar quarter.” In addition to issuing guidance, OMB and DOT provided several types of clarifying information to recipients as well as opportunities to interact and ask questions or receive help with the reporting process. However, FTE calculations varied depending on the period of performance the recipient reported on, and we found examples where the issue of a project period of performance created significant variation in the FTE calculation. For example, in Pennsylvania, each of four transit entities we interviewed used a different denominator to calculate the number of full-time equivalent jobs they reported on their recipients reports for the period ending September 30, 2009. Southeastern Pennsylvania Transportation Authority in Philadelphia used 1,040 hours as its denominator, since it had projects under way in two previous quarters. Port Authority of Allegheny County prorated the hours based on the contractors’ start date, as well as to reflect that hours worked from September were not included due to lag time in invoice processing; Port Authority used 1,127 hours for contractors starting before April, 867 hours for contractors starting in the second quarter, and 347 hours for contractors starting in the third quarter. Lehigh and Northampton Transportation Authority in Allentown used 40 hours in the 1512 report they tried to submit, but, due to some confusion about the need for corrective action, the report was not filed. Finally, the Pennsylvania Department of Transportation in the report for nonurbanized transit agencies reported using 1,248 hours, which was prorated by multiplying 8 hours per workday times the 156 workdays between February 17 and September 30, 2009. In several other of our selected states, this variation across transit programs’ period of performance for the FTE calculation also occurred. Our November report provided additional detail and recommendations to address the problems and confusion associated with how FTEs were calculated in the October recipient report. GAO’s review of states’ use of Recovery Act funds covers three programs administered by the U.S. Department of Education (Education)—the State Fiscal Stabilization Fund (SFSF); Title I, Part A of the Elementary and Secondary Education Act of 1965 (ESEA), as amended; and the Individuals with Disabilities Education Act (IDEA), as amended. As part of this review, GAO surveyed a representative sample of local education agencies (LEA)—generally, school districts—nationally and in 16 states and the District of Columbia about their planned uses of Recovery Act funds for each of these programs. State Fiscal Stabilization Fund. The State Fiscal Stabilization Fund (SFSF) included approximately $48.6 billion to award to states by formula and up to $5 billion to award to states as competitive grants. The Recovery Act created the SFSF in part to help state and local governments stabilize their budgets by minimizing budgetary cuts in education and other essential government services, such as public safety. Stabilization funds for education distributed under the Recovery Act must first be used to alleviate shortfalls in state support for education to LEAs and public institutions of higher education (IHE). States must use 81.8 percent of their SFSF formula grant funds to support education (these funds are referred to as education stabilization funds) and must use the remaining 18.2 percent for public safety and other government services, which may include education (these funds are referred to as government services funds). For the initial award of SFSF formula grant funds, Education awarded at least 67 percent of the total amount allocated to each state, but states had to submit an application to Education to receive the funds. The application required each state to provide several assurances, including that the state will meet maintenance-of-effort requirements (or will be able to comply with the relevant waiver provisions) and that it will implement strategies to advance four core areas of education reform, as described by Education: (1) increase teacher effectiveness and address inequities in the distribution of highly qualified teachers; (2) establish a pre-K-through-college data system to track student progress and foster improvement; (3) make progress toward rigorous college- and career-ready standards and high-quality assessments that are valid and reliable for all students, including students with limited English proficiency and students with disabilities; and (4) provide targeted, intensive support and effective interventions to turn around schools identified for corrective action or restructuring. In addition, states were required to make assurances concerning accountability, transparency, reporting, and compliance with certain federal laws and regulations. After maintaining state support for education at fiscal year 2006 levels, states must use education stabilization funds to restore state funding to the greater of fiscal year 2008 or 2009 levels for state support to LEAs and public IHEs. On November 12, 2009, Education published final requirements for Phase II applications for SFSF, which states must submit by January 11, 2010. The Department also published additional guidance for Phase II applications in December 2009. According to the Phase II application, in order to receive the remainder of their SFSF allocation, states must agree to collect and publicly report on over 30 indicators and descriptors related to the four core areas of education reform described above. Additionally, states generally must, among other things, provide confirmation that they maintained support for education in 2009 at least at the level of such support in fiscal year 2006 and reaffirm or provide updated information that they will maintain state support in 2010 and 2011. When distributing these funds to LEAs, states must use their primary education funding formula, but they can determine how to allocate funds to public IHEs. In general, LEAs have broad discretion in how they can use education stabilization funds, but states have some ability to direct IHEs in how to use these funds. ESEA Title I, Part A. The Recovery Act provides $10 billion to help LEAs educate disadvantaged youth by making additional funds available beyond those regularly allocated through Title I, Part A of the Elementary and Secondary Education Act of 1965 (ESEA), as amended. The Recovery Act requires these additional funds to be distributed through states to LEAs using existing federal funding formulas, which target funds based on such factors as high concentrations of students from families living in poverty. In using the funds, LEAs are required to comply with applicable statutory and regulatory requirements and must obligate 85 percent of the funds by September 30, 2010. Education is advising LEAs to use the funds in ways that will build the agencies’ long-term capacity to serve disadvantaged youth, such as through providing professional development to teachers. IDEA, Parts B and C. The Recovery Act provided supplemental funding for programs authorized by Parts B and C of the Individuals with Disabilities Education Act (IDEA) as amended, the major federal statute that supports early intervention and special education and related services for children, and youth with disabilities. Part B provides funds to ensure that preschool and school-age children with disabilities have access to a free and appropriate public education and is divided into two separate grant programs—Part B grants to states (for school-age children) and Part B preschool grants. Part C funds programs that provide early intervention and related services for infants and toddlers with disabilities—or at risk of developing a disability—and their families. Education funding in the United States primarily comes from state and local governments. Prior to the influx of Recovery Act funding for education from the federal government, LEAs, on average, derived about 48 percent of their fiscal year 2007 funding budget from state funds, 44 percent from local funds, and 9 percent from federal funds. These percentages, however, likely shifted due to increased federal Recovery Act funds and reductions in some state budgets for education. While the federal role in financing public education has historically been a limited one, the federal funds appropriated under the Recovery Act provide a significant but temporary increase in federal support for education to states and localities in part to help them address budget shortfalls. According to CRS, the Recovery Act provided approximately $100 billion for discretionary education programs—elementary, secondary, and postsecondary—in fiscal year 2009, which, when combined with regular appropriations, represents about a 235 percent increase in federal funding compared to fiscal year 2008. According to our survey, however, even with the current infusion of Recovery Act funding for education programs, the budget condition of LEAs across the country is mixed. Based on our national survey results, we estimate that approximately the same amount of LEAs—17 percent— face decreases of 5 percent or more in total education funding as face funding increases for the current school year. On the other hand, an estimated 57 percent of LEAs reported smaller or no funding changes for the current school year. Changes to LEA budgets for the current school year varied substantially depending on the source of the funding—federal, state, or local government. Figure 9 shows the estimated percentage of LEAs nationally that are facing budget fluctuations of 5 percent or more by funding source. For the current school year, we estimate that 50 percent of LEAs nationwide received such funding increases from the federal government. By contrast, however, state funding cuts of 5 percent or more were common for many LEAs across the country. According to our survey, an estimated 41 percent of LEAs across the country are seeing state funding cuts of 5 percent or more for education. By contrast, an estimated 6 percent of LEAs report similar decreases from the federal government for the current school year. Regarding local funds, an estimated 9 percent of LEAs reported increases of 5 percent or more and 17 percent reported decreases of the same magnitude. For LEAs, a cut in state or local funds may only be partially offset by an increase in federal funds because LEAs, on average, receive a much higher proportion of their funds from state and local governments than from the federal government. While the national results of our survey show a mixed budgetary picture for LEAs, sizable funding cuts to LEA overall budgets were concentrated in a few of the states on which we are focusing our Recovery Act review— California, North Carolina, and Georgia (see fig. 10). In California, for example, a majority of LEAs in the state—an estimated 67 percent—are experiencing declines of 5 percent or more in their overall education budgets this year. We previously reported that, in California, the state legislature authorized substantial budget cuts in order to balance the fiscal year 2009-2010 budget, with funding for education making up a large part of the reduction—$6.5 billion was cut from K-12 and community college funding in July alone. According to officials at Los Angeles Unified School District—the largest LEA in the state—the LEA faces steep drops in state revenue in education in fiscal year 2009-2010. In addition to California, we estimate that nearly 40 percent of LEAs in both Georgia and North Carolina face overall funding cuts of 5 percent or more, well above the national average of 17 percent. According to the Department of Public Instruction in North Carolina, the economic recession has resulted in significant declines in state revenues for education, with federal Recovery Act funding offsetting only a portion of the state cuts. For example, one North Carolina LEA reported that the current year budget process was difficult, with federal Recovery Act funding “softening the blow” of state and local funding cuts but not completely compensating for the reductions. In other states, however, many LEAs report total funding increases for education of 5 percent or more for the current school year. According to our survey, about 30 percent of LEAs in Texas, Mississippi, and New Jersey reported total education funding increases of 5 percent or more. Our survey results indicate that much of the Recovery Act funds for education are being used by LEAs to retain staff. An estimated 64 percent of LEAs nationally reported giving very great or great importance to retaining jobs when deciding how to spend Recovery Act funds. Because employee-related expenditures are the largest category of school expenditures—with salaries and benefits accounting for more than 80 percent of local school expenditures, according to Education’s most recent estimates —it is understandable that LEAs would use some of their Recovery Act funds for staff salaries. Also, given the fiscal uncertainty and substantial budget shortfalls facing states, federal funds authorized by the Recovery Act provide LEAs with additional support for the retention of education staff. Overall, the impact of Recovery Act education funds on job retention may be significant because K-12 public school systems employ about 6.2 million staff, based on Education’s estimates, and make up about 4 percent of the nation’s workforce. Retaining Jobs Was LEAs’ Top Use for Recovery Act Funds across Three Education Programs Job retention was the top planned use for Recovery Act funds for LEAs across the three federal Education programs GAO reviewed. Figure 11 shows the national results of the estimated percentages of LEAs that reported planning to use more than 50 percent of their Recovery Act funds under SFSF, IDEA, Part B, and ESEA Title I, Part A to retain and create education jobs. An estimated 63 percent of LEAs, the highest percentage among the 3 programs we reviewed, plan to use Recovery Act SFSF funds to retain jobs. In contrast, an estimated 25 percent and 19 percent of LEAs said they planned to use over half of their Recovery Act funds on job retention under ESEA Title I, Part A and IDEA, Part B, respectively. Overall, the percentages of LEAs that reported planning to use Recovery Act funds to create jobs were lower than the percentages planning to retain jobs, with an estimated 11 percent under ESEA Title I, 7 percent under IDEA, and 3 percent under SFSF planning to create jobs. State education officials reported a variety of factors that may help explain why LEAs reported planning to use Recovery Act funds to retain jobs. In particular, officials noted that SFSF funds provided flexibility in how they could be used. For example, one state education official noted that LEAs have more flexibility in spending SFSF funds for general education expenses because ESEA Title I and IDEA programs target special populations---disadvantaged youth and students with disabilities, respectively. This official said that because funding levels for general education programs in his state have decreased while federal funding levels for ESEA Title I and IDEA programs have increased, LEAs have used SFSF funds to shore up funding for general education and, in particular, preserve jobs. The percentage of LEAs reporting they planned to use over 50 percent of their Recovery Act education funds to retain jobs varied considerably by state. In particular, Georgia, Michigan, Florida, New Jersey, New York and North Carolina were among the states with the highest percentages of LEAs that reported planning to use over half their SFSF funds for job retention (see fig. 12). North Carolina, Iowa, New York, Georgia, Florida and Michigan were among the states with the highest percentages of LEAs that reported they planned to use over half of their ESEA Title I or IDEA Recovery Act funds for this purpose (see fig. 12). LEA officials described the use of Recovery Act funds to retain staff in the context of decreasing state and local education funds. For example, education officials in New York City told us that Recovery Act funds helped the city reduce a total education budget gap of nearly $1.46 billion to $400 million for the current school year and avoid teacher layoffs. In the small, rural school district of Jasper-Troupsburg in upstate New York, district officials told us they were facing a budget gap of $250,000. They said they would use 95 percent of their Recovery Act funds to retain jobs. Without these funds, the district would have been forced to cut teachers’ salaries and reduce work hours, as well as lay off 8 to 10 teachers out of 60 teachers, according to LEA officials. Similarly in Charlotte-Mecklenburg, North Carolina, LEA officials told us that Recovery Act funds allowed the district to compensate for reductions in state aid and local funds and that a large portion of these funds enabled the district to retain education jobs. In another LEA in Arizona, officials explained that with Recovery Act funds, they were able to offer contracts to all teachers who were returning, but without these funds the extent to which they would have had to reduce staff positions is unclear. They speculated that, absent Recovery Act funds, other cost-cutting measures might have included decreasing staff salaries and benefits. Some LEAs used Recovery Act funds to hire new staff. When planning how to spend Recovery Act funds, an estimated 17 percent of LEAs nationally reported creating jobs as of very great or great importance during the decision-making process. Officials at the Arlington Elementary School District, a rural LEA in Arizona containing a single school, said that IDEA Recovery Act funds would help the district add a special education teacher to the one they currently have. They said the timing of the Recovery Act funds was important to their district because of the addition of three new students with disabilities to the school. Without the IDEA Recovery Act funds they received, they said they would have had to draw funds away from general education needs, which would have meant combining classes and eliminating a position. Similarly, in Weldon City Schools in North Carolina, officials reported that IDEA Recovery Act funds allowed the LEA to create teaching and teaching assistant positions for severely emotionally disturbed students. Without these funds, officials said they would have had to lay off two special education staff and would have been unable to provide the intensive support for students with disabilities. Education officials in some states said they are concerned about funding cliffs if LEAs use Recovery Act funds to create new positions. For example, an official at one LEA in New York state said district officials are concerned that using Recovery Act Title I funds may lead to a funding cliff and that the district may be unable to retain teachers hired with those funds once they expire. About a Third of LEAs Expected to Lose Jobs, Even with SFSF Funds An estimated 32 percent of LEAs nationally expected to lose jobs, even with SFSF funds, but the percentage of LEAs expecting to lose jobs varies by state. (See fig. 13.) Among the states with higher percentages of LEAs expecting job losses even with SFSF funds were Georgia, Florida, North Carolina, and California. According to our analysis, in all of these states except for Florida, the proportion of LEAs that experienced decreases of 5 percent or more in total education funding from last year was larger than the national average of 17 percent. For example, in Georgia 65 percent of LEAs reported that they expected to lose jobs even with SFSF funds, and 39 percent of LEAs also reported they experienced a total decrease in funds of 5 percent or more. State education officials in Georgia said that declining state and local revenues have forced many LEAs to cut their budgets and eliminate programs, resulting in a loss of jobs. Our analysis also found that the estimated percentage of the largest LEAs that reported expecting to lose jobs even with SFSF funds was higher than the national average. For example, officials at Charlotte- Mecklenburg Schools, the largest LEA in North Carolina, said the district was facing an $87 million reduction in state and county funding and sustained a net reduction of 769 positions after Recovery Act funds had been applied. While budget gaps may help explain the loss of jobs in some states and localities, there may be other factors that contribute to job loss. For example, Florida state officials noted that Florida’s declining student enrollment has meant that LEAs are retaining fewer staff. In planning how to spend Recovery Act funds for their LEAs, most local officials reported placing great importance on advancing educational goals and reform set forth in Education’s guidance on how best to use the funds (see fig 14). Specifically, we estimate that most LEAs—about 80 percent—gave great or very great importance to “improving results for students” in deciding how to use Recovery Act funds for their school districts. “Increasing educators’ long term capacity” was the next most cited, with approximately 70 percent of LEAs giving very great or great importance to this factor. A majority of LEAs considered “advancing district/reform and avoid recurring costs” as important factors when s when planning how to utilize the Recovery Act funding at their LEAs. planning how to utilize the Recovery Act funding at their LEAs. According to our survey, LEAs planned to spend some of their Recovery Act funds on items that could help build long-term capacity and advance educational goals and reform while also avoiding recurring costs for LEAs. Overall, LEAs reported several nonrecurring items such as purchasing technological equipment, including new computers; providing professional development for instructional staff; and purchasing instructional materials as among the highest uses of funds after job retention and creation. Figure 15 shows the national estimated percentages of LEAs that reported planning to use more than a quarter of their Recovery Act funds for these three nonrecurring budgetary items across the three education programs. Interviews with LEAs in a number of states illustrate the range of reform- oriented and capacity-building projects in these areas being supported with Recovery Act funds. For example, in the Los Angeles Unified School District, officials described using Recovery Act funds for a special education leadership academy for assistant principals to instruct them on compliance with special education requirements and working with teachers to implement effective instructional programs. In Weldon City Schools in North Carolina, LEA officials reported that IDEA Recovery Act funds would enable the district to provide more technology for children in their special education program, including updated computers and transition kits for occupational course study classrooms. Without these Recovery Act funds, officials said that technology funds for such a program would have been unavailable. At Buckeye Elementary School District in Arizona, officials said they used some of their IDEA Recovery Act funds as seed money for acquiring software needed to implement an educational initiative focusing on preventing the need for special education interventions and serving approximately 600 students with disabilities. LEAs must budget at least the same total or per capita amount of local funds for the education of children with disabilities as the LEA spent in the most recent prior year for which information is available. LEAs. Overall, among the 15 states in our study that had made LEA determinations related to their state performance plan this year, all but New York, Georgia, and Texas had experienced an increase in the number of LEAs that met requirements. State officials in states that experienced such increases attributed these increases to training, technical assistance and monitoring of indicators that were problematic for LEAs to meet in previous years. However, officials in some states also told us they had changed the criteria in their state performance plan this year. Others changed the determinations process by increasing the minimum number of students—called an “n” size or cell size—required for making calculations related to the state performance plan, which could effectively prevent some LEAs with small numbers of students from being evaluated in certain areas. If an LEA has fewer than the minimum number of special education students required for a particular target, the LEA’s data on that target would be considered “not applicable” and would not have bearing on the determination of whether the LEA met requirements. Officials in states that changed their determinations processes or criteria said that doing so made their plans and targets comparable to other states’ targets and helped ensure that expectations placed on LEAs were reasonable. Three states changed their determinations criteria and experienced large increases in the number of LEAs meeting requirements—Arizona, Michigan, and Ohio—while two others that increased their minimum “n” size also experienced large increases— California and Illinois. (See table 5.) Officials in Ohio told us that they changed the determinations criteria with the goal of increasing the number of LEAs that were determined to meet requirements, thereby giving most LEAs in the state the option to reduce their local spending. States have some discretion over their determinations process and criteria, but the Secretary of Education issued a letter to state education officials in October 2009 encouraging them to implement the LEA determinations process in a rigorous manner, with a focus on improving results for students with disabilities and ensuring that appropriate special education and related services are provided. According to some state officials, some LEAs were hesitant to utilize the reduced local expenditure flexibility in the past, because the increase in their allocation—and the amount of local or state funding that could be “freed up”—was small. However, this year, the amount of funding that can be “freed up” is larger than in prior years, and using this flexibility will give LEAs, some facing budgetary pressures, more flexibility in deciding how to spend their local funds. According to state officials, LEAs that take advantage of this flexibility will not necessarily reduce their local spending by the entire 50 percent allowed under the law, but some state officials said that some LEAs may reduce local spending because they have concerns about creating unsustainable funding commitments for special education, because services cannot be easily cut after Recovery Act funds are gone. In Ohio and Colorado, state officials said that this flexibility will allow LEAs to fund important services that will benefit both general education and special education students. Another option for LEAs seeking to benefit students in both general education and special education settings is to set aside up to 15 percent of their IDEA funds for Coordinated Early Intervening Services (CEIS), which can be used to serve students who have not been identified as having a disability. Mississippi state officials said that some of their LEAs plan to set aside funds for CEIS instead of using the flexibility to decrease local spending. This year, according to our survey, an estimated 44 percent of LEAs plan to use the reduced local expenditure flexibility to decrease local spending on students with disabilities, although the percentages vary across states: from 14 percent in New York to 72 percent in Iowa. (See fig. 16.) An estimated 48 percent of the largest LEAs planned to do so. However, officials in some states said they had advised LEAs about whether to use the flexibility, and state education officials in Colorado, Iowa, and Georgia said they expect many or all eligible LEAs to utilize the flexibility, whereas officials in the District of Columbia, Arizona, Mississippi, and Texas said they expect few, if any, to do so. As of November 6, 2009, states covered by our review had drawn down 46 percent ($8.4 billion) of the awarded education stabilization funds, 11 percent ($735 million) of Recovery Act funds for ESEA Title I, and 10 percent ($755 million) of Recovery Act funds for IDEA. Some states had drawn down a much larger portion of their funds than other states. For example, Arizona, California, Georgia, and Illinois had drawn down 83 percent or more of their awarded education stabilization funds, while the District of Columbia and Pennsylvania had not drawn down any funds. Pennsylvania had little time to draw down funds because it had just received approval for its SFSF application a few days earlier. The District of Columbia had not yet requested assurances from the LEAs that education stabilization funds would be used in accordance with federal requirements—the District requires such assurances before the LEAs obligate federal funds. In addition, the District of Columbia had not drawn down any of its Recovery Act funds for ESEA Title I or IDEA, Part B, in part, because it had not completed its review of LEA applications for these funds, according to District of Columbia officials. Although New Jersey had not drawn down any of its ESEA, Title I or IDEA Recovery Act funds as of November 6, the state drew down funds later in November. Department of Education officials report they continue to work with several states to provide clarification on the appropriate methods for managing cash flows under the newly created SFSF program. However, some state educational agencies (SEA) report that they need clarifying guidance on cash management issues before moving forward with guidance to LEAs. As we have reported, Recovery Act cash management issues in a number of states have been a concern to Education and the Education Office of Inspector General, and Education officials report that they are monitoring drawdowns of Recovery Act funds to help ensure that states are complying with federal requirements. In our recent discussions with Education officials regarding cash management, they said their guidance to SEAs and LEAs is to minimize the amount of time they hold federal funds before they need to spend them. Department of Education regulations require states to minimize the time elapsing between the transfer of the grant funds from the U.S. Treasury and disbursement by the states, and similarly require LEAs to minimize the time they hold funds before disbursing them. Regulations generally require subgrantees to calculate and remit any interest earned on advance payments made to them by states on at least a quarterly basis. In other words, the goal is to draw down the funds when they are needed and spend them immediately. Education officials told us that if LEAs retain federal cash balances of SFSF or other federal funds in interest bearing accounts, they are to calculate the interest due using the actual interest the funds have earned. These officials stated, however, that Education does not require LEAs to keep federal funds in interest bearing accounts. Further, according to Education officials, regulations do not require that LEAs calculate the interest due on each federal funding program separately. However, as we have previously reported, several states do not have cash management systems in place for SFSF funds that can disburse funds to LEAs when they are needed and ensure the calculation and remittance of any interest due. Officials in some of these states told us they are seeking clarifying guidance from Education on how to properly track and report on cash balances and interest earned. The Illinois State Board of Education (ISBE) does not have a mechanism in place to allow LEAs to draw down SFSF funds on an as- needed basis. As a result, the ISBE distributes the state’s share of SFSF funds as General State Aid payments—these payments are made based on a predetermined schedule (semimonthly, in equal installments). According to Education officials, the agency is working with the ISBE to develop a procedure to withhold future SFSF payments from LEAs that carry SFSF cash balances. In Arizona, state distribution of funding raised concerns at one LEA. LEA officials told us they had planned to pay the salaries of 15 teachers over the course of the school year with their SFSF funds, and they submitted a drawdown request for 1 month’s funding. However, the state unexpectedly sent the funding all at one time, and the LEA officials were concerned about having excess SFSF cash on hand at month’s end. LEA officials said they used the SFSF funds to pay all district salaries for that month, in order to be able to expend all funds in a timely manner. In our discussions with Education officials, they acknowledged there could be a cash management issue if an SEA is sending SFSF funds to LEAs in advance of the LEAs’ needing it. Education officials said they would need to look into this matter. As we previously reported, the California Department of Education (CDE) has recently implemented a pilot program to monitor LEA cash balances. CDE officials report they are currently developing interest calculation procedures for LEAs, including for Recovery Act SFSF fund balances. Education officials said they have been in communication with CDE about that agency’s efforts to develop procedures for LEA calculation of interest on SFSF funds and other federal cash balances. Education officials told us they are waiting to make a decision on CDE’s proposed interest calculation procedures until they receive the proposal in writing from CDE. CDE officials told us they would issue further cash management instruction to LEAs when the issue is resolved. New Jersey Department of Education (NJED) officials reported that they currently have a system in place to monitor SFSF cash balances. They said they instruct LEAs to remit any interest over $100 earned on SFSF cash balances back to the federal government; however, they do not expect LEAs to accrue interest on SFSF funds because the LEAs plan to use the funds each month to pay salaries. State officials told us they monitor LEA SFSF expenditures on a quarterly basis to determine LEA cash needs for the following quarter. If an LEA spends less than 90 percent of the payments issued that quarter, the NJED withholds payments until the LEA’s expenditures exceed 90 percent. Our survey estimates show that a majority of LEAs nationwide found Education’s guidance on allowable uses for IDEA, ESEA Title I, and SFSF Recovery Act funds to be very adequate, adequate, or neither adequate nor inadequate. For example, officials in two LEAs we interviewed after the survey was completed told us they had found Education’s guidance adequate. An official in another district we visited said that at the time of the survey, he had assessed Education’s guidance as neither adequate nor inadequate but later considered Education’s guidance adequate because Education has issued additional guidance. A much smaller percentage of LEAs found the guidance to be inadequate or very inadequate. Specifically, as shown in figure 18, we estimate that the percentage of LEAs reporting that guidance was very adequate, adequate, or neither adequate nor inadequate was 69 percent for IDEA, 75 percent for ESEA Title I, and 60 percent for SFSF. We found a statistically significant relationship for all three Education programs we reviewed showing that LEAs with favorable assessments of state guidance also tend to have favorable assessments of federal guidance. For example, in Florida, where 87 percent of LEAs indicated that their state’s IDEA Recovery Act guidance was very adequate or adequate, 72 percent of LEAs indicated that Education’s guidance on this subject was very adequate or adequate. Both of these estimates are statistically higher than the national averages of 58 percent for state guidance and 46 percent for Education’s guidance. Further, our survey results indicate that LEAs’ assessment of both Education’s guidance and their state’s guidance varied by the size of LEAs—with larger LEAs assessing guidance more favorably than smaller LEAs. This difference was statistically significant for SFSF as well as for IDEA and ESEA Title I Recovery Act guidance. For example, an estimated 63 percent of the largest LEAs said Education’s ESEA Title I Recovery Act guidance w very adequate or adequate compared to 48 percent of all other LEAs nationally. Three states—Florida, Massachusetts, and Georgia—were among the be in terms of the percentage of LEAs assessing their state’s Recovery Act guidance for ESEA Title I, IDEA, and SFSF as adequate or very adequa Our interviews with state officials in these three states revealed three common themes: (1) continuous communication between state officials and LEA program and financial staff; (2) collaboration between stat local program and financial officials in developing brief, navigable guidance documents to ease use; and (3) use of various media (or technology) to enhance efficiency in delivering guidance. Education officials agreed that states can play a critical role in disseminating and explaining federal guidance. In particular, Education officials were interested in knowing more about promising practices in states where LEAs were satisfied with guidance, so that they could help disseminate those practices to other states. te. First, regarding communication, officials in Georgia said there is continuous dialogue between state officials and LEA officials, and official in Massachusetts reported that the state has developed an organizational culture that placed a high priority on commun the field. Further, officials in Florida said that their frequent communication with LEAs helped them keep LEAs abreast of importa updates and was particularly helpful because it helped state officials generate a list of LEA questions and concerns that they were able to draw on in deciding what guidance to develop. In contrast, officials in a school s district we visited in another state told us that when they call their state’ Departmen returned. t of Education for guidance, they often do not get their calls Second, regarding collaboration in developing guidance, state off Florida said they directly involved a group of superintendents in developing user-friendly guidance documents and later invited all superintendents to give feedback on the guidance. These guidance documents are posted on the state’s Web site, highlight 21 possible strategies for using Recovery Act funds, and indicate which strategies icials in correspond to particular Recovery Act programs. Further, officials in three states said they had brought state and local programmatic and financial officials together as part of their guidance efforts. One state official in Florida said that this effort had been critical to making sure the guidan ce was understood by both program and financial staff at the LEA level. Finally, regarding strategies to enhance efficiency in delivering guidanc Florida, Georgia, and Massachusetts used webinars to directly answer questions from LEAs and used LISTERV e-mail lists, so that they could compose a single e-mail message alert including new guidance and send it state officials to all superintendents at once. Both strategies have allowed to provide consistent information to many superintendents simultaneously. In contrast, officials in one district we visited in anoth state told us there had been times they had needed to call around the school district to see who had received guidance from state officials because there was no consistency in which local officials were receiving guidance from state officials. Florida officials also told us they had create summaries of Education’s guidance that highlighted the most important information to make it easier for superintendents to find the information they needed. In contrast, a school superintendent in another state who reported on GAO’s survey that his state’s guidance for ESEA Title I a SFSF was very inadequate said he felt “stranded on a desert island” because he did not receive updates when new guidance was made available on the state Web site and did not have time to check the Web site search for answers to his questions in daily to see what had changed or to Education’s guidance documents. Education continues to provide intensive technical assistance to six and territories that the department felt could benefit the most from additional assistance. Education identified the six states and territories that would be most likely to benefit from intensive technical assistance using a risk-based approach that assessed factors such as high funding levels and recent monitoring or audit findings. Four of the states— California, Illinois, Michigan, and Texas—and the District of Columbia part of our review. Education officials have made site visits and held conference calls with these states and involved officials from multiple offices in the department to provide programmatic and financial expertis to answer the states’ questions. Education officials said that in plann ing these meetings, they worked with each state to identify the types of technical assistance that would be needed to address state-specific concerns. Education also provides technical assistance to other sta issues related to the Recovery Act, but this technical assistance is provided separately by individual program offices. Education also hosts biweekly webinars open to any states and school districts on Recovery Act-related topics, such as quarterly reporting and cash management, a it makes the presentations available on its Web site for downloading. Education officials told us they have been conducting on-site monito visits concerning ESEA Title I and IDEA that include monitoring of Recovery Act-related issues, and have been monitoring SFSF in other way as it continues development of a comprehensive monitoring plan fo new program. Education officials told us they have asked specific questions related to the Recovery Act during ESEA Title I and IDEA monitoring visits. In addition, the program office responsible for IDEA ha been piloting a desk review tool specifically related to the Recovery Act and shared an early draft with states to help inform them about h will be monitored. According to Education officials, to date, the department has been monitoring the use of SFSF funds through its reviof SFSF applications, waiver applications, and quarterly Recovery Act reporting and through telephone calls with states. Officials said their upcoming review of Phase II SFSF applications to be submitted by states will help identify states that may be having problems related to SFSF, so that the department can conduct on-site monitoring visits to those states. Education officials said they plan to collect states’ SFSF subrecipient monitoring plans in the future but have not yet begun to collect these plans; in our last report, GAO recommended that Education take action, such as collecting and reviewing documentation of state monitoring plans, to ensure that states understand and fulfill their responsibility to monitor subrecipients of SFSF funds. Department officials sent an e-mail reminding states of their responsibility to conduct ates’ subrecipient monitoring on SFSF and specifying what should be in stmonitoring plans. Education officials said they routinely discuss the requirement for subrecipient monitoring during their site visits and conference calls with states. Our work in states continues to indicate a need for Education’s oversight of state subrecipient monitoring p example, we found that officials in Massachusetts do not have a comprehensive monitoring plan and are instead planning to rely on their lans. For state’s Single Audit report, alterations to their LEA reporting requirements, and reviews of LEAs’ funding applications to monitor SFSF sub-recipients. However, Education officials told us they consistently tell states that the Single Audit is not enough for subrecipient monitoring and that states have to be active with ongoing subrecipient monitoring. The Recovery Act requires the U.S. Department of Housing and Urban Development (HUD) to allocate $3 billion through the Public Housing Capital Fund to public housing agencies using the same formula for amounts made available in fiscal year 2008. HUD allocated Capital Fund formula dollars to public housing agencies shortly after passage of the Recovery Act and, after entering into agreements with more than 3,100 public housing agencies, obligated these funds on March 18, 2009. As of November 14, 2009, 2,598 public housing agencies (83 percent of the housing agencies that entered into agreements with HUD for Recovery Act funds) had reported to HUD that they had obligated a total of $1.46 billion, an increase of over $500 million from the level reported as of September 5, 2009. In total, public housing agencies reported obligating about 49 percent of the total Capital Fund formula funds HUD allocated to them (see fig. 19). According to HUD officials, housing agencies report obligations after they have entered into binding commitments to undertake specific projects. A majority of housing agencies that had obligated funds—2,113 of 2,598 housing agencies—had also drawn down funds in order to pay for project expenses already incurred. In total, as of November 14, 2009, public housing agencies had drawn down almost $350 million, or about 12 percent of the total HUD allocated to them. Funds drawn down more than doubled, increasing by $204 million from the level reported as of September 5, 2009. The Recovery Act requires that housing agencies obligate 100 percent of their funds within 1 year from when the funds became available, which means they have until March 17, 2010, to obligate 100 percent of their funds. More than 1,000 housing agencies (33 percent) had reported obligating 25 percent of their funds or less as of November 14, 2009, including 523 (17 percent) that had reported obligating none of their Recovery Act funds (see fig. 20). However, 1,055 housing agencies (34 percent) had reported obligating 100 percent of their funds as of November 14, 2009, placing them well ahead of the Recovery Act’s 12- month deadline. An additional 467 housing agencies (15 percent) had reported obligating more than 75 percent of their funds as of November 14, 2009. The size of the grant and the number, size, and complexity of projects that housing agencies selected may account for some of the differences in obligation rates. Although HUD is making efforts to assist housing agencies with meeting the deadline, officials expect some housing agencies probably will not obligate all of their funds in time. HUD officials stated they have been emphasizing the 1-year deadline to housing agencies, and they pointed to notices, frequently asked questions, and Web seminars as evidence. In addition, they have stressed that the Recovery Act does not provide HUD with any way to grant exceptions or extensions. HUD will recapture any funds not obligated by March 17, 2010, and will reallocate those funds to other housing agencies. According to HUD officials, in November 2009 HUD field staff began contacting housing agencies that had not obligated any Recovery Act funds by phone, by e- mail, or in person in order to understand where these housing agencies are in the process of awarding contracts and obligating funds. They said they will repeat the process for housing agencies below certain obligation levels, such as 25 percent or 50 percent, beginning in early December. Field staff will be preparing status reports for each housing agency, which HUD will review in order to determine what additional steps HUD should take to assist housing agencies in meeting the March 2010 deadline. HUD headquarters staff are also preparing an e-mail notification to all housing agencies that are below the level of obligations at which HUD expects them to be at this point in the year. HUD officials said they will send these notifications each month. For housing agencies that continue to struggle to obligate their funds, HUD officials said they plan to provide additional technical assistance, including possibly sending staff on site to help the process along. HUD plans to ask housing agencies to report obligations as funds are obligated—agencies report monthly—so that HUD can have up– to-date information to determine ongoing outreach and monitoring efforts. As they get closer to the March deadline, HUD officials expect more housing agencies will achieve 100 percent obligations, allowing HUD to better target its outreach efforts. While HUD’s goal is that agencies achieve 100 percent obligations, officials said that realistically some housing agencies probably will not obligate all of their funds in time. They said that part of the process of reaching out to housing agencies with low obligations is to identify which housing agencies do not expect to make the deadline, so that HUD can begin planning for recapturing and reallocating the funds. They hope to have an estimate of how much will not be obligated in time by early February 2010. The officials stated HUD has not yet determined how it will reallocate funds that are recaptured. It will be important for HUD to follow through on these efforts to ensure housing agencies obligate the funds in a timely manner. Of the 47 housing agencies in 16 states and the District of Columbia we selected for in-depth review throughout our Recovery Act work, as of November 14, 2009, 45 had reported obligating funds totaling $207 million, or about 39 percent of the total Capital Fund formula funds HUD had allocated to the agencies (see fig. 21). Obligations had increased by about $60 million from the level we reported in September. A majority of housing agencies that had obligated funds—43 of 45 housing agencies—had also drawn down funds. In total, these housing agencies had drawn down about $34 million, or about 6 percent of the total allocated to them by HUD, an increase of about $21 million from the level we reported in September 2009. Housing agencies that received Recovery Act formula grants of less than $100,000 continue to obligate and draw down funds at a faster rate than housing agencies that received grants of more than $500,000. The difference between these groups of housing agencies has remained about the same—13 percentage points—as when we reported in September 2009. For housing agencies with smaller grants—that is, less than $100,000—the average percentage of Recovery Act funds obligated was about 63 percent, while for housing agencies with larger grants—that is, more than $500,000—the average percentage of Recovery Act funds obligated was 50 percent (see table 7). Similarly, the average percentage of Recovery Act funds drawn down was 41 percent for housing agencies with smaller grants, compared with 17 percent for housing agencies with larger grants. As we reported in September 2009, housing agencies with smaller grants are often able to take advantage of simplified and less formal procurement procedures, which could help them obligate funds more quickly. In addition, we found that housing agencies with smaller grants are using their Recovery Act funds on a limited number of small and narrowly focused projects, while housing agencies with larger grants are using Recovery Act funds on either a larger number of projects or projects with a broader scope, some of which may require additional layers of HUD review and approval. Housing agencies we visited reported that more of their projects had begun since our prior visits for the July 2009 report, and several housing agencies reported they had completed one or more projects during that time. For this report, we selected 47 Recovery Act-funded projects at 25 housing agencies in nine states—11 of which had not started, 22 of which were under way, and 14 of which were already completed (see fig. 22). Many of the completed projects involved roof replacement, including projects in Iowa, New Jersey, and Arizona. We visited several projects under way that involved replacing windows and siding, repainting building exteriors, or repairing sidewalks. As we previously reported, other planned uses of Recovery Act funds include heating, ventilation, and air conditioning (HVAC) system upgrades or replacements; interior rehabilitation work, such as kitchen or bathroom renovations and flooring or carpet replacements; and demolition and construction of new units. The estimated costs for the projects we selected ranged from $4,500 for one roof replacement to more than $32 million for the complete rehabilitation of 172 rental units—$28 million of which will be Recovery Act funds. Housing agencies reported that 62 of the 77 contracts they planned to award for these projects—some projects had more than one contract— had already been awarded or were in the process of soliciting bids. Officials from at least four housing agencies stated that they received bids that were lower than expected, which will allow them to complete more projects with these funds. They said that, due to economic conditions, contractors have little work and are submitting lower bids in order to have projects and keep their staff employed. As a result, housing agencies may have to identify additional projects on which to use Recovery Act funds in order to obligate all their funds, although officials from these agencies did not anticipate having difficulties in obligating all their Recovery Act funds before the deadline. For example, officials from Mississippi Regional Housing Authority VIII were considering expanding the scope of an interior renovation project after awarding a contract for less than half of what they had budgeted for roofing, siding, and other exterior improvements at another property. The Recovery Act required housing agencies to give priority to projects already under way or in the 5-year plan, projects that can award contracts based on bids within 120 days, and projects that rehabilitate vacant rental units, and in many cases housing agencies were able to meet one or more of these priorities. As we reported in July 2009, housing agencies generally selected projects that were on their 5-year plans. Others, such as Boston Housing Authority, also selected projects that were already under way but that could be expanded or accelerated with additional funds. Eighteen housing agencies we visited were able to award at least one contract based on bids within 120 days of the funds becoming available. For example, Rahway Housing Authority in New Jersey awarded seven of its nine contracts, representing 87 percent of its Recovery Act funds, within 120 days. In addition, two housing agencies each had only one project and one contract for that project, which they were able to award within 120 days. However, housing agencies with larger projects or a larger number of projects were at times unable to meet this time frame due to extensive design work that needed to be done first or to internal and external policies and procedures that are not easily sped up. For example, officials at Boston Housing Authority said that the design work to meet the extensive and complex building codes takes time. In addition, housing agencies that HUD put on “zero threshold” or that were troubled performers said they had difficulty meeting this priority because of the additional monitoring steps HUD had put in place for them. Finally, housing agencies reported having few vacant units and therefore did not have many projects to rehabilitate vacant units. One exception was Newark Housing Authority in New Jersey, which had rehabilitated 313 vacant units using Recovery Act funds and expected to rehabilitate 109 more. Newark Housing Authority officials said they had about 700 long- term vacant units, as well as 300 units vacant as a result of normal turnover. The Recovery Act also required that housing agencies use Recovery Act funds to supplement rather than supplant funds from other sources. Housing agency officials we spoke with generally did not see supplanting as a major challenge and thought they would have no trouble abiding by the requirement. Officials at several housing agencies noted they had many more projects that needed to be done than could be completed with only their regular Capital Fund grants, so it was not difficult to identify projects that did not have any other funding. In addition, housing agency officials told us they were keeping track of their Recovery Act funds separately from their regular Capital Fund grants in order to make clear that the Recovery Act funds were not supplanting other funds that had already been obligated. Other housing agency officials stated that annual statements and 5-year plans are reviewed multiple times—by the public, by the housing agency’s board, and by HUD—and that these layers of review serve as a check to ensure that supplanting does not occur. As we noted in our September 2009 report, HUD has designated 172 housing agencies as troubled under its Public Housing Assessment System (PHAS) and has implemented a strategy for monitoring these housing agencies. Of these 172 troubled housing agencies, 106 (61.6 percent) were considered by HUD to be low-risk troubled, 53 (30.8 percent) were considered medium-risk troubled, and the remaining 13 (7.6 percent) were considered high-risk troubled. HUD officials stated they have completed remote reviews of these housing agencies’ administration of the Recovery Act and plan to complete on-site reviews on the premises of these housing agencies by December 31, 2009. HUD analyzed a sample of 45 remote reviews and 45 on-site reviews. Among other things, HUD remote reviews found that many housing agencies had not amended their procurement polices as required by HUD. On-site reviews found that most sampled agencies had not yet awarded contracts at the time of the review. HUD also found that agencies were moving cautiously on contracting as they awaited HUD’s August 2009 guidance on implementing the “Buy American” provision of the Recovery Act. HUD’s remote reviews also raised questions about proposed work items that do not appear in previously approved annual statements or 5-year plans. As a result, according to HUD, field staff contacted housing agencies to ensure that they appropriately amended their plans to reflect these projects. As of November 14, 2009, troubled housing agencies accounted for 6 percent of all Recovery Act funds provided by HUD, and they continue to obligate and draw down Recovery Act funds at a slower rate than nontroubled housing agencies (see fig. 23). Further, when obligation rates are broken down by quartiles (see fig. 24), as of November 14, 2009, 65 percent of all troubled housing agencies have obligated 25 percent or less of their Recovery Act funds. More than one- third, almost 37 percent, of the troubled housing agencies have not obligated any Recovery Act funds. As noted above, according to HUD officials, HUD is in the process of contacting all housing agencies that had not obligated any funds, including troubled housing agencies, as well as housing agencies with low obligation rates, in order to determine what assistance HUD could provide to these agencies. One possible reason for these slower obligation and draw-down rates is the additional monitoring that HUD is implementing for housing agencies that are designated as troubled performers under PHAS. For example, according to HUD officials, all 172 troubled public housing agencies— regardless of risk category—have been placed on a “zero threshold” status, which means HUD has not allowed them to draw down Recovery Act funds without HUD field office approval. HUD officials said the ability to place housing agencies on “zero threshold” has always been available and had been used for housing agencies that have had problems obligating and expending their Capital Fund grants appropriately prior to the Recovery Act. However, as we previously reported, HUD has implemented more extensive monitoring for all troubled housing agencies, including requiring that HUD field office staff review all award documents (such as solicitations, contracts, or board resolutions, where applicable) prior to obligation of Recovery Act funds. According to HUD officials, also contributing to the low obligation percentages is the fact that many troubled housing agencies routinely struggle with procurement processes. Building on its efforts to more closely monitor the use of Recovery Act funds by troubled housing agencies, HUD is implementing a strategy for monitoring nontroubled housing agencies, as well. Under its nontroubled strategy, HUD has taken the 2,949 nontroubled housing agencies that received Recovery Act funds and separated them into two groups for the purposes of monitoring and oversight: high risk and low risk. The high- risk group is composed of the 332 housing agencies that have been identified as the highest risk based in part on the amount of their Recovery Act funding. The low-risk group consists of the remaining 2,617 nontroubled housing agencies. HUD’s nontroubled strategy calls for remote reviews to be completed by January 15, 2010, on all nontroubled housing agencies. In addition, HUD’s strategy calls for on-site reviews for a sample of nontroubled housing agencies from each of the two risk groups, with the objective of reaching those at greatest risk and ensuring coverage of grantees constituting the greatest amount of formula grant dollars. Remote reviews are to focus on four main components: grant initiation, environmental compliance, procurement, and grant administration. On-site reviews of a sample of housing agencies provide follow up to outstanding issues from the remote reviews and also include a review of contract administration for procurements related to the use of Recovery Act funds. HUD’s nontroubled strategy calls for on-site reviews for a sample of 252 high-risk nontroubled housing agencies to be completed by February 15, 2010. For the remaining 2,617 housing agencies in the low-risk group, HUD’s strategy calls for on-site reviews for a sample of 286 housing agencies to be completed by February 15, 2010. In September 2009, we recommended that HUD expand the criteria for selecting housing agencies for on-site reviews to include housing agencies with open Single Audit findings that may affect the use of Recovery Act funds. In October 2009, HUD implemented this recommendation by expanding its criteria for selecting housing agencies for on-site reviews to include all housing agencies with open 2007 and 2008 Single Audit findings as of July 7, 2009, relevant to the administration of Recovery Act funds. HUD has identified 27 such housing agencies and plans to complete these on-site reviews by February 15, 2010. HUD officials said that even though many of the data elements requested for Recovery Act recipient reporting were new to housing agencies, approximately 96 percent of housing agencies had successfully reported into federalreporting.gov. Initial reports suggested a lower reporting rate of approximately 84 percent, but this was due to a substantial number of housing agencies incorrectly entering values into certain identification fields, such as the award ID number, the awarding agency, or the type of funding received. HUD officials said the system did not have validation measures in place to ensure the correct award ID numbers were entered. In addition, housing agencies could not edit the award ID number without submitting a new report. According to a HUD official, OMB initially termed reports that could not be matched with a federal agency as “orphaned.” A HUD official said that HUD program and Recovery team staff reviewed reports submitted with nonmatching award ID numbers and OMB’s list of reports that could not be matched to a federal agency to determine if they matched HUD awards. As a result of these efforts by HUD staff, HUD was able to achieve a rate of reporting of approximately 96 percent. According to HUD officials, public housing agencies encountered challenges related to registration and system accessibility. For example, a HUD official said the registration process for federalreporting.gov requires several steps such as obtaining a DUNS number, registering with the Central Contractor Registration (CCR) and obtaining a Federal Reporting Personal Identification Number (FRPIN). The HUD official told us these steps are necessary for validating the recipient reports because they ensure the appropriate points of contact at the appropriate organizations—in this case, public housing agencies—are reporting for each program. Federalreporting.gov states that each recipient’s point of contact information is taken directly from the CCR, and if an organization changes its point of contact information, it will take 48 hours for federalreporting.gov to receive the change and e-mail the FRPIN and temporary password to the new point of contact. According to the HUD official, a housing agency’s contact information in CCR is sometimes outdated, and the systems are often not updated in time for access to be correctly transferred. Additionally, one housing agency official in Mississippi reported saving his data entry as a draft before being timed out of the system but was unable to retrieve the data when he re-entered the reporting Web site. A HUD official said that, in the future, HUD and OMB will need to improve the function of the system and that the agencies are working to ensure all housing agencies have access to the reporting systems. According to a HUD official, there was widespread misunderstanding by public housing agencies about OMB’s methodology for calculating the number of jobs created or retained by the Recovery Act, in part because housing agencies are not familiar with reporting jobs information. In a few cases, we found that public housing agencies had reported the number of jobs created or retained into federalreporting.gov without converting the number into full-time equivalents. For example, officials from a housing agency in Illinois reported the number of people, by trade, who worked on Recovery Act-related projects but did not apply the full-time equivalent calculation outlined by OMB in the June 22 reporting guidance. Additionally, officials from a public housing agency in Mississippi told us that they based the number of jobs they reported into federalreporting.gov on letters from their contractors detailing the number of positions rather than full-time equivalents created as a result of their Recovery Act-funded projects. In another case, a housing agency official in Massachusetts told of having difficulty locating guidance on calculating job creation. As a result, the housing agency may have underreported jobs data from an architectural firm providing design services for a Recovery Act window replacement project at a public housing complex. OMB published guidance on calculating jobs created and retained using full-time equivalents (FTE) on June 22, 2009. In early September, HUD posted the OMB guidance to its Web site and provided information by e- mail to housing agencies on registration for federalreporting.gov, as well as links to Web seminars and training provided by OMB. In the meantime, as HUD was developing program-specific guidance, HUD and OMB discussed clarifying portions of OMB’s guidance right up to the end of September, according to a HUD official. HUD issued further guidance to public housing agencies by e-mail on September 25, 2009, approximately 2 weeks before the October 10, 2009, deadline for recipient reporting, providing templates and data dictionaries tailored to the Public Housing Capital Fund. The guidance also reiterated the recipient reporting responsibilities for public housing agencies. HUD officials told us they did not have enough time to translate some of the terminology into concrete terms that would be clearer to housing agency officials, partly due to their continuing discussions with OMB on clarifying its guidance. For example, HUD posted a jobs calculator spreadsheet to its Web site, and HUD field staff would direct housing agencies to this guidance when they asked specific questions about how to calculate jobs. A HUD official said it seemed like some housing agencies may have pulled information for the recipient reports from the wrong fields in the job calculator, which produced errors. Therefore, greater instruction may be needed beyond what was provided to housing agencies on the job calculator’s instructions page. A HUD official stated they will work with OMB to improve housing agencies’ understanding of the methodology for reporting in full-time equivalents prior to the next round of recipient reporting in January 2010. This is consistent with recommendations we recently made. We reported in November 2009 that recipients of Recovery Act funds were inconsistent in their interpretation of OMB guidance on reporting FTEs. We recommended that OMB, among other things, 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. HUD has taken a number of steps to ensure recipient reported data are correct, including developing a data quality review plan, automated data checks, flags for duplicate entries, awards entered incorrectly as contracts, and incorrect award identification numbers. Overall, HUD entered approximately 2,700 comments into federalreporting.gov through its data quality checks of housing agency recipient reports. We continue to monitor these efforts as part of our ongoing assessment of recipient reporting requirements. As we reported in September 2009, HUD developed the Recovery Act Management and Performance System (RAMPS) for Recovery Act reporting purposes, including public housing agencies’ compliance information for the National Environmental Policy Act (NEPA), as required by the Recovery Act. Section 1609 of the Recovery Act requires that adequate resources must be devoted to ensuring that applicable environmental reviews under NEPA are completed expeditiously and that the shortest existing applicable process under NEPA shall be used. HUD officials said that while public housing agencies have had to comply with NEPA since it was enacted in 1970, reporting on environmental assessments is a new requirement for public housing agencies. A HUD official said most of the challenges that housing agencies faced were related to registration and accessing RAMPS rather than entering data. For example, some housing agencies reported having difficulty gaining access to RAMPS. According to a HUD official, this may be due to housing agencies’ unfamiliarity with electronic reporting and frustration with the amount of reporting required. The official said that for RAMPS, HUD provided screenshot-by-screenshot guidance to housing agencies to assist them through the reporting system. However, the HUD official also said there was no self-registration for RAMPS. Instead, HUD provided registration information to housing agencies using data elements from HUD systems, including information on active users combined with recipient groups, tax identification numbers and grant numbers. According to the HUD official, if any of these elements did not line up across systems, housing agencies were not registered to use RAMPS and could not access the system. The official said HUD is working to clean up the data in RAMPS to make sure the registration process is successful for the next round of recipient reporting. According to a HUD official, in some cases HUD field offices are responsible for conducting the environmental reviews under NEPA and therefore are responsible for reporting into RAMPS. The official said a consequence of this is that it takes staff away from other responsibilities, such as monitoring and oversight. In other cases, housing agencies that complete environmental reviews under NEPA must report data directly into HUD’s RAMPS. Under the Recovery Act, HUD was required to award nearly $1 billion to public housing agencies based on competition for priority investments, including investments that leverage private sector funding or financing for renovations and energy conservation retrofitting. HUD accepted applications from June 22 to August 18, 2009, and according to a HUD official, 746 housing agencies submitted 1,817 applications for these competitive grants. In September 2009, HUD awarded competitive grants to housing agencies that successfully addressed the requirements of the notice of funding availability under the following four categories: For the creation of energy-efficient communities, 36 grants totaling $299.7 million were awarded for substantial rehabilitation or new construction, and 226 grants totaling $305.8 million were awarded for moderate rehabilitation. For gap financing for projects that are stalled due to financing issues, 38 grants totaling $198.8 million were awarded. For public housing transformation, 15 grants totaling $95.9 million were awarded to revitalize distressed or obsolete public housing projects. For improvements addressing the needs of the elderly or persons with disabilities, 81 grants totaling $94.8 million were awarded. According to data provided by HUD, larger housing agencies (that is, those with more than 250 public housing units) were more successful in obtaining competitive grants. Although smaller housing agencies (those with fewer than 250 units) outnumber larger housing agencies by three to one, larger agencies submitted about three applications for every one submitted by smaller agencies. A HUD official said that some small housing agencies have only one or two projects, and because one competitive grant may be awarded for a given project, these agencies had fewer opportunities to apply. Further, applications from larger housing agencies were more likely to be successful. Specifically, while about 26 percent of applications from larger housing agencies resulted in competitive grant awards, 11 percent of applications from smaller housing agencies resulted in awards. Housing agencies with more than 250 units represent about one-fourth of all housing agencies but manage most of the public housing units nationally. As a result, because these housing agencies likely have more needs and more projects to be funded, it was no surprise to the HUD official they were so successful. He said HUD was satisfied by the participation and successful applications of housing agencies of all sizes. We selected one competitive grant from each of eight housing agencies. Six of the grants we selected were multimillion-dollar efforts, while five grants had an energy-efficiency focus. Four projects involve at least 100 units, including one involving 281 units. See table 8 for a summary of the projects. Housing agency officials said these projects would begin in the coming months. We found mixed views of the competition among housing agency officials that had applied for competitive grants. We visited 15 housing agencies that applied for competitive grants, including 8 that received competitive grant awards. Officials at three agencies said they were very satisfied with the application process, while five others said they were somewhat satisfied, including two that were not awarded a competitive grant. Only one official was very dissatisfied, and another was somewhat dissatisfied, and in both cases, their housing agencies were not awarded a competitive grant. Both officials said they had not received feedback on why their applications were not successful and thought the requirements may have favored agencies with more resources. HUD officials said they recently notified housing agencies that had unsuccessful applications why they were not selected, the most common reason being insufficient funds. In addition, officials from two housing agencies thought the competition was not fair because housing agencies that had already made certain improvements, such as increasing energy efficiency or completing lead- paint abatement, were not able to accumulate as many points for those types of activities as housing agencies that had been less proactive. Capacity was a substantial barrier to applying for competitive grants for a variety of agencies we visited, including at least one housing agency that was awarded a competitive grant. For example, officials in Phoenix stated they had a contractor assist with the application because their staff did not have the time or capacity to complete it in time. Officials from two other housing agencies stated they did not apply because they did not have enough time or staff to pull together the information required before the deadline. Officials from another agency believed that larger housing agencies were able to put together better applications that were more likely to be awarded grants because they had professional staff in house to put the applications together. Other housing agency officials said they did not apply because they were not sure that they had the capacity to administer the competitive grant within the time frames specified in the Recovery Act. The Recovery Act appropriated $5 billion for the Weatherization Assistance Program, which the Department of Energy (DOE) is distributing to each of the states, the District of Columbia (District), and seven territories and Indian tribes; the funds are to be spent over a 3-year period. During the past 32 years, the program has helped more than 6.2 million low-income families by making such long-term energy-efficiency improvements to their homes as installing insulation; sealing leaks; and modernizing heating equipment, air circulation fans, and air conditioning equipment. These improvements enable families to reduce energy bills, allowing these households to spend their money on other needs, according to DOE. The Recovery Act appropriation represents a significant increase for a program that has received about $225 million per year in recent years. DOE has approved the weatherization plan of each of the states, the District, and seven territories and Indian tribes. DOE has obligated about $4.76 billion of the Recovery Act’s weatherization funding to the states, while retaining about 5 percent of funds to cover the department’s expenses. Each state has access to 50 percent of its funds, and DOE plans to provide access to the remaining funds once a state meets a certain target. As of September 30, 2009, 43 states and territories reported they had begun to use Recovery Act weatherization funds, while 15 states and territories reported they had not used any Recovery Act funds. The 43 states and territories also reported that, as of September 30, 2009, they had outlaid $113 million, or about 2 percent, of the $5 billion for weatherization activities and had completed weatherizing about 7,300, or about 1 percent, of the 593,000 housing units planned. In addition, they reported that about 2,800 jobs had been created and about 2,400 jobs had been retained through the use of the Recovery Act’s weatherization funds. As shown in table 9, as of November 30, 2009, six of the states in our review had begun spending Recovery Act funds to weatherize homes, while California and the District had not. A key factor slowing the start of weatherization activities is the act’s requirement that all laborers and mechanics employed by contractors and subcontractors on Recovery Act projects be paid at least the prevailing wage, including fringe benefits, as determined under the Davis-Bacon Act. Because the Weatherization Assistance Program, funded through annual appropriations, is not subject to the Davis-Bacon Act, the Department of Labor (Labor) had not previously determined prevailing wage rates for weatherization workers. On September 3, 2009, Labor completed its determination of wage rates for weatherization work conducted on residential housing units in each county of the 50 states and the District. Officials in each of the states and the District in our review said that, overall, Labor’s county-by-county prevailing wage rates for weatherization work were about what they had expected. About two-thirds of these officials told us Labor’s wage rates are similar to what local agencies had previously been paying. Many representatives of the local agencies we interviewed confirmed that these rates generally were about what they had been paying for weatherization work. However, many weatherization contracts between states and local agencies have been delayed because of concerns about complying with Recovery Act requirements—including Davis-Bacon Act requirements that contractors pay workers weekly and submit weekly certified payroll records—and OMB’s reporting requirements. Some state agencies have delayed disbursing Recovery Act funds to local agencies because they were not satisfied that local agencies had the proper infrastructure in place to comply with these requirements. Pennsylvania officials told us that delays occurred because some local agencies had initially submitted management plans that had not included language describing how they would comply with the Davis-Bacon Act. The state agencies of California and the District of Columbia, which had not spent any Recovery Act funds to weatherize homes, were finalizing Recovery Act weatherization contracts with their local agencies as of November 30, 2009. California’s state agency requires local agencies to adopt Recovery Act requirements in their weatherization contracts, including certifying that they can comply with the Davis-Bacon Act, before these agencies are provided with Recovery Act funds to weatherize homes. Only 2 of California’s 35 local agencies that have been awarded Recovery Act funds had accepted these required amendments by the initial October 30, 2009, deadline. According to California officials, many local agencies pursued negotiations due to concerns about some provisions of these amendments. Several state and local agency officials expressed concern about the administrative burden to state and local agencies of complying with Recovery Act requirements, and many of these agencies were taking the time to hire additional staff to better ensure compliance. For example, Michigan officials told us their agency planned to add 22 staff, including a Davis-Bacon analyst, to ensure compliance with Recovery Act requirements. They also told us that federal administrative requirements, such as a weekly certified payroll, required them to make technological upgrades in their weatherization division. Ohio officials told us that ensuring compliance with the Davis-Bacon Act documentation was a significant undertaking. District officials told us that their agency had not expended Recovery Act funds to weatherize homes because they have been developing the infrastructure to administer the program by, for example, hiring new staff. Local agencies in California, Michigan, New York, and Ohio had also hired new staff to process Davis-Bacon paperwork. Several state and local officials expressed concern about the administrative burden on small contractors of complying with Recovery Act requirements because these contractors generally have fewer resources and less experience with accounting processes. According to DOE officials, some local agencies have been hesitant to use Recovery Act funding to weatherize homes until they are certain they are in compliance with the Davis-Bacon Act. The DOE officials had expected to receive fewer questions from local agencies about Davis-Bacon Act requirements after Labor had determined prevailing wages, but in fact they continue to receive frequent questions about these requirements. The DOE officials explained that many local agencies have been expending their DOE annual appropriation funds—which are not subject to Davis-Bacon Act requirements—to weatherize homes before using their Recovery Act funds. State and local officials in California, New York, and Ohio also expressed concern about Labor’s determination that the new prevailing wage rates for weatherization workers are limited to multifamily residential buildings of four or fewer stories, while Labor’s commercial building construction wage rates (for plumbers, carpenters, and other laborers) apply to multifamily residential buildings of five or more stories. As a result, local agencies conducting weatherization work on multifamily units in high rise buildings must pay their workers wage rates that can be significantly higher than what local agencies pay weatherization workers for residential housing units. For example, in New York County (Manhattan), commercial prevailing wages were three times more than the rates for residential weatherization laborers. Representatives of two local agencies in New York told us that they intend to subcontract out all weatherization work conducted on buildings over four stories because they could not pay their workers vastly different wages based on the type of building involved. According to Ohio officials, some local agencies had delayed projects in larger multifamily buildings until they could better estimate project costs. In response to states’ concerns, DOE’s November 10, 2009, guidance states that the wage rates for the new weatherization laborer category do not apply to weatherization work performed on buildings of five or more stories. The guidance allows the states to calculate the cost effectiveness over the lifetime of a project by using the new weatherization wage rates rather than the prevailing wages for plumbers, carpenters, and other laborers working on multifamily buildings. Compliance with the National Historic Preservation Act could also slow the use of the Recovery Act’s weatherization funds. First enacted in 1966, the National Historic Preservation Act requires federal agencies to, among other things, take into account the effect of any federal or federally assisted undertaking on historical properties included in a national register of historic sites, buildings, structures, and objects. Michigan state officials told us that, under the act, its State Historic Preservation Office is allowed to conduct a historic review of every home over 50 years of age if any work is to be conducted. They explained that, in Michigan, this could mean an estimated 90 percent of the homes to be weatherized would need such a review, which could cause significant delays. H e in November 2009, Michigan state officials signed an agreement with th State Historic Preservation Office that is designed to expedite the review process. With this agreement in place, state officials said they are confident that the historic preservation requirements can be met without causing further delays. New York officials told us that several entire neighborhoods in their state fall under the protection of the act and noted owever, that the State Historic Preservation Office may have to conduct a review before any residential units in such a neighborhood can be weatherized. State officials in Iowa expressed similar concerns. State officials in New York and Iowa have contacted their respective historic preservation offices to develop approaches for addressing the review process. DOE’s guidance directs the states to report on the number of housing units weatherized and the resulting impacts to energy savings and jobs created and retained at both the state and local agency level. While state officials have estimated the number of housing units that they expect to weatherize using Recovery Act funds, only a few of the states have begun collecting data about actual impacts. Although many local officials have collected data about new hires, none could provide us with data on energy savings. This lack of information about impacts exists primarily because most state and local agencies either are just beginning to use Recovery Act funds to weatherize homes or have not yet begun to do so. Some of the local agencies, however, either collect or plan to collect information about other impacts. For example, local agencies in both California and Michigan collect data about customer satisfaction. In addition, a local agency in California plans to report about obstacles, while an agency in New York will track and report the number of units on the waiting list. In regard to recipient reporting, weatherization officials in all eight states that we reviewed said they submitted these reports on schedule. However, Massachusetts and Ohio officials cited issues with the reporting requirements. In Massachusetts, state officials told us of confusion associated with terminology related to new or retained jobs, and local officials said that the Massachusetts Recovery and Reinvestment Office requires additional information about demographics not required by OMB. Ohio officials told us that for reporting purposes, they estimated the number of jobs that could potentially be created. The inconsistency between potential positions and actual hours worked resulted in an inaccurate reporting of jobs created. One of the local agencies we visited reported 36 jobs created, but officials acknowledged they had only filled 20 positions at the time of our visit. Another local agency reported 14 agency and 8 contractor jobs created, but an official confirmed that only 6 agency and 7 contractor positions had been filled. States plan to monitor the use of the Recovery Act’s weatherization funds through fiscal and programmatic reviews of the local agencies providing weatherization service. DOE requires that state agencies collect information from their local agencies and submit programmatic and fiscal reports. Only a few states we reviewed expressed concerns that a small number of their local agencies did not have adequate controls. Most states reported that the primary tools for evaluating a local agency’s internal controls will be the fiscal reviews and program monitoring. This includes reviews of client files and financial information, on-site monitoring of local service providers, and site inspections of at least 5 percent of weatherized homes. State officials in Iowa reported that controls were in place prior to the Recovery Act and that the demonstrated success of these programs is proof of sufficient internal controls. Other state officials reported that Single Audits provided insight into a local agency’s internal controls. Five of the eight states we reviewed reported that they had adequate resources to monitor the status of Recovery Act funds and evaluate the program’s success. However, some states noted they would need to hire staff to meet the increased workload. Local agencies plan to use a variety of controls to ensure that the Recovery Act’s weatherization funds are used for the intended purposes. The most frequently mentioned controls were to separate Recovery Act funds from annually appropriated weatherization funds, pre- and post- weatherization evaluations, tracking job costs, and unannounced site inspections. Most local agencies also have procedures in place to ensure they do not contract with service providers that have been placed on the “Excluded Parties List” due to a history of fraudulent business practices. Local agencies reported the most common procedure to evaluate a contractor’s reputation was to check the contractor’s name online against the “Excluded Parties List.” Other local agencies require contractors to sign documentation stating that they have not been debarred or bankrupt. Risk assessments also serve as a procedure to prevent fraudulent or wasteful use of Recovery Act funds. For example, some local agencies reported that new contractors are subjected to a higher level of scrutiny than more experienced contractors. Local agency officials in New York, California, and Ohio told us a long history of weatherization service mitigates the risk that a contractor will improperly use funds. Our review has started to examine the states’ efforts to monitor the performance and reporting of local agencies. While the states have spent relatively few funds and we have reviewed weatherization activities in only a few locales, we have identified challenges for DOE and the states to ensure that Recovery Act funds are spent prudently and that the performance of local agencies is well-managed. For example, in Ohio we found during our site visits that grantees had inconsistent practices for reporting the number of homes weatherized and, in one case, a grantee used Recovery Act funds to weatherize the home of an ineligible applicant. Faced with these early implementation challenges, Ohio officials indicated that administrative monitoring will begin in December 2009 and fiscal monitoring in January 2010, and on November 20, 2009, the state issued new guidance to all state agencies regarding reporting requirements. Challenges in Pennsylvania include expanding the state’s oversight capacity, training and certifying weatherization workers, and implementing a statewide procurement system for weatherization materials purchased with Recovery Act funds. In addition, California’s Inspector General reported that one local agency has been designated as high risk because of questionable spending. DOE is hiring staff to provide national oversight to the Recovery Act weatherization program. DOE officials told us that each state will be assigned a project officer who will review the state’s fiscal and programmatic reports. Project officers will also be responsible for coordinating site visits to the state and local agencies responsible for weatherization, as well as visiting a sample of projects being weatherized with Recovery Act funds. DOE is in the process of hiring this team. The Emergency Food and Shelter Program (EFSP), which is administered by the Federal Emergency Management Agency (FEMA) within the Department of Homeland Security (DHS), was authorized in July 1987 by the Stewart B. McKinney Homeless Assistance Act to provide food, shelter, and supportive services to the homeless. The program is governed by a National Board composed of a representative from FEMA and six statutorily designated national nonprofit organizations. Since its first appropriation in fiscal year 1983, EFSP has awarded over $3.4 billion in federal aid to more than 12,000 local private nonprofit and government human service entities in more than 2,500 communities nationwide. The Recovery Act included a $100 million appropriation for the EFSP program in addition to the $200 million included in DHS’s fiscal year 2009 appropriations. The additional funding was awarded to the National Board on April 9, 2009. As stated in FEMA’s May 15, 2009, Recovery Act Plan for EFSP, EFSP’s goal is to deliver critical funding to human services organizations serving hungry and homeless people throughout our nation. While additional funding is provided, FEMA’s Recovery Act plan notes that EFSP’s objectives remain the same. These objectives are to allocate funds to the neediest areas, deliver the funds expeditiously and efficiently, create and strengthen public and private sector partnerships, empower local representatives to make funding decisions, and maintain minimal but accountable reporting. The National Board distributes the EFSP funds to local recipient organizations (LRO) selected by Local Boards in jurisdictions the National Board has determined are eligible for funds—for example, local food banks or shelters within a state. The United Way Worldwide is the Secretariat and Fiscal Agent to the National Board and employs a staff of 12 to administer the program. One FEMA permanent full-time position is dedicated to the EFSP program, but the position is not funded through the EFSP appropriation. By law, the total amount appropriated for the EFSP program is awarded to the National Board. The National Board uses population, unemployment, and poverty data to determine which jurisdictions, such as counties or cities within a state, are eligible for EFSP funds. Local Boards evaluate applications from LROs in the jurisdiction and determine which LROs will receive the grant awards. In order to be eligible to have LROs receive a portion of the $100 million in EFSP Recovery Act funds, jurisdictions must have met one of the following criteria from February 2008 through January 2009: their number of unemployed was 13,000 or more with a 5 percent rate of unemployment, their number of unemployed was between 300 and 12,999 with a 7 percent rate of unemployment, or their number of unemployed was 300 or more with a poverty rate of 11 percent. Once the National Board determines that jurisdictions are eligible for EFSP funding, and notifies the jurisdictions of their allocations, Local Boards are convened in each of the qualifying jurisdictions to review applications submitted by LROs and determine which LROs in their communities will receive funds. While the Local Board determines which LROs are to be awarded funds, the National Board distributes the funds directly to the LROs, rather than through the Local Board or a state or local government agency. The National Board’s program manual stipulates, however, that the Local Boards are responsible for monitoring LRO’s expenditure of EFSP funds to ensure that LRO’s actual expenditures are consistent with planned uses of funds and are within the purpose of the Act that established the EFSP program. EFSP funds, including the Recovery Act funds, can be used for a range of services, including food in the form of served meals or other food, such as groceries; lodging in a mass shelter or hotel; 1 month’s rent or mortgage payment; 1 month’s utility bill payment; minimal repairs to allow a mass feeding or sheltering facility to function during a program year; and equipment necessary to feed or shelter people up to a $300 limit per item. Program funds cannot be used for rental security deposits of any kind, cash payments of any kind, lobbying efforts, salaries (except as an administrative allowance that is limited to 2 percent of the total award), purchases or improvements of an individual’s private property, telephone costs, repairs to government-owned or profit-making facilities, and any payments for services not incurred. The National Board reserved about $12 million of the $100 million EFSP Recovery Act funds for State Set-Aside (SSA) awards. SSA committees identify jurisdictions with significant needs or service gaps that may not have qualified for EFSP funding under the standard formula. The jurisdictions may include areas with recent jumps in unemployment and isolated pockets of homelessness or poverty. The SSA committees develop their own formula, based on the number of unemployed in the non-EFSP qualifying jurisdictions in each state, to identify pockets of homelessness or jumps in unemployment. As of November 4, 2009, LROs in the 16 states and the District of Columbia (District) that GAO is following as part of its Recovery Act review were awarded almost $66.2 million in Recovery Act EFSP funds (76 percent) out of almost $87 million in standard Recovery Act awards nationwide, and about $4.8 million (almost 40 percent) of the approximately $12 million in Recovery Act SSA awards. The Recovery Act awards (standard and set- aside combined) for the LROs in the 16 states and the District ranged from $14.6 million for California’s LROs to $720,540 for Iowa’s LROs. (See table 10.) The average standard EFSP Recovery Act award for the LROs in each of the 16 states and the District was about $3.6 million. The average SSA Recovery Act award was about $300,000 for the LROs in the 16 states, ranging from about $724,000 for Pennsylvania’s LROs to about $2,300 for Arizona’s. SSA funds, which are intended to meet significant needs or fill gaps in places not covered by the standard EFSP funds, constituted differing proportions of the total EFSP awards in the states we reviewed. For example, the SSA award for LROs in Pennsylvania represented 19 percent of the state’s total EFSP award, while it represented less than 1 percent of Arizona LROs’ total award. In contrast, Iowa LROs received a total SSA award of about $406,000—more than half (56 percent) of the state LROs’ total award of about $720,500. As of November 4, 2009, LROs in 16 states and the District of Columbia had plans for using more than $64.7 million (98 percent) of their total Recovery Act EFSP awards. (See table 11.) Our analysis of the planned use of EFSP Recovery Act funds reported by the Local Boards in the 16 states and the District showed that the largest planned use of funds by the LROs was for “other food” (32 percent)—that is, food programs such as food banks and pantries, food vouchers and food-only gift certificates, and rent and mortgage assistance (29 percent). However, there is some variation in how LROs in the states planned to use the EFSP funds. For example, while LROs in California and New York reported that they planned to use about 40 percent of their total award funds on other food, LROs in Texas, Florida, and Michigan reported that they planned to use from 29 percent to 37 percent of their award funds on other food. Further, LROs in the District, Iowa, and Mississippi reported that they planned to use from 29 percent to 39 percent of their EFSP funds on mortgage and rent assistance, the second largest category for planned use of funds. Mass shelter was the third-largest category for planned use of EFSP funds by LROs across the 16 states and the District, representing about 14 percent of total planned use of funds by LROs in these states. For this report we expanded our focus on the use of Recovery Act funds to include local as well as state governments. As shown in figure 25, we visited 44 local governments to collect information regarding their use of Recovery Act funds. To select local governments for our review, we identified localities representing a range of types of governments (cities and counties), population sizes, and economic conditions (unemployment rates greater than and less than the state’s overall unemployment rate). We balanced these selection criteria with logistical considerations including other scheduled Recovery Act work, local contacts established during prior reviews, and the geographic proximity of the local government entities. The 44 localities we visited ranged in population from 15,042 in Newton, Iowa to 8,363,710 in New York City. Unemployment rates in our selected localities ranged from 5.8 percent in Garfield County, Colorado to 26.3 percent in Flint, Michigan. The use of Recovery Act funds helped to fund existing programs for some local governments. A number of local government officials reported that they used Recovery Act funds for existing programs or non-recurring projects and did not apply for grants that would result in long-term financial obligations. For example, although several local government officials reported applying for the Community Oriented Policing Services (COPS) Hiring Recovery Program grant, officials in a few localities expressed concerns about their ability to retain officers hired with Recovery Act funds. Several localities reported applying for and receiving funds for public works or infrastructure projects. For example, Meridian, Mississippi is using Recovery Act funds from the Energy Efficiency and Conservation Block Grant to complete restoration of its city hall using energy-efficient materials. A few localities reported that projects to increase energy efficiency could provide long-term cost-savings to the local government. The process of distributing federal assistance through grants is complicated and involves many different parties. Most Recovery Act funds to local governments flow through existing federal grant programs. Some of these funds are provided directly to the local government by federal agencies and others are passed from the federal agencies through state governments to local governments. As shown in table 12, local officials reported their governments’ use of Recovery Act funds in program areas including public safety (COPS, Edward Byrne Memorial Justice Assistance Grant (JAG)), Energy Efficiency and Conservation Block Grants (EECBG), housing (Community Development Block Grant (CDBG) and Homeless Prevention and Rapid Re-Housing Program (HPRP)), transportation and transit, workforce investment (Workforce Investment Act (WIA)), and human services (Community Services Block Grants (CSBG) and Supplemental Nutrition Assistance Program (formerly the food stamp program), and education (SFSF). Other Recovery Act funds received by the selected localities included grants for community health centers, waste water treatment, airport improvement, and other programs. In addition to Recovery Act funds for which local governments were prime recipients, several local government officials reported that additional Recovery Act funds were received by other entities within their local jurisdictions. For example, housing authorities, transit authorities, nonprofit organizations, and school systems were reported as entities within local jurisdictions which received Recovery Act funds directly from the federal government. Newark, New Jersey officials reported that their local government actively helped community partners pursue funding that the city was not eligible for, such as a National Endowment for the Arts grant. The city of Chicago, Illinois also established a partnership with nonprofit organizations to provide training on how to apply for Recovery Act grants for which the city was ineligible. Some local governments reported experiencing challenges in applying for and administering Recovery Act grants, including insufficient staff capacity, lack of guidance, budget constraints, and short application timetables. In particular, smaller localities, which are often rural, reported that they faced challenges due to grant requirements and a lack of staff capacity to find and apply for federal Recovery Act grants. Allegan County, Michigan officials also told us the requirements and goals of many Recovery Act programs do not fit the needs of a rural county like Allegan. For example, applicants for a grant from the U.S. Department of Transportation’s Transit Investments for Greenhouse Gas and Energy Reduction program must apply for at least $2 million, making it difficult for Allegan County to compete. Other local government officials reported that they did not employ a staff person to handle grants and therefore did not have the capacity to understand which grants they were eligible for and how to apply for them. A few local officials also reported concerns regarding some grants’ matching requirements, either at the state or federal level. For example, officials in Springfield, Massachusetts and Harrisburg, Pennsylvania reported an inability to apply for some grants because it was not feasible for them to generate the funds needed to meet the matching requirements. Local government officials reported that use of Recovery Act funds helps to support local services but recent revenue declines are still resulting in mid-cycle budget shortfalls. An October 2009 survey by the National Association of Counties said that 56 percent of counties responding to the survey reported starting their fiscal years with up to $10 million in projected shortfalls. In the face of decreasing revenue sharing by counties and states, a number of localities used Recovery Act funds to plug the resulting gaps in program funding. The localities we visited reported varied revenue-sharing relationships with state or county governments, but several received at least some revenue from the state or county government. A few of these localities reported that decreases in revenue sharing contributed to their current budget shortfalls. In some cases, the receipt of Recovery Act funds helped offset the decline in revenue sharing from other levels of government. In other cases, Recovery Act funds received at the state level may have reduced the severity of the state’s revenue sharing reductions. Several of the local governments included in our review experienced revenue declines and budget gaps. For example, Los Angeles, California officials stated that they were facing a $530 million shortfall as a result of declining property taxes, sales taxes, transfer/real estate transaction taxes, as well as utility and gas user taxes. In Jackson, Mississippi, the county government in which Jackson is located reduced the city’s 2009 fiscal year portion of the road and bridge tax revenue by over $500,000 and city officials expect the revenue decrease to continue into fiscal year 2010. City officials in Cincinnati, Ohio anticipate there will be a $28 million shortfall in their general fund tax revenues for fiscal year 2009 and that these revenues will continue to fall in fiscal year 2010. Local governments took a variety of budget actions to address shortfalls. Cincinnati, Ohio, for example, took several steps to close their budget shortfall, including layoffs, furloughs, union wage concessions, cutbacks in services, and drawing down on reserves. According to officials from Atlanta, Georgia, they offset declines in revenues by raising the property tax rate to address a projected $56 million budget gap. Officials from the city of Dallas, Texas explained that property and sales taxes represent two thirds of their $1.3 billion general revenue fund and the city of Dallas experienced declines in property and sales tax revenue for the previous 12 months, and anticipates a decline in property tax revenue for fiscal year 2010. Dallas officials relied on reductions in staff and city services as well as using $21.7 million from the city’s reserve fund to balance their budget. Officials from both Dallas and Denton County, Texas reported that their local governments receive no state aid. In contrast, the city of Springfield, Massachusetts relies on state aid for 60 percent of its revenue base, and state aid for the city of Buffalo, New York comprises about 43 percent of its revenue base. Officials from Buffalo expressed concern over impending cuts to state aid, while Springfield, Massachusetts officials noted that reductions in state aid would have been more severe had the state not received Recovery Act funds. Local government officials reported varied approaches to planning for the end of Recovery Act funds and several local officials did not report the need for a formal exit strategy. Officials representing a number of local governments said they did not need an exit strategy because of the limited effect of the use of Recovery Act funds. Officials in Yavapai County, Arizona stated that Recovery Act funds did not result in the adjustment of any budget actions. Although the county administration is not planning a formal exit strategy, county agencies are developing plans for the end of specific grant periods. Officials in Halifax County, North Carolina also reported that Recovery Act funds have not yet impacted the city’s budget and they have not discussed an exit strategy. Some local officials said that because Recovery Act funds were generally used for one-time projects which will not result in long-term liabilities they did not plan to develop an exit strategy. For example, officials in Los Angeles reported that they are working to ensure that Recovery Act funds are for one-time uses and making sure funds are leveraged to enhance community services rather than to fund ongoing projects requiring future financial support. Officials in Newton, Iowa stated that the development of a Recovery Act exit strategy is currently not applicable because the Recovery Act funded one- time improvement projects and not recurring operation expenses. On the other hand, a number of local governments reported that they are developing plans to sustain current Recovery Act projects after Recovery Act funding ends. Officials in Dallas, Texas acknowledged that sustaining the 50 police officers beyond the 3-year period of the Recovery Act funding would be challenging, but because public safety is a top priority and because it would be politically difficult to eliminate police officer positions, the city is committed to taking any necessary steps to ensure it can retain the additional officers. Other local governments reported developing a more general exit strategy consisting of reductions in expenditures or possible increases in revenue to prepare for the end of Recovery Act funding. Officials in Steuben County, New York said that they will have to increase taxes, reduce expenditures, and tap into their reserve while Westchester County, New York officials said that they may have to increase taxes and tap into reserves to prepare for the end of Recovery Act funds. Officials in Tift County, Georgia plan to maintain two positions in the District Attorney’s office supported by Recovery Act funds by charging users a fee in the future. Officials in Springfield, Massachusetts stated that the city is preparing for a “doomsday budget” once Recovery Act funds are no longer available and are planning to hold back expenditures as much as possible while exploring additional revenue sources. The Recovery Act continues to help state governments maintain services. According to associations representing state officials, budget cuts and tax increases would be larger without the use of Recovery Act funds. According to the National Governors Association (NGA) and National Association of State Budget Officers (NASBO), states will have faced $256 billion in budget gaps between fiscal years 2009 and 2011. These shortfalls were closed through a combination of budget cuts, tax increases, use of available reserves, and use of Recovery Act funds provided primarily for health care and education. According to the Pew Center on the States (Pew), 6 of our 16 selected states fall within Pew’s top 10 list of recession-stricken states that are particularly affected with ongoing fiscal woes. According to a senior Iowa official, the receipt of Recovery Act funds allowed Iowa to mitigate the effects of an across-the- board cut of 10 percent in fiscal year 2010 general fund expenditures, including maintaining state and local education services and reducing the number of layoffs in state agencies and local school districts. Without the use of Recovery Act funds, Iowa may have needed to cut additional programs, services and staff. As we reported in September 2009, Colorado had already planned to use more than $600 million in Recovery Act funds in fiscal year 2010. These funds include SFSF and the increased FMAP for Medicaid, which Colorado used to pay expenses related to its increased Medicaid caseload. The state now plans to use an additional $190 million in Recovery Act funds to offset proposed cuts in budgets for higher education and corrections. North Carolina state budget officials told us Recovery Act funds are helping in the areas of education and health and human services, and the state intends to use more of its State Fiscal Stabilization funds in the second quarter. The Governor of Massachusetts also announced a plan to close the latest budget gap through the use of $62 million in Recovery Act funds, among other strategies. Pennsylvania enacted its fiscal year 2010 budget since our September report. Michigan and the District of Columbia completed their fiscal years and their 2010 budgets since our September report. According to Michigan officials, the state enacted its 2010 budget on October 30, 2009. Michigan addressed a projected $2.7 billion shortfall through spending cuts, including cuts to state agencies’ budgets, local school districts, provider reimbursement rates for Medicaid services, and state revenue sharing to local governments. Starting in April 2009, we have noted in our bimonthly reports that OMB needs to take additional action to focus auditors’ efforts on areas that can provide the most efficient and most timely results to realize the Single Audit Act’s full potential as an effective oversight tool for Recovery Act programs. We reported that as federal funding of Recovery Act programs accelerates, the Single Audit process may not provide the accountability and focus needed to assist recipients in making timely adjustments to internal controls to provide assurances that the money is being spent efficiently and effectively to meet program objectives. To provide additional leverage as an oversight tool for Recovery Act programs, we recommended that OMB adjust the current audit process to, among other things, provide for review of internal controls before significant expenditures occurred. The statutory Single Audit reporting deadline is too late to provide audit results in time for the audited entity to take action on internal control deficiencies before significant expenditures of Recovery Act funds. As a result, an audited entity may not receive feedback needed to correct identified internal control deficiencies until the latter part of the subsequent fiscal year. The timing problem is exacerbated by the extensions to the 9-month deadline, consistent with OMB guidance, that have routinely been granted. OMB has developed a Single Audit Internal Control Project in response to our recommendations. One of the project’s goals is to encourage auditors to identify and communicate significant deficiencies and material weaknesses in internal control over compliance for selected major Recovery Act programs 3 months sooner than the 9-month time frame currently required under statute. If effective, the project should allow auditee program management to expedite corrective action and mitigate the risk of improper Recovery Act expenditures. OMB announced the project on September 10, 2009. In order to facilitate early communication of internal control significant deficiencies and material weaknesses, the project requires the auditor to issue an interim report by November 30, 2009, based on its internal control test work. This communication is to be based on the OMB Circular A-133 test work on the internal control over compliance in effect for the period ended June 30, 2009, and is to be presented to auditee management prior to December 31, 2009. Auditee management is to provide the interim communication report and a corrective action plan to the appropriate federal agency by January 31, 2010. Federal agencies—each of which will assign a project liaison—will then have up to 90 days to issue a written interim management decision regarding their assessment of the areas that have the highest risk to Recovery Act funding and any concerns about the proposed plan of corrective action. The project was designed to include at least 10 states that received Recovery Act funding, with each state selecting at least 2 Recovery Act programs for interim internal control testing and reporting from the following 11 programs. Department of Labor’s Unemployment Insurance; Department of Transportation’s (DOT) Federal-Aid Highway Surface DOT’s Federal Transit-Capital Investment Grants; Environmental Protection Agency’s (EPA) Capitalization Grants for Clean Water State Revolving Fund; EPA’s Capitalization Grants for Drinking Water State Revolving Fund; Department of Energy’s (DOE) Weatherization Assistance Program, Department of Education’s (Education) State Fiscal Stabilization Education’s Title I, Part A of the Elementary and Secondary Education Act of 1965, as amended; Health and Human Services’ (HHS) Child Care and Development Block HHS’s Medicaid; and various agencies’ research and development clusters. OMB designed the project to be voluntary. To encourage participation, OMB provided incentives to the states for volunteering. States and their auditors that participate are granted some relief in their workload because the auditor will not be required to perform risk assessments of smaller federal programs. OMB has also modified the requirements under Circular A-133 to reduce the number of low-risk programs that must be included in some project participants’ Single Audits. GAO had previously recommended that OMB evaluate options for providing relief related to low-risk programs to balance new audit responsibilities associated with the Recovery Act. One of the project’s goals is to identify deficiencies in internal controls for selected major Recovery Act programs 3 months sooner than the 9-month time frame currently required under statute, so that potential issues can be addressed by the auditee’s management and the federal agencies in a timely manner. Another goal is to provide OMB with insight into how a variety of states are implementing certain Recovery Act programs. By monitoring and analyzing the project’s results, OMB officials stated they can determine whether states are experiencing issues that OMB may need to address through additional guidance. If significant problems are identified, OMB officials have stated they may release further guidance for Recovery Act programs. At the end of the project period, OMB will determine the success of the project by evaluating whether there has been sufficient participation from the auditees, auditors, and federal agencies; the early communication process provides auditee and federal program management with useful information regarding internal control deficiencies in the Recovery Act programs administered by the states, thus resulting in expedited correction of such deficiencies and reduced risk to Recovery Act programs; and the process accelerates the audit resolution by the federal agencies and therefore provides auditee management with early feedback to assist in correction of the high-risk deficiencies in the most expeditious manner. On October 7, 2009, OMB announced that it was soliciting auditors and auditees from the 50 states, the District of Columbia, Puerto Rico, and Guam, to participate in the project. OMB encouraged potential participants to respond to the announcement by October 16, 2009. The following 16 states volunteered to participate in the project: Alaska, California, Colorado, Florida, Georgia, Louisiana, Maine, Missouri, Nevada, North Carolina, Ohio, Oklahoma, South Dakota, Tennessee, Texas, and Virginia. GAO had previously recommended that the Director of OMB take steps to achieve sufficient participation and coverage of Recovery Act funded programs in the project to leverage Single Audits as an effective oversight tool. The 16 project participants can provide important information on the potential impact of the early communication process. OMB met its goals for the scope of the project, and OMB officials stated that, overall, they were satisfied with the population and geographic diversity among the states that volunteered. Participants include states that use auditors within state government to conduct Single Audits as well as some that use external auditors. In addition, California and Texas, which are among the top three states with the highest levels of Recovery Act obligations from the federal government, are participating. The project required the states to select at least two programs for internal control testing. Thirteen states selected 2 programs, 2 states selected more than 2 programs, and Texas selected 8 programs. OMB officials said that some of the officials from states not participating expressed concerns about lacking sufficient resources to do the work. Of the 16 project participants, 9 selected the unemployment insurance program, 5 selected the SFSF program, 4 selected the Medicaid program, and 5 selected the Highway Infrastructure Investment program for audit. As of October 23, 2009, the Recovery Act portions of these 4 programs were the top 4 of all Recovery Act programs in terms of obligations to states. Further, each of the 11 Recovery Act programs included in the project by OMB was selected for inclusion by at least one participating state for early internal control testing. The project’s coverage could be more comprehensive to provide greater assurances about the extent that Recovery Act funding was effectively used to meet program objectives. As of October 23, 2009, Recovery Act federal obligations attributable to states totaled $236.5 billion and related outlays totaled $106.3 billion. Based on these and other data gathered through October 23, we estimate that, in dollar terms, the project participants’ selected Recovery Act programs are responsible for 16 percent of Recovery Act obligations, 23 percent of Recovery Act outlays, 36 percent of Recovery Act obligations for the 16 volunteer states, and 50 percent of Recovery Act outlays for the 16 volunteer states. OMB officials acknowledged that the project was not designed to provide coverage over a majority of Recovery Act program funding. We commend the 16 states that elected to participate in the project. OMB has stated that by participating in the project, the auditors and auditees are demonstrating to Congress and the general public their deep interest in safeguarding the Recovery Act funds against fraud, waste, and abuse. However, the project’s dependence on voluntary participation limits its scope and coverage. Voluntary participation may also bias the project’s results by excluding from analysis states or auditors with practices that cannot accommodate the project’s requirement for early reporting of control deficiencies. It is unclear whether OMB has the authority to mandate participation in the project. The project’s goal of identifying potential material weaknesses and significant deficiencies for selected major Recovery Act programs sooner than currently required has merit, especially since the project includes two of the three states with the largest amounts of Recovery Act funding nationwide—California and Texas. Although the project’s coverage could be more comprehensive, it is our view that the analysis of the project’s results could provide meaningful information to OMB for better oversight of Recovery Act programs. OMB stated that it will use the results of its analysis of the project as an indicator for making potential future modifications for improvement in the Single Audit Act. We will continue to monitor the implementation and progress of the project and report on its status in our February 2010 report. As we reported in July 2009, because a significant portion of Recovery Act expenditures will be in the form of federal grants and awards, the Single Audit process could be used as a key accountability tool over these funds. However, the Single Audit Act, enacted in 1984 and most recently amended in 1996, did not contemplate the risks associated with the current environment where large amounts of federal awards are being expended quickly through new programs, greatly expanded programs, and existing programs. Finally, in our July 2009 report, we included a matter for congressional consideration pointing out that Congress is considering a legislative proposal. We believe that the matter continues to be relevant for Congressional consideration and reemphasize that: To the extent that appropriate adjustments to the Single Audit process are not accomplished under the current Single Audit structure, Congress should consider amending the Single Audit Act or enacting new legislation that provides for more timely internal control reporting, as well as audit coverage for smaller Recovery Act programs with high risk. To the extent that additional audit coverage is needed to achieve accountability over Recovery Act programs, Congress should consider mechanisms to provide additional resources to support those charged with carrying out the Single Audit Act and related audits. During a time when states are grappling with unprecedented levels of declining state revenues and fiscal stress, states continue to seek relief from additional pressures created by requirements to implement and comply with the Recovery Act. This includes a wide range of activities to help ensure the prudent, timely, and transparent expenditures of Recovery Act funds, including, but not limited to, Single Audits. States often take on additional fiscal and administrative burdens to accomplish critical activities such as awarding grants, contracts, and cooperative agreements and providing funds for expenses incurred for general administration. Such additional costs can exacerbate states’ existing fiscal stress. However, states do not generally recover central administrative costs up front, but instead are reimbursed for such expenses after the fact. This process can have the unintended consequence of preventing state governments from obtaining the necessary resources to quickly build administrative capacities to meet the important new oversight, reporting, and audit requirements of the Recovery Act. In addition, as we previously noted, it is our view that Congress should consider mechanisms to provide additional resources to support those charged with carrying out the Single Audit Act and related audits. Our September 23, 2009, Recovery Act report noted that in order to achieve the delicate balance between robust oversight and the smooth flow of funds to Recovery Act programs, states may need timely reimbursement for these activities. We recommended that to the extent that the Director of OMB has the authority to consider mechanisms to provide additional flexibilities to support state and local officials charged with carrying out Recovery Act responsibilities, it is important to expedite consideration of alternative administrative cost reimbursement proposals. In response to this recommendation, OMB issued a memorandum on October 13, 2009, to provide guidance to address states’ questions regarding specific exceptions to OMB Circular A-87, Cost Principles for State, Local and Indian Tribal Governments. In the memorandum, OMB provided clarifications for states regarding specific exceptions to OMB Circular A-87 that are necessary in order for the states to perform timely and adequate Recovery Act oversight, reporting, and auditing. We believe the October OMB guidance provides the additional clarification needed for states and localities to proceed with their plans to recoup administrative costs. We previously reported that the risks inherent in the initial round of section 1512 recipient reporting could negatively impact the completeness, accuracy, and reliability of the information reported and on actions taken by OMB, the states, and federal agencies. Many recipients had not previously been subject to such reporting requirements, and their systems and processes had not been tested to provide reliable and accurate data, such as that required by section 1512. Risks were also increased because of the large number of recipients, making it more difficult for states and federal agencies to monitor the quality of the data reported by these recipients within a short time. While actions have been taken by the states, the District of Columbia, and federal agencies to address risks and help ensure the quality of the reported data, we found there are significant issues to be addressed in reporting data quality and consistent application of OMB guidance. All of the jurisdictions we reviewed had data quality review procedures in place for the recipient reporting data, either by a central state office or by state agencies. For example, at least three states (Florida, Michigan, and Pennsylvania) and the District of Columbia subjected the data to reviews at different levels in the state, including reviews by state program offices, state agencies, state recovery czars, and state agency inspectors general (IG). In the District of Columbia, data was reviewed at three different levels—by grant managers, by the agency administering the grant, and by the District’s recovery czar. In Florida, fiscal and program staff in state agencies and state agency IGs reviewed the data. At least six states (Florida, Georgia, Iowa, Michigan, Ohio, and Pennsylvania) required prime recipients to certify that they had reviewed the data. At least seven states (Florida, Georgia, Iowa, Michigan, New Jersey, North Carolina, and Texas) and the District of Columbia implemented controls, either manual or automated, intended to identify blank fields, correct field size, typographical errors, outliers, and other anomalies, such as whether the amount of funds spent was greater than the amount of funds received. In general, federal agencies that awarded Recovery Act funds to states developed internal policies and procedures for limited data quality reviews, as required by OMB. Federal agency IGs conducted reviews at federal agencies to determine whether the agencies had established processes to perform limited data quality reviews intended to identify material omissions and significant reporting errors and notify the recipients of the need to make appropriate and timely changes to their reported data. Even with the data quality review actions taken by states and federal agencies, we found that the data suffers from a number of issues. As we reported last month, based on our initial set of basic analyses of the recipient report data available for download from Recovery.gov, we identified recipient report records that showed certain data values or patterns in the data that were either erroneous or merit further review due to an unexpected or atypical data value or relationship between data values. Although recipients in the states we reviewed generally made good faith efforts to report accurately, there is evidence that the data reporting has been inconsistent, partly due to various interpretations of guidance. For example, recipients appear to have interpreted guidance on how to calculate and report data on jobs created or retained in somewhat different ways and took different approaches in how they developed their jobs data. We made two recommendations to the Director of OMB. First, to improve the consistency of full-time equivalent (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 (1) 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; (2) 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 (3) continue working with federal agencies and encourage them to provide or improve program-specific guidance to assist recipients, especially as it applies to the FTE calculation for individual programs. Second, 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. OMB agreed with our recommendations. In a written response to our recommendations, OMB’s Controller told us that OMB is committed to continually improving the reporting process, so that the Recovery Act goals of transparency and usefulness to the American people will be met. He also stated that each of our recommendations aligns with what OMB is hearing directly from recipients and agencies. OMB is working to better define the reporting period of measurement for recipients. As the reporting becomes more regular with quarterly updates, the time period covered by the data should be more consistent. OMB also plans to issue streamlined guidance to provide additional clarity in advance of the January reporting period, including refining its jobs-counting guidance. Further, OMB has continuing discussions with agencies about lessons learned and best practices, including suggestions for data quality. OMB pointed out that while there were numerous instances of reliable and accurate data reported, there were also erroneous data. OMB will continue to work with the Recovery Board to identify errors, large and small, and transparently correct them. 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 reported information. Our subsequent quarterly reports on recipient reporting will also discuss actions taken on the recommendations and will provide additional recommendations, as appropriate. Recipients of Recovery Act funds are expected to report quarterly on a number of measures, including the use of funds and the number of jobs created and retained. In addition to statutory requirements, the Office of Management and Budget (OMB) has directed federal agencies to collect performance information and to assess program accomplishments. Recipient financial tracking and reporting: Recovery Act prime recipients and federal agency reviewers are required to perform data quality checks; however, OMB guidance does not explicitly mandate a methodology for conducting quality reviews and providing final approval of data reported. Recommendations: In our July report, we recommended that the Director of OMB (1) clarify what constitutes appropriate quality control and reconciliation by prime recipients, especially for subrecipient data, and (2) specify who should provide formal certification and approval of data reported. More recently, in our comments on recipient reporting of jobs data, we recommended that OMB work with the Recovery Accountability and Transparency Board and federal agencies to re- examine review and quality assurance processes, procedures, and requirements in light of experiences and identified issues with the first round of recipient reporting and consider whether additional modifications need to be made and if additional guidance is warranted. The Controller of OMB in a November 18, 2009, letter outlined a series of actions OMB plans to take to address the issues and recommendations in our November report on recipient reporting. Those actions include conducting survey research with individual recipients to learn directly about what they liked about the reporting system, as well as problems they encountered. According to the OMB Controller, OMB and federal agencies will continue to work with the Recovery Board to examine recipient data for inconsistencies or errors. We believe that if effectively implemented, OMB’s planned and ongoing actions will address our recommendations. Other impact measures: As we noted in our July report, reporting on Recovery Act performance results is broader than the employment-related reporting required by the act. We continue to recommend that the Director of OMB—perhaps through the Senior Management Councils—clarify what other program performance measures recipients are expected to report on to demonstrate the impact of Recovery Act funding. Funding notification and program guidance: State officials expressed concerns regarding communication on the release of Recovery Act funds and their inability to determine when to expect federal agency program guidance. As we recommended, OMB now requires federal agencies to notify recovery coordinators in states, the District of Columbia, commonwealths, and territories within 48 hours of an award to a grantee or contractor in their jurisdiction. However, OMB does not have a master timeline for issuing federal agency guidance. We believe that OMB and federal agencies can strike a better balance between developing timely and responsive guidance and providing a longer-range timeline to support states’ and localities’ planning efforts. Recommendation: We recommended in our April report and continue to recommend the addition of a master schedule for anticipated new or revised federal Recovery Act program guidance and a more structured, centralized approach to making this information available, such as what is provided at www.recovery.gov on recipient reporting. OMB provided technical comments that have been incorporated into this report, as appropriate. We are sending copies of this report to the Office of Management and Budget; the Centers for Medicare & Medicaid Services; the Departments of Education, Energy, Housing and Urban Development, and Transportation; and the Federal Emergency Management Agency. In addition, we are sending sections of the report to officials in the 16 states and the District covered in our review. The report 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) 512-5500. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. This appendix describes our objectives, scope, and methodology (OSM) for this fourth of our bimonthly reviews on the Recovery Act. A detailed description of the criteria used to select the core group of 16 states and the District of Columbia (District) and programs we reviewed is found in appendix I of our April 2009 Recovery Act bimonthly report. The Recovery Act specifies several roles for GAO, including conducting bimonthly reviews of selected states’ and localities’ use of funds made available under the act. As a result, our objectives for this report were to assess (1) selected states’ and localities’ uses of and planning for Recovery Act funds, (2) the approaches taken by the selected states and localities to ensure accountability for Recovery Act funds, and (3) states’ plans to evaluate the impact of the Recovery Act funds they have received to date. Our teams visited the 16 selected states, the District, and a nonprobability sample of 155 entities (e.g., state and local governments, local education agencies, and public housing authorities) during September, October, November, and December 2009. As for our previous Recovery Act reports, our teams met with a variety of state and local officials from executive- level and program offices. During discussions with state and local officials, teams used a series of program review and semistructured interview guides that addressed state plans for management, tracking, and reporting of Recovery Act funds and activities. We also reviewed state constitutions, statutes, legislative proposals, and other state legal materials for this report. Where attributed, we relied on state officials and other state sources for description and interpretation of state legal materials. Appendix III details the states and localities visited by GAO. Criteria used to select localities within our selected states follow. Using criteria described in our earlier bimonthly reports, we selected the following streams of Recovery Act funding flowing to states and localities for review during this report: increased Medicaid Federal Medical Assistance Percentage (FMAP) grant awards; the Federal-Aid Highway Surface Transportation Program; the Transit Capital Assistance Program, the State Fiscal Stabilization Fund (SFSF); Title I, Part A of the Elementary and Secondary Education Act of 1965 (ESEA); Parts B and C of the Individuals with Disabilities Education Act (IDEA); the Public Housing Capital Fund; the Weatherization Assistance Program; and the Emergency Food and Shelter Program. We also reviewed how Recovery Act funds are being used by states and localities. In addition, we analyzed www.recovery.gov data on federal spending. For the increased FMAP grant awards, we obtained increased FMAP grant and draw-down figures for each state in our sample and the District from the Centers for Medicare & Medicaid Services (CMS). To examine Medicaid enrollment, states’ efforts to comply with the provisions of the Recovery Act, and related information, we relied on our Web-based survey, asking the 16 states and the District to provide new information as well as to update information they had previously provided to us. When necessary, we interviewed Medicaid officials from certain states to clarify survey responses. We also interviewed CMS officials regarding the agency’s oversight of increased FMAP grant awards and its guidance to states on Recovery Act provisions. To assess the reliability of increased FMAP draw-down figures, we interviewed CMS officials on how these data are collected and reported. To establish the reliability of our Web-based survey data, we pretested the survey with Medicaid officials in several states and also conducted consistent follow-up with all sample states to ensure a high response rate. Based on these steps, we determined that the data provided by CMS and submitted by states were sufficiently reliable for the purposes of our engagement. For highway infrastructure investment, we reviewed status reports and guidance to the states and discussed these with the U.S. Department of Transportation (DOT) and Federal Highway Administration (FHWA) officials. We obtained data from FHWA on obligations, reimbursements, and types of projects funded with Recovery Act highway infrastructure funds nationally and for the District and each of the 16 states. From state DOT officials, we obtained information on the status of projects and contracts, including the number of projects planned, out for bid, awarded, and completed. We interviewed officials from Arizona, California, Georgia, Massachusetts, Mississippi, and New Jersey regarding the progress of project and highway development in metropolitan areas. We interviewed officials from Arizona, California, and Illinois, who developed their own criteria to determine economically distressed areas to examine how these states calculated and justified their designations. We obtained data from 10 states and the District on highway project cost estimates and contract awards and analyzed these data to determine the savings from awarding contracts for less than the estimated costs. In all, we reviewed 1,880 contracts ranging from 12 contracts in the District to 587 in Illinois. For Recovery Act public transit investment, we reviewed information from California, Colorado, Illinois, Iowa, New York, North Carolina, and Pennsylvania on the Federal Transit Administration’s (FTA) Transit Capital Assistance Program. We also examined the Fixed Guideway Infrastructure Investment program in New York and Pennsylvania. We reviewed status reports and guidance to the states and discussed these with FTA officials. To determine the current status of transit funding, we obtained data from FTA on obligations and unobligated balances for Recovery Act grants nationally and, for each of our selected urbanized and nonurbanized areas, the numbers and types of projects funded. We reviewed information from selected urbanized and nonurbanized areas to include how projects were chosen, how funds were used, and how progress was reported. To determine how transit agencies and states are ensuring the accountability of funds and addressing reporting requirements, we reviewed the guidance each state uses to meet reporting requirements, including reporting on project status, subcontracts, and estimated jobs created. We also interviewed selected bus manufacturers on how job creation figures were calculated for Recovery Act-funded purchases. We also interviewed FTA about meetings with bus manufacturers to standardize guidance on job reporting. To obtain national and selected state-level information on how Recovery Act funds made available by the U.S. Department of Education under SFSF, ESEA Title I, and IDEA are being used at the local level, we designed and administered a Web-based survey of local education agencies (LEA) in the 50 states and the District of Columbia. We surveyed school district superintendents across the country to learn if they have received or expect to receive Recovery Act funding and how these funds are being used. We conducted our survey from August to October 2009, with a 73 percent final weighted response rate at the national level. We selected a stratified random sample of 2,101 LEAs from the population of 16,028 LEAs included in our sample frame of data obtained from the Common Core of Data (CCD) in 2006-2007. In order to make estimates for each of the 16 states and the District of Columbia, we stratified the sample based on those specific states. With the exception of the District of Columbia, all of our sample states had a response rate that exceeded 70 percent, with final weighted response rates ranging from 71 percent for Iowa to 90 percent for Georgia. We took steps to minimize nonsampling errors by pretesting the survey instrument with officials in 5 LEAs in July and August 2009. Because we surveyed a sample of LEAs, survey results are estimates of a population of LEAs and thus are subject to sampling errors that are associated with samples of this size and type. Our sample is only one of a large number of samples that we might have drawn. As each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 10 percentage points). We excluded 14 of the sampled LEAs for various reasons—because they were no longer operating in the 2009-2010 school year, were a duplicate entry, or were not an LEA—and therefore were considered out of scope. All estimates produced from the sample and presented in this report are representative of the in-scope population and have margins of error of plus or minus 5 percentage points or less for our overall sample and 12 percentage points or less for our 16 state samples, excluding the District, unless otherwise noted. To obtain specific examples of how LEAs are using Recovery Act funds, we visited at least two LEAs in Arizona, California, the District, New York, and North Carolina and interviewed LEA officials. To learn about issues related to Recovery Act funds for education, we interviewed officials in the District and state officials in each of the 16 states covered by our review. We also interviewed officials at the U.S. Department of Education (Education) and reviewed relevant laws, guidance, and communications to the states. Further, we obtained information from Education about the amount of funds these states have drawn down from their accounts with Education. For Public Housing, we obtained data from HUD’s Electronic Line of Credit Control System on the amount of Recovery Act funds that have been obligated and drawn down by each housing agency in the country. To update progress on how housing agencies are using these funds, we visited 25 of the 47 agencies we previously selected in nine states. At the selected agencies, we interviewed housing agency officials and conducted site visits of ongoing or planned Recovery Act projects. We also selected one Capital Fund Recovery Competition grant in all but one of the nine states and collected information on the housing agency’s plans for those funds. We also interviewed HUD officials to understand their procedures for monitoring housing agency use of Recovery Act funds and validating data that housing agencies reported to FederalReporting.gov. For the Weatherization Assistance Program, we reviewed relevant regulations and federal guidance and interviewed Department of Energy officials who administer the program at the federal level. In addition, for this report, we collected updated information from seven of our selected states and the District on their weatherization programs. We conducted semistructured interviews of officials in the states’ agencies that administer the weatherization program and with local service providers responsible for weatherization production. These interviews covered updates on the use of funds, the implementation of the Davis-Bacon Act, accountability measures, and impacts of the Recovery Act weatherization program. We also conducted site visits to interview 20 local providers of weatherization and to witness weatherization production. We continued to collect data about each state’s total allocation for weatherization under the Recovery Act, as well as the allocation already provided to the states and the expenditures to date. For the Emergency Food and Shelter Program (EFSP), we reviewed relevant federal laws and regulations, and guidance from the Federal Emergency Management Agency (FEMA) and the program’s National Board, which administer the program, and interviewed the FEMA official responsible for managing the program. We also analyzed data on the EFSP Recovery Act funds awarded to local recipient organizations (LRO) in the 16 states and the District that GAO reviewed, as well as data on the planned uses of EFSP Recovery Act funds reported by the LROs. We continued our review of the use of Recovery Act funds for the 16 states and the District, with a particular focus on those jurisdictions that enacted budgets since our last report. We conducted interviews with budget officials and reviewed proposed and enacted budgets and revenue estimates to update our understanding of the use of Recovery Act funds in the selected states and the District. To select local governments for our review, we identified localities representing a range of types of governments (cities and counties), population sizes, and economic conditions (unemployment rates greater than or less than the state’s overall unemployment rate). We used the latest unemployment rates and population sizes that were available as we prepared the draft. We balanced these selection criteria with logistical considerations, including other scheduled Recovery Act work, local contacts established during prior reviews, and the geographic proximity of the local government entities. The teams visited a total of 44 local government entities, 27 cities, 16 counties, and one local government entity organized as a city and county, Denver. Due to the small sample size and judgmental nature of the selection, GAO’s findings are not generalizable to all local governments. To gain an understanding of local governments’ use of Recovery Act funds we met with the chief executives, recovery coordinators, auditors, and finance officials at the selected local governments. We also met with associations representing local governments to understand their perspectives on the impact of the Recovery Act on local governments and reviewed reports and analysis regarding the fiscal conditions of local governments. The list of local governments selected in each state is found in appendix III. To determine how states are planning for the recipient reporting requirements of the Recovery Act, we asked cognizant officials to describe the activities undertaken related to recipient reporting, including guidance that has been issued to state agencies and subrecipients, monitoring plans, and policies and procedures that have been developed for recipient reporting. We also reviewed relevant recipient reporting guidance issued by the Office of Management and Budget (OMB). For audit work related to Single Audits, we reviewed OMB’s guidance and the scope and objectives for the Single Audit Internal Control Project. We also discussed with relevant OMB officials their efforts toward implementing the project. We reviewed and analyzed federal agency financial and activity reports to compare obligations and outlays by states for programs included in the OMB project to obligations and outlays attributable to states for all Recovery Act programs as of October 23, 2009. We obtained this data from www.Recovery.gov. In addition, we discussed with OMB officials OMB’s progress toward addressing GAO recommendations related to Single Audits our in previous Recovery Act reports. We collected funding data from www.recovery.gov and federal agencies administering Recovery Act programs for the purpose of providing background information. We used funding data from www.recovery.gov— which is overseen by the Recovery Accountability and Transparency Board—because it is the official source for Recovery Act spending. Based on our limited examination of this information thus far, we consider these data sufficiently reliable with attribution to official sources for the purposes of providing background information on Recovery Act funding for this report. Our sample of states, localities, and entities has been purposefully selected and the results of our reviews are not generalizable to any population of states, localities, or entities. We conducted this performance audit from September 18, 2009, to December 4, 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. Following are descriptions of selected grant programs discussed in this report. Medicaid is a joint federal-state program that finances health care for certain categories of low-income individuals, including children, families, persons with disabilities, and persons who are elderly. The federal government matches state spending for Medicaid services according to a formula based on each state’s per capita income in relation to the national average per capita income. The Centers for Medicare & Medicaid Services, within the Department of Health and Human Services, approves state Medicaid plans, and the amount of federal assistance states receive for Medicaid service expenditures is known as the Federal Medical Assistance Percentage (FMAP). The Recovery Act’s temporary increase in FMAP funding will provide the states with approximately $87 billion in assistance. The Recovery Act provides funding to states for restoration, repair, and construction of highways and other activities allowed under the Federal Highway Administration’s Federal-Aid Highway Surface Transportation Program and for other eligible surface transportation projects. The Recovery Act requires that 30 percent of these funds be suballocated, primarily based on population, for metropolitan, regional, and local use. Highway funds are apportioned to states through federal-aid highway program mechanisms, and states must follow existing program requirements. While the maximum federal fund share of highway infrastructure investment projects under the existing federal-aid highway program is generally 80 percent, under the Recovery Act, it is 100 percent. Funds appropriated for highway infrastructure spending must be used in accordance with Recovery Act requirements. States are required to ensure that all apportioned Recovery Act funds—including suballocated funds— are obligated within 1 year. The Secretary of Transportation is to withdraw and redistribute to eligible states any amount that is not obligated within these time frames. Additionally, the governor of each state must certify that the state will maintain its level of spending for the types of transportation projects funded by the Recovery Act it planned to spend the day the Recovery Act was enacted. As part of this certification, the governor of each state is required to identify the amount of funds the state plans to expend from state sources from February 17, 2009, through September 30, 2010. The Recovery Act appropriated $8.4 billion to fund public transit throughout the country through existing Federal Transit Administration (FTA) grant programs, including the Transit Capital Assistance Program, and the Fixed Guideway Infrastructure Investment program. Under the Transit Capital Assistance Program’s formula grant program, Recovery Act funds were apportioned to large and medium urbanized areas—which in some cases include a metropolitan area that spans multiple states— throughout the country according to existing program formulas. Recovery Act funds were also apportioned to states for small urbanized areas and nonurbanized areas under the Transit Capital Assistance Program’s formula grant programs using the program’s existing formula. Transit Capital Assistance Program funds may be used for such activities as vehicle replacements, facilities renovation or construction, preventive maintenance, and paratransit services. Recovery Act funds from the Fixed Guideway Infrastructure Investment program were apportioned by formula directly to qualifying urbanized areas, and funds may be used for any capital projects to maintain, modernize, or improve fixed guideway systems. As they work through the state and regional transportation planning process, designated recipients of the apportioned funds— typically public transit agencies and metropolitan planning organizations (MPO)—develop a list of transit projects that project sponsors (typically transit agencies) submit to FTA for approval. Funds appropriated for the Transit Capital Assistance Program and the Fixed Guideway Infrastructure Investment Program must be used in accordance with Recovery Act requirements. States are required to ensure that all apportioned Recovery Act funds are obligated within 1 year. The Secretary of Transportation is to withdraw and redistribute to each state or urbanized area any amount that is not obligated within these time frames. Additionally, governors must certify that the state will maintain the level of state spending for the types of transportation projects funded by the Recovery Act it planned to spend the day the Recovery Act was enacted. As part of this certification, the governor of each state is required to identify the amount of funds the state plans to expend from state sources from February 17, 2009, through September 30, 2010. The State Fiscal Stabilization Fund (SFSF), administered by the Office of Elementary and Secondary Education of the Department of Education, included approximately $48.6 billion to award to states by formula and up to $5 billion to award to states as competitive grants. The Recovery Act created the SFSF in part to help state and local governments stabilize their budgets by minimizing budgetary cuts in education and other essential government services, such as public safety. Stabilization funds for education distributed under the Recovery Act must first be used to alleviate shortfalls in state support for education to Local Education Agencies (LEA) and public institutions of higher education (IHE). States must use 81.8 percent of their SFSF formula grant funds to support education (these funds are referred to as education stabilization funds) and must use the remaining 18.2 percent for public safety and other government services, which may include education (these funds are referred to as government services funds). For the initial award of SFSF formula grant funds, Education made available at least 67 percent of the total amount allocated to each state, but states had to submit an application to Education to receive the funds. The application required each state to provide several assurances, including that the state will meet maintenance-of-effort requirements (or will be able to comply with the relevant waiver provisions) and that it will implement strategies to advance four core areas of education reform: (1) increase teacher effectiveness and address inequities in the distribution of highly qualified teachers; (2) establish a pre-K-through-college data system to track student progress and foster improvement, (3) make progress toward rigorous college- and career-ready standards and high-quality assessments that are valid and reliable for all students, including students with limited English proficiency and students with disabilities; and (4) provide targeted, intensive support and effective interventions to turn around schools identified for corrective action or restructuring. In addition, states were required to make assurances concerning accountability, transparency, reporting, and compliance with certain federal laws and regulations. After maintaining state support for education at fiscal year 2006 levels, states must use education stabilization funds to restore state funding to the greater of fiscal year 2008 or 2009 levels for state support to LEAs and public IHEs. When distributing these funds to LEAs, states must use their primary education funding formula, but they can determine how to allocate funds to public IHEs. In general, LEAs have broad discretion in how they can use education stabilization funds, but states have some ability to direct IHEs in how to use these funds. The Recovery Act provides $10 billion to help LEAs educate disadvantaged youth by making additional funds available beyond those regularly allocated through Title I, Part A of the Elementary and Secondary Education Act of 1965, as amended. Title I funding is administered by the Office of Elementary and Secondary Education within the Department of Education. The Recovery Act requires these additional funds to be distributed through states to LEAs using existing federal funding formulas, which target funds based on such factors as high concentrations of students from families living in poverty. In using the funds, LEAs are required to comply with applicable statutory and regulatory requirements and must obligate 85 percent of the funds by September 30, 2010. Education is advising LEAs to use the funds in ways that will build the agencies’ long-term capacity to serve disadvantaged youth, such as through providing professional development to teachers. The Recovery Act provided supplemental funding for Parts B and C of the Individuals with Disabilities Education Act (IDEA), as amended, the major federal statute that supports early intervention and special education and related services for children, and youth with disabilities. Part B provides funds to ensure that preschool and school-aged children with disabilities have access to a free and appropriate public education and is divided into two separate grant programs —Part B grants to states (for school-age children) and Part B preschool grants. The IDEA Part B grants are administered by the Office of Special Education and Rehabilitative Services. Part C funds programs that provide early intervention and related services for infants and toddlers with disabilities—or at risk of developing a disability—and their families. The Public Housing Capital Fund provides formula-based grant funds directly to public housing agencies to improve the physical condition of their properties; to develop, finance, and modernize public housing developments; and to improve management. Under the Recovery Act, the Office of Public and Indian Housing within the U.S. Department of Housing and Urban Development (HUD) allocated nearly $3 billion through the Public Housing Capital Fund to public housing agencies using the same formula for amounts made available in fiscal year 2008 and obligated these funds to housing agencies in March 2009. HUD was also required to award nearly $1 billion to public housing agencies based on competition for priority investments, including investments that leverage private sector funding or financing for renovations and energy conservation retrofitting. In September 2009, HUD awarded competitive grants for the creation of energy-efficient communities, gap financing for projects stalled due to financing issues, public housing transformation, and improvements addressing the needs of the elderly or persons with disabilities. The Recovery Act appropriated $5 billion for the Weatherization Assistance Program, which the Department of Energy (DOE) is distributing to each of the states, the District, and seven territories and Indian tribes, to be spent over a 3-year period. The program, administered by the Office of Energy Efficiency and Renewable Energy within DOE, enables low-income families to reduce their utility bills by making long- term energy-efficiency improvements to their homes by, for example, installing insulation, sealing leaks, and modernizing heating equipment, air circulation fans, and air conditioning equipment. Over the past 32 years, the Weatherization Assistance Program has assisted more than 6.2 million low-income families. By reducing the energy bills of low-income families, the program allows these households to spend their money on other needs, according to DOE. The Recovery Act appropriation represents a significant increase for a program that has received about $225 million per year in recent years. DOE has approved the weatherization plans of the 16 states and the District that are in our review and has provided at least half of the funds to those areas. The Emergency Food and Shelter Program (EFSP), which is administered by the Federal Emergency Management Agency (FEMA) within the Department of Homeland Security (DHS), was authorized in July 1987 by the Stewart B. McKinney Homeless Assistance Act to provide food, shelter and supportive services to the homeless. The program is governed by a National Board composed of a representative from FEMA and six statutorily-designated national nonprofit organizations. Since its first appropriation in fiscal year 1983, EFSP has awarded over $3.4 billion in federal aid to more than 12,000 local private, non-profit, and government human service entities in more than 2,500 communities nationwide. The following grant programs were mentioned in the state and local budget section of this report. Within the Department of Transportation, the Federal Aviation Administration’s Airport Improvement Program provides formula and discretionary grants for the planning and development of public-use airports. The Recovery Act provides $1.1 billion for discretionary Grant-in- Aid for Airports under this program with priority given to projects that can be completed within 2 years. The Recovery Act requires that the funds must supplement, not supplant, planned expenditures from airport- generated revenues or from other state and local sources for airport development activities. The Recovery Act provides $1.1 billion for this program. The Recovery Act Assistance to Rural Law Enforcement to Combat Crime and Drugs Program is administered by the Bureau of Justice Assistance (BJA), a component of the Office of Justice Programs, U.S. Department of Justice. The purpose of this program is to help rural states and rural areas prevent and combat crime, especially drug-related crime, and provides for national support efforts, including training and technical assistance programs strategically targeted to address rural needs. The Recovery Act provides $125 million for this program, and BJA has made 212 awards. The Department of Commerce’s National Telecommunications and Information Administration (NTIA) administers the Recovery Act’s Broadband Technology Opportunities Program. This program was appropriated $4.7 billion, including $350 million for the purposes of developing and maintaining a broadband inventory map. To accomplish this, NTIA has developed the State Broadband Data and Development Grant Program, a competitive, merit-based matching grant program to fund projects that collect comprehensive and accurate state-level broadband mapping data, develop state-level broadband maps, aid in the development and maintenance of a national broadband map, and fund statewide initiatives directed at broadband planning. The Recovery Act provides $100 million to the Brownfields Program, administered by the Office of Solid Waste and Emergency Response within the Environmental Protection Agency, for cleanup, revitalization, and sustainable reuse of contaminated properties. The funds will be awarded to eligible entities through job training, assessment, revolving loan fund, and cleanup grants. The Department of Health and Human Services’ Health Resources and Services Administration has allocated $862.5 million in Recovery Act funds for Capital Improvement Program grants to health centers to support the construction, repair, and renovation of more than 1,500 health center sites nationwide, including purchasing health information technology and expanding the use of electronic health records. Administered by the Administration for Children and Families within the Department of Health and Human Services, Child Care and Development Block Grants, one of the funding streams comprising the Child Care and Development Fund, are provided to states, according to a formula, to assist low-income families in obtaining child care, so that parents can work or participate in education or training activities. The Recovery Act provides $1.9 billion in supplemental funding for these grants. The Recovery Act provides $4 billion for the Clean Water State Revolving Fund, administered by the Office of Water within the Environmental Protection Agency, to fund municipal wastewater infrastructure projects. The Recovery Act requires states to use at least 50 percent of the amount of their capitalization grant to provide additional subsidization of loans to eligible recipients. In addition, to the extent there are sufficient project applications, at least 20 percent of the appropriated funds must be designated for green infrastructure, water efficiency improvements, or other environmentally innovative projects. The Department of Energy’s Clean Cities program, administered by the Office of Energy Efficiency and Renewable Energy, is a government- industry partnership that works to reduce America’s petroleum consumption in the transportation sector. The Department of Energy is providing nearly $300 million in Recovery Act funds for projects under the Clean Cities program, which provide a range of energy-efficient and advanced vehicle technologies, such as hybrids, electric vehicles, plug-in electric hybrids, hydraulic hybrids and compressed natural gas vehicles, helping reduce petroleum consumption across the United States. The program also supports refueling infrastructure for various alternative fuel vehicles, as well as public education and training initiatives, to further the program’s goal of reducing the national demand for petroleum. The Community Development Block Grant (CDBG) program, administered by the Office of Community Planning and Development within the Department of Housing and Urban Development, enables state and local governments to undertake a wide range of activities intended to create suitable living environments, provide affordable housing, and create economic opportunities, primarily for persons of low and moderate income. Most local governments use this investment to rehabilitate affordable housing and improve key public facilities. The Recovery Act includes $1 billion for the CDBG program. Community Services Block Grants (CSBG), administered by the Administration for Children and Families within the Department of Health and Human Services (HHS), provide federal funds to states, territories, and tribes for distribution to local agencies to support a wide range of community-based activities to reduce poverty. The Recovery Act appropriated $1 billion for CSBG to become available immediately. The COPS Hiring Recovery Program (CHRP), administered by the Office of Community Oriented Policing Services within the U.S. Department of Justice, provides competitive grant funds directly to law enforcement agencies for the purpose of hiring or rehiring career law enforcement officers and increasing their community policing capacity and crime- prevention efforts. CHRP grants provide 100 percent funding for 3 years for approved entry-level salaries and benefits for newly hired, full-time sworn officer positions or for rehired officers who have been laid off, or are scheduled to be laid off on a future date, as a result of local budget cuts. The program objective of the Diesel Emission Reduction Act Grants, administered by the Office of Air and Radiation in conjunction with the Office of Grants and Debarment, within the U.S. Environmental Protection Agency (EPA), is to reduce diesel emissions. EPA will award grants to address the emissions of in-use diesel engines by promoting a variety of cost-effective emission reduction strategies, including switching to cleaner fuels, retrofitting, repowering or replacing eligible vehicles and equipment, and idle reduction strategies. The Recovery Act appropriated $300 million for the Diesel Emission Reduction Act grants. In addition, the funds appropriated through the Recovery Act for the program are not subject to the State Grant and Loan Program Matching Incentive provisions of the Energy Policy Act of 2005. The Drinking Water State Revolving Fund program was established under the Safe Drinking Water Act (SDWA) Amendments of 1996, which authorizes the Environmental Protection Agency (EPA) to award capitalization grants to states, which in turn are authorized to provide low- cost loans and other types of assistance to public water systems to finance the costs of infrastructure projects needed to achieve or maintain compliance with SDWA requirements. The Recovery Act provides $2 billion in funding for this program, which is administered by the Office of Water within EPA. The Edward Byrne Memorial Justice Assistance Grant (JAG) Program within the Department of Justice’s Bureau of Justice Assistance provides federal grants to state and local governments for law enforcement and other criminal justice activities, such as crime prevention and domestic violence programs, corrections, treatment, justice information sharing initiatives, and victims’ services. JAG funds are allocated based on a statutory formula determined by population and violent crime statistics, in combination with a minimum allocation to ensure that each state and territory receives some funding. The Energy Efficiency and Conservation Block Grants (EECBG), administered by the Office of Energy Efficiency and Renewable Energy within the Department of Energy, provides funds through competitive and formula grants to units of local and state government and Indian tribes to develop and implement projects to improve energy efficiency and reduce energy use and fossil fuel emissions in their communities. The Recovery Act includes $3.2 billion for the EECBG. Of that total, $400 million is to be awarded on a competitive basis to grant applicants. Administered by the Administration for Children and Families within the Department of Health and Human Services, the Foster Care Program helps states to provide safe and stable out-of-home care for children until the children are safely returned home, placed permanently with adoptive families or placed in other planned arrangements for permanency. The Adoption Assistance Program provides funds to states to facilitate the timely placement of children, whose special needs or circumstances would otherwise make placement difficult, with adoptive families. Federal Title IV-E funds are paid to reimburse statea for their maintenance payments using the states’ respective Federal Medical Assistance Percentage (FMAP) rates. Under the Recovery Act, an estimated additional $806 million will be provided to states to increase the federal match for state maintenance payments for foster care, adoption assistance, and guardianship assistance. The Head Start program, administered by the Office of Head Start of the Administration for Children and Families within the Department of Health and Human Services, provides comprehensive early childhood development services to low-income children, including educational, health, nutritional, social, and other services, intended to promote the school readiness of low-income children. Federal Head Start funds are provided directly to local grantees, rather than through states. The Recovery Act provided an additional $2.1 billion in funding for Head Start, including $1.1 billion directed for the expansion of Early Head Start programs. The Early Head Start program provides family-centered services to low-income families with very young children designed to promote the development of the children, and to enable their parents to fulfill their roles as parents and to move toward self-sufficiency. The Homelessness Prevention and Rapid Re-Housing Program, administered by the Office of Community Planning and Development within the Department of Housing and Urban Development, awards formula grants to states and localities to prevent homelessness and procure shelter for those who have become homeless. Funding for this program is being distributed based on the formula used for the Emergency Shelter Grants program. According to the Recovery Act, program funds should be used for short-term or medium-term rental assistance; housing relocation and stabilization services, including housing search, mediation or outreach to property owners, credit repair, security or utility deposits, utility payments, and rental assistance for management; or appropriate activities for homeless prevention and rapid rehousing of persons who have become homeless. The Recovery Act includes $1.5 billion for this program. The Department of Health and Human Services’ Health Resources and Services Administration (HRSA) has allocated Recovery Act funds for Increased Demand for Services (IDS) grants to health centers to increase health center staffing, extend hours of operations, and expand existing services. The Recovery Act provided $500 million for health center operations. HRSA has allocated $343 million for IDS grants to health centers. Internet Crimes Against Children Initiatives (ICAC), administered by the Department of Justice, Office of Justice Programs’ (OJP) Office of Juvenile Justice and Delinquency Prevention (OJJDP), seeks to maintain and expand state and regional ICAC task forces to address technology- facilitated child exploitation. This program provides funding to states and localities for salaries and employment costs of law enforcement officers, prosecutors, forensic analysts, and other related professionals. The Recovery Act appropriated $50 million for ICAC. The Recovery Act provides $50 million to be distributed in direct grants by the National Endowment for the Arts to fund arts projects and activities that preserve jobs in the nonprofit arts sector threatened by declines in philanthropic and other support during the current economic downturn. The Neighborhood Stabilization Program (NSP), administered by the Office of Community Planning and Development within the Department of Housing and Urban Development, provides assistance for the acquisition and rehabilitation of abandoned or foreclosed homes and residential properties, among other activities, so that such properties may be returned to productive use. Congress appropriated $2 billion in NSP2 funds in the Recovery Act for competitive awards to states, local governments, and nonprofit organizations. NSP is considered to be a component of the Community Development Block Grant (CDBG) program and basic CDBG requirements govern NSP. The Recovery Act Assistance to Firefighters Fire Station Construction Grants, also known as fire grants or the FIRE Act grant program, is administered by the Department of Homeland Security, Federal Emergency Management Agency (FEMA), Assistance to Firefighters Program Office. The program provides federal grants directly to fire departments on a competitive basis to build or modify existing non-federal fire stations in order for departments to enhance their response capability and protect the communities they serve from fire and fire-related hazards. The Recovery Act includes $210 million for this program and provides that no grant shall exceed $15 million. Under title IV-D of the Social Security Act, the Administration for Children and Families (ACF), within the Department of Health and Human Services, administers matching grants to states to carry out their child support enforcement programs, which enhance the well-being of children by identifying parents, establishing support obligations, and monitoring and enforcing those obligations. Furthermore, ACF makes additional incentive payments to states based on their child support enforcement programs meeting certain performance goals. These activities are appropriated annually and the Recovery Act does not appropriate funds for either of them. However, the Recovery Act temporarily provides for incentive payments expended by states for child support enforcement to count as state funds eligible for the matching grants. This change is effective October 1, 2008, through September 30, 2010. Administered by the Department of Transportation’s Office of the Secretary, the Recovery Act provides $1.5 billion in competitive grants, generally between $20 million and $300 million, to state and local governments, and transit agencies. These grants are for capital investments in surface transportation infrastructure projects that will have a significant impact on the nation, a metropolitan area, or a region. Projects eligible for funding provided under this program include, but are not limited to, highway or bridge projects, public transportation projects, passenger and freight rail transportation projects, and port infrastructure investments. The Transit Investments for Greenhouse Gas and Energy Reduction (TIGGER) Grant program, administered by the Federal Transit Administration within the Department of Transportation, is a discretionary program to support transit capital projects that result in greenhouse gas reductions or reduced energy use. The Recovery Act provides $100 million for the TIGGER program, and each submitted proposal must request a minimum of $2 million. The Senior Community Service Employment Program (SCSEP), administered by the Employment and Training Administration within the Department of Labor, promotes useful part-time opportunities in community service activities for unemployed low-income persons who are 55 years or older and who have poor employment prospects. The Recovery Act provides $120 million for SCSEP. Under the STOP Program, the Office on Violence Against Women within the Department of Justice, has awarded over $139 million in Recovery Act funds to promote a coordinated, multidisciplinary approach to enhance services and advocacy to victims, improve the criminal justice system’s response, and promote effective law enforcement, prosecution, and judicial strategies to address domestic violence, dating violence, sexual assault, and stalking. The Supplemental Nutrition Assistance Program (SNAP), administered by the Food and Nutrition Service within the Department of Agriculture, serves more than 35 million people nationwide each month. SNAP’s goal is to help low-income people and families buy the food they need for good health. The Recovery Act provides for a monthly increase in benefits for the program’s recipients. The increases in benefits under the Recovery Act are estimated to total $20 billion over the next 5 years. The Department of Agriculture’s Forest Service administers the Wildland Fire Management Program funding for projects on federal, state, and private land. The goals of these projects include ecosystem restoration, research, and rehabilitation; forest health and invasive species protection; and hazardous fuels reduction. The Recovery Act provided $500 million for the Wildland Fire Management program. The Workforce Investment Act of 1998 (WIA) programs, administered primarily by the Employment and Training Administration within the Department of Labor, provide job training and related services to unemployed and underemployed individuals. The Recovery Act provides an additional $2.95 billion in funding for state formula grants for Youth, Adult, and Dislocated Worker Employment and Training Activities under Title I-B of WIA. These grants are allocated to states, which in turn allocate funds to local entities. The adult program provides training and related services to individuals ages 18 and older, the youth program provides training and related services to low-income youth ages 14 to 21, and dislocated worker funds provide training and related services to individuals who have lost their jobs and are unlikely to return to those jobs or similar jobs in the same industry. Northern Arizona Council of Governments California Department of Transportation (Caltrans) Federal Highway Administration - Illinois Division Office New York City Department of Transportation City of Plano San Diego Association of Governments San Francisco Municipal Transportation Agency Metropolitan Atlanta Rapid Transit Authority (MARTA) Des Moines Area Regional Transit Authority Pace, the Suburban Bus Division of the Regional Transportation Authority North Carolina Department of Transportation Public Transportation Division Lehigh and Northampton Transportation Authority (LANTA) Lehigh Valley Planning Commission (LVPC) Pennsylvania Department of Transportation Bureau of Public Transportation Southeastern Pennsylvania Transportation Authority (SEPTA) Port Authority of Allegheny County Desert Star Community School, Inc. Maricopa County Community College District Saddle Mountain Unified School District Los Angeles Unified School District District of Columbia Public Schools William E. Doar, Jr. Public Charter School Illinois State Board of Education New York City Department of Education Weldon City Schools City of Glendale Community Housing Division City of Phoenix Housing Department Housing Authority of Maricopa County City of Tucson Department of Housing and Community Development Housing Authority of the City and County of Denver Housing Authority of the Town of Kersey Des Moines Municipal Housing Agency North Iowa Regional Housing Authority Housing Authority for LaSalle County Mississippi Regional Housing Authority No. VIII The Housing Authority of the City of Picayune The Housing Authority of the City of Rahway San Antonio Housing Authority (SAHA) Community Action Partnership of Orange County Pacific Asian Consortium in Employment (PACE) Community Action Partnership of Riverside County Project Go, Inc. District Department of the Environment Polk County Public Works Department Mid-Iowa Community Action, Inc. Community Action Programs Inter-City, Inc. Action, Inc. Community Action Agency of Jackson, Lenawee, Hillsdale Michigan Department of Human Services Oakland Livingston Human Services Agency Community Development Corporation of Long Island Long Island City Community Environmental Center People’s Equal Action and Community Effort Corporation for Ohio Appalachian Development (COAD) Mid-Ohio Regional Planning Commission (MORPC) Community Action Partnership of the Greater Dayton Area (CAP-Dayton) Total number of local governments visited by GAO is 44. The following staff contributed to this report: Stanley Czerwinski, Denise Fantone, Susan Irving, and Yvonne Jones, (Directors); Thomas James, James McTigue, and Michelle Sager, (Assistant Directors); Sandra Beattie (Analyst-in-Charge); and Robert Alarapon, David Alexander, Marie Penny Ahearn, Judith Ambrose, Peter Anderson, Lydia Araya, Thomas Beall, James Bennett, Noah Bleicher, Jessica Botsford, Anthony Bova, Muriel Brown, Lauren Calhoun, Richard Cambosos, Ralph Campbell Jr., Virginia Chanley, Tina Cheng, Marcus Corbin, Robert Cramer, Jeffrey DeMarco, Michael Derr, Helen Desaulniers, Ruth “Eli” DeVan, David Dornisch, Kevin Dooley, Holly Dye, Abe Dymond, James Fuquay, Alice Feldesman, Alexander Galuten, Ellen Grady, Anita Hamilton, Geoffrey Hamilton, Tracy Harris, Bert Japikse, Karen Keegan, John Krump, Jon Kruskar, Hannah Laufe, Jean K. Lee, Sarah McGrath, Jean McSween, Donna Miller, Kevin Milne, Shelia McCoy, Mimi Nguyen, Josh Ormond, Ken Patton, Sarah Prendergast, Brenda Rabinowitz, Carl Ramirez, James Rebbe, Beverly Ross, Aubrey Ruge, Sylvia Schatz, Sidney Schwartz, John Smale Jr., Kathryn Smith, George Stalcup, Andrew J. Stephens, Alyssa Weir, Crystal Wesco, and Kimberly Young. | This report is the fourth in a series responding to a mandate under the American Recovery and Reinvestment Act of 2009 (Recovery Act). As of November 27, 2009, $69.1 billion, or about one quarter of the approximately $280 billion of total Recovery Act funds for programs administered by states and localities, had been paid out. The largest programs were the Medicaid Federal Medical Assistance Percentage (FMAP), the State Fiscal Stabilization Fund (SFSF), and highways. The Government Accountability Office's (GAO) work continues to focus on 16 states and the District of Columbia (District). Of their increased FMAP grant awards for federal fiscal year 2009, the 16 states and the District had drawn down about $22.3 billion, or 97 percent of the funds available, as of November 30, 2009. Through November 16, 2009, in the 16 states and the District, $11.9 billion (76 percent) of Recovery Act highway funds had been obligated for nearly 4,600 projects and $1.9 billion (16 percent) had been reimbursed. Nationally, $20.4 billion (77 percent) had been obligated for over 8,800 projects and $4.2 billion (20 percent) had been reimbursed. Almost half of Recovery Act obligations nationally have been for pavement improvements--resurfacing, rehabilitating, and reconstructing roadways. Of the $7.5 billion in Recovery Act formula funding made available nationally for transit projects, $6.7 billion (88 percent) had been obligated through November 5, 2009. Most of these obligations are being used to upgrade transit facilities, improving bus fleets and light rail systems, and conducting preventive maintenance. As of November 6, 2009, of the Recovery Act funds available to them, the 16 states and the District had drawn down about $8.4 billion (46 percent) in SFSF; $735 million (11 percent) in Elementary and Secondary Education Act Title I, Part A funds; and $755 million (10 percent) in Individuals with Disabilities Education Act (IDEA), Part B funds. GAO surveyed a sample of local educational agencies about their planned uses of Recovery Act funds and found (1) retaining jobs is the primary planned use, with 63 percent planning to use over 50 percent of their SFSF funds to retain jobs; (2) other planned uses include nonrecurring items such as equipment; and (3) most report placing great importance on educational goals and reform. The Department of Housing and Urban Development has entered into funding agreements with 3,121 public housing agencies and made available nearly all of the almost $3 billion in public housing formula grant funds provided under the Recovery Act. As of November 14, these agencies had reported obligating about half of the funds HUD had made available. Housing agencies GAO visited are using funds to replace roofs, windows, and floors; upgrade kitchens and baths, and renovate rental units. Regarding the Weatherization Assistance Program, nationally, the states reported that, as of September 30, 2009, they had spent about $113 million (2 percent) of the $5 billion in Recovery Act funding and had completed weatherizing about 7,300 (1 percent) of the 593,000 housing units planned for weatherization. The Recovery Act also included a $100 million appropriation for the Emergency Food and Shelter Program. Local recipient organizations in the 16 states and the District were awarded almost $66.2 million and plan to use the funds primarily for "other food" services such as food banks and pantries, food vouchers, and rent and mortgage assistance. |
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BIE’s mission is to provide Indian students with quality education opportunities starting in early childhood. Its Indian education programs derive from the federal government’s trust relationship with Indian tribes, a responsibility established in federal statutes, treaties, and court decisions. Students attending BIE schools generally must be members of federally recognized Indian tribes, or descendants of members of such tribes, and reside on or near federal Indian reservations. About one-third of BIE schools serve students from the Navajo Nation. BIE schools are primarily funded through Interior, but like public schools, they also receive annual formula grants from Education. Like state educational agencies that oversee public schools in their respective states, BIE administers and oversees the operation of these Education grants, including grants through two Acts: the Elementary and Secondary Education Act of 1965 (ESEA) and the Individuals with Disabilities Education Act (IDEA). Title I, Part A of ESEA (Title I)—the largest funding source for kindergarten through grade 12 under ESEA—provides funding to expand and improve educational programs in schools with students from low-income families and may be used for supplemental services to improve student achievement, such as instruction in reading and mathematics. BIE schools receive IDEA funding for special education and related services, such as physical therapy or speech therapy, for children with disabilities. BIE has access to some detailed, real-time expenditure data for BIE- operated schools since they are operated directly by BIE. For example, BIE has direct access to these schools’ costs for transportation, instruction, and operations. Access to these data enables BIE officials to closely track BIE-operated school spending. However, certain costs for administrative services to operate BIE schools, such as procurement or human resources, are not performed or tracked by BIE. As we reported in September 2013, BIE is part of the Office of the Assistant Secretary- Indian Affairs (Indian Affairs), and Indian Affairs performs many administrative functions to support BIE-operated schools that a school superintendent’s office or school district typically would. However, Indian Affairs does not currently identify all its costs to support BIE schools, despite our 2003 report in which we recommended that it do so, in accordance with federal accounting standards. Meanwhile, the Tribally Controlled Schools Act of 1988 limits the financial information that most tribally-operated schools are required to submit to BIE. Tribal school grantees must complete an annual report that includes, among other things, an annual financial statement reporting revenue and expenditures as well as a financial audit in accordance with the Single Audit Act of 1984. This law, as implemented by the Office of Management and Budget, requires a financial audit of grantees who expend at least $500,000 in federal grants and other assistance in a fiscal year. These audits are commonly called “single audits.” The audits are carried out at the end of a school’s fiscal year and are conducted by independent auditors who are contracted by the grantee. They include both the entity’s financial statements and the records of spending of federal grant awards for each program. Auditors determine whether the grantee met the compliance requirements listed in the Office of Management and Budget’s Circular No. A-133 Compliance Supplement for each program. Auditors also report on the entity’s internal control over compliance for these programs and report identified control deficiencies or noncompliance in the single audit report. It is the grantee’s responsibility to follow up and take corrective actions on the audit findings. Auditors also must follow up on findings from past years’ audits, as reported by the grantee. According to Indian Affairs’ policy manual, BIE has several responsibilities that pertain to single audit reporting, including ensuring that audits are completed and reports submitted; providing technical advice and counsel to grantees as requested; and issuing a management decision on audit findings within six months after receipt of the audit report. BIE is under Indian Affairs, and the BIE director is responsible for the direction and management of education functions, including the formation of policies and procedures, supervision of all program activities, and approval of the expenditure of funds for education purposes. BIE has a central office in Washington, D.C.; a major field service center in Albuquerque, New Mexico; three regional offices (one in the east and two in the west, including one serving only schools in the Navajo Nation); and 22 education line offices located on or near Indian reservations, 17 of which currently have responsibilities for financial oversight. On June 13, 2014, the Secretary of the Interior issued an Order restructuring BIE. The reorganization is to occur in two phases, with the first phase becoming operational before the start of the 2014-15 school year. The second phase is anticipated to be operational by the end of the 2015-16 school year. Additionally, the Order states that Interior will strengthen and support the efforts of tribal nations to directly operate BIE schools. At the time of our review, several offices were responsible for oversight of BIE school expenditures (see fig. 1). BIE’s local education line offices have been responsible for providing oversight and technical assistance to both BIE- and tribally-operated schools. Education line office administrators are the lead education administrators for these offices and have responsibilities similar to school district superintendents for BIE-operated schools. Additionally, education line office administrators serve as grant officers to tribally-operated schools, allowing or disallowing costs questioned in BIE schools’ single audits. BIE’s Division of Performance and Accountability (Performance and Accountability), located in Albuquerque, administers and oversees Education-funded programs for BIE schools and develops strategies to improve academic achievement. Staff are responsible for overseeing BIE- and tribally-operated schools’ IDEA and ESEA programs. BIE’s Division of Administration (Administration), also in Albuquerque, implements budget policies, procedures, processes, and systems for all fiscal and accounting functions for education programs and schools. According to senior BIE officials, Administration staff oversee expenditures for Interior and Education-funded programs for both BIE- and tribally-operated schools, but their main focus is on BIE-operated schools. Indian Affairs’ Office of Internal Evaluation and Assessment—staffed mainly by accountants and auditors—is responsible for providing guidance and oversight to BIE to ensure that internal controls are established and maintained. The office maintains an automated tracking system to provide Administration and line office management with information on the status of tribally-operated schools’ single audits; notifies Administration and line office management when schools have failed to submit the audits; reviews all audits submitted to Administration; and is responsible for providing technical assistance to line office administrators. This office provides these and many other services to all Indian Affairs organizations. According to the office’s director, BIE represents a very small portion of the office’s overall portfolio. All BIE schools—both BIE-operated and tribally-operated—receive almost all of their funding to operate from federal sources, namely, Interior and Education. Specifically, these elementary and secondary schools received approximately $830 million in fiscal year 2014—including about 75 percent, or $622 million from Interior and about 24 percent, or approximately $197 million, from Education. BIE schools also received small amounts of funding from other federal agencies, mostly the Department of Agriculture (see fig. 2). The largest source of funding for BIE schools is Interior’s Indian School Equalization Program (ISEP). ISEP provides funding for basic instruction; supplemental instruction, such as language development and gifted and talented programs; staffing to oversee student residences and dormitories; and food service, among other services. The second and third largest sources of funding for BIE schools are from Education’s Title I and IDEA programs, respectively. Funding under Title I accounted for about $93.2 million of the $120.9 million that BIE received in fiscal year 2014 under ESEA programs. Except for a 2-year infusion of $149 million of funding in 2009 and 2010 through the American Recovery and Reinvestment Act of 2009 (Recovery Act) and a related act, according to BIE documents, total annual funding from Interior and Education fluctuated slightly from fiscal year 2009 to fiscal year 2014. Excluding Recovery Act funding, annual funding for BIE schools increased overall from fiscal year 2009 to fiscal year 2014 by about 6 percent in nominal terms, which does not account for inflation. However, adjusting for inflation, we estimate that funding during that period actually decreased slightly, by about 1 percent. Meanwhile, for public schools, funding data from Education were generally not available for the full period from fiscal year 2009 to fiscal year 2014. According to BIE officials, very little funding for BIE schools comes from non-federal sources. BIE-operated schools received very little tribal, state, or other revenue in fiscal year 2014, according to BIE. However, some tribally-operated schools received a small amount of revenue from other sources, such as tribes. Of the schools we visited that serve tribes in four states, officials from one tribe, which operated casinos, reported contributing a small amount of funding to its schools. Unlike BIE schools, the vast majority of funding for public schools nationwide comes from state and local sources, while a relatively small proportion comes from federal sources. For example, in school year 2009-10, public schools nationwide received about 87 percent of their funding from state and local sources—43 percent from state sources and 44 percent from local sources. In contrast to BIE schools, federal funding has generally comprised about 9 percent of public schools’ funding from school year 2002-03 to 2008-09. Subsequently, in school year 2009-10, federal funding for public schools comprised about 13 percent, which was slightly higher than in previous years due in part to the Recovery Act. (See fig. 3.) For public schools nationally, Education’s Title I and IDEA programs provide the largest amounts of federal funding. The percent of federal funding of public schools varies across states and local school districts. For example, in one district we visited, which was located near BIE schools, federal funding accounted for about 35 percent of its funding, and in another district about 68 percent. A key reason for the larger amount of federal funding for these districts was their funding from a federal formula grant program known as Impact Aid. Impact Aid is intended to compensate school districts for funding losses resulting from federal activities. These funds were in addition to the districts’ Title I and IDEA funding. Average per-pupil expenditures for the 32 BIE-operated day schools were at least 56 percent higher than in public schools nationally in school year 2009-10, and were higher in the four categories of operating expenditures that we analyzed. According to our analysis, BIE-operated day schools spent an estimated average of at least $15,391 per pupil, while public schools nationwide spent an estimated average of $9,896, excluding food service. (See fig. 4). When Recovery Act spending was excluded, per- pupil expenditures for these BIE-operated schools were at least 61 percent greater than at public schools. Similarly, we found higher per- pupil expenditures at BIE-operated day schools in the categories of instruction (the largest category), transportation, facilities operations and maintenance, and administration. For example, transportation expenditures were more than twice as much at BIE-operated schools than at public schools nationwide. Unlike the national averages, per-pupil expenditures at 4 of the 16 BIE schools that we visited appeared similar to those at nearby public school districts. Like the BIE schools we visited, these nearby rural public school districts served students who were mostly Indian and low-income. Thus, certain student demographics as well as the geographic location of the schools were comparable. In one state, two tribally-operated schools spent an estimated $17,066 per pupil, and the nearby public school district spent $17,239 per pupil. In another state, per-pupil expenditures, excluding facilities operations and maintenance, were $12,972 at two BIE-operated schools and $11,405 at the nearby public school district. However, the findings from this sample are not generalizable to all BIE and nearby public schools. Also, data limitations prevented us from comparing the other 12 BIE schools that we visited with nearby public schools. Several factors help to explain higher per-pupil expenditures at the 32 BIE-operated schools relative to public schools nationwide (see table 1). Student demographics. Students in BIE schools—both tribally- operated and BIE-operated—tend to have different demographic characteristics than students in public schools nationally. These characteristics, including higher poverty rates and a higher percent of students with special needs, are among the factors yielding higher per-pupil expenditures on average, as we have noted in previous reports. In BIE schools, students tend to be from lower income households than public school students. For example, all BIE schools were eligible for Title I funding on a school-wide basis because they all had at least 40 percent of children from low income households in school year 2009-10, according to an Education study. In contrast, half of all public schools were eligible for Title I funds on a school-wide basis. In addition, BIE-operated day schools have a higher percentage of students receiving special education services than public schools nationwide, according to BIE and Education data. Students in special education generally need additional services, such as physical, occupational or speech therapy, so expenditures tend to be higher for these students. Smaller enrollment and remote location. The smaller enrollment and isolated location of many BIE schools contribute to their higher expenditures. In school year 2009-10, BIE schools, including BIE- operated schools, generally had smaller average enrollment than public schools nationwide. For example, over 85 percent of BIE- operated day schools (28 of 32 schools) had fewer than 300 students according to our analysis, as compared to about 30 percent of public schools nationwide. Along with smaller size, the remote location of many BIE schools hinders their ability to benefit from economies of scale, as we have previously reported. For example, expenditures for facilities operations and maintenance may be higher, to the extent that many schools are geographically dispersed and unable to share facilities personnel, supplies, or services. Other factors may help explain higher per-pupil expenditures at BIE- operated schools, including the higher costs of instruction, transportation, facilities operations and maintenance, and administration. Instructional expenditures were greater at BIE-operated schools than at public schools nationwide, due partly to teacher salaries. Teacher salaries were typically higher in BIE-operated schools than in public schools, according to BIE salary schedules and an Education study of school year 2011-12. For example, in school year 2011-12, the yearly base salary for a teacher with a bachelor’s degree and no experience at BIE-operated schools was $39,775, compared to averages of $35,500 at public schools nationwide and $33,200 at rural public schools nationwide. The higher salaries at BIE-operated schools are mainly due to a federal law which requires BIE to pay teachers using the same pay scale as teachers at Department of Defense schools located overseas. The law requires similar pay, in part, to help recruit and retain teachers at BIE-operated schools. Although our analysis of per-pupil expenditures focused on BIE-operated schools, teacher salaries at tribally-operated schools—which set their own salary amounts—generally were lower than teacher salaries at public schools. According to an Education study of school year 2007-08 (the most recent study that included tribally-operated schools), all BIE schools—two-thirds of which were tribally-operated—paid teachers, on average, an estimated base salary of $41,500. By contrast, public schools nationwide paid, on average, an estimated base salary of $49,600, including an average of $44,000 in rural public schools. According to Education’s study of school year 2007-08, teachers at BIE schools and public schools nationwide generally appeared to have similar years of experience, but a slightly lower percentage of teachers at BIE schools had a master’s degree as their highest degree compared to public school teachers nationally. In addition, BIE schools had lower median student-teacher ratios than public schools in school year 2009-10, which makes per-pupil spending higher. The median ratio was 11.4 students per teacher at all BIE schools and 15.5 students per teacher at public schools, according to an Education study. This lower ratio mainly relates to the smaller average enrollment at BIE schools than at public schools, which limits BIE schools’ ability to benefit from economies of scale. BIE reported that the remote locations of its schools and poor road conditions contributed to higher transportation expenditures than those of public schools, among other factors. For example, daily round-trip bus routes averaged about 80 miles for all BIE schools and ranged from a few miles to more than 320 miles, according to BIE officials. Also, the poor road conditions, including dirt or unimproved roads, lead to wear and tear on vehicles transporting students, according to BIE budget documents and administrators at schools we visited (see fig. 5). By contrast, slightly more than half of public schools are located in cities or suburbs, and therefore may be unlikely to face such long bus routes or poor road conditions. As transportation expenditures increase, BIE reported that schools are trying to contain costs in various ways, such as combining or reducing bus routes or using more appropriate vehicles for the number of students or road conditions. Facilities-related expenditures may be higher at BIE-operated schools than public schools because a greater proportion of schools that BIE manages are in poor condition than public schools. BIE reported that about one-third of its schools were in poor condition as of the end of school year 2012-13, while two-thirds were in fair or good condition. At one school we visited that BIE identified as in poor condition, the main classroom building was built in the 1930s, and several other school buildings no longer had functioning heat. Conversely, an estimated 3 percent of public schools nationwide with permanent buildings reported that they were in poor condition in school year 2012-13, excluding temporary, or portable, buildings. BIE-operated schools may also have higher facilities-related expenditures than public schools because some BIE schools are responsible for funding the operations and maintenance of many services that public school districts typically are not, such as water and sewer service or trash and snow removal. For example, at another BIE school we visited in poor condition, the 50-year old building lacked a sprinkler system and was located in a remote area. As a result, school officials said that they provide a fire truck and supplies for the school as well as for the local vicinity, contributing to higher operations and maintenance expenditures. As with other categories of spending, higher per-pupil spending on administration at the 32 BIE-operated day schools relates partly to their smaller average enrollment than enrollment at public schools. As we reported in 2003, expenditure categories for administration are not comparable for BIE and public schools in light of their different organizational structures. At BIE-operated day schools in school year 2009-10, about $1,502 of the $15,391 in per-pupil expenditures, or about 10 percent, was for administration. Of the $1,502 per pupil for administration, $1,149 was spent on school-level administration, such as principals’ salaries; $47 was allotted for the school board; and an estimated $306 was spent by BIE education line offices. These offices provide academic and financial guidance, similar to a school district’s office of the superintendent. Meanwhile, public schools in school year 2009-10 spent per pupil, on average, $1,088, or about 10 percent, for administration: about $568 for school-level administration, $186 for the school board and the office of the superintendent, and $334 for additional administration, such as procurement, finance, and payroll. However, the costs for administering BIE-operated schools are greater than $1,502 per pupil since our estimate excludes the costs of the administrative services that Indian Affairs provides to BIE. Indian Affairs performs many administrative functions to support BIE-operated schools that a school or school district typically would, such as procurement, finance, and human resources. However, Indian Affairs does not currently identify all the costs associated with supporting these schools. These costs and services are to shift from Indian Affairs to BIE by the end of school year 2015-16, according to a June 2014 Order from the Secretary of the Interior. Line office administrators are integral to overseeing school expenditures, but the number of full-time administrators who oversee school expenditures decreased from a total of 22 in 2011 to 13 in 2014, 6 permanent and 7 acting. The workload of the vacant administrator positions has been absorbed by the remaining administrators. Besides key responsibilities in academic and other aspects of school administration, line office administrators’ responsibilities include: overseeing and evaluating schools’ expenditures; ensuring that tribally-operated schools submit their annual single audits and providing them to the Federal Audit Clearinghouse and BIE’s Administration office; approving or disapproving costs that are questioned in tribally- operated schools’ single audits, and working with tribes and schools to ensure that any single audit findings are resolved; and collaborating with BIE’s Performance and Accountability officials to identify schools that may need additional oversight because of failure to comply with Education program requirements, such as Title I and IDEA fiscal requirements. Beginning in 2012, when BIE officials announced plans to reorganize and possibly close line offices, staff began resigning and retiring. Staff departures increased further when Indian Affairs announced Voluntary Early Retirement Authority and Voluntary Separation Incentive Payments in 2013. From fiscal years 2011 to 2014, funding for management of BIE schools, including for line office staff, decreased by about 38 percent. As a result of having fewer line office administrators, the remaining administrators have been assigned additional responsibilities and their workload has increased, making it challenging for them to conduct needed oversight. For example, administrators in two of the three line offices we interviewed reported that over the last 2 years their responsibilities have increased significantly, and they are now overseeing and providing technical assistance to a greater number of schools. One official told us that in addition to the 7 schools he usually monitors, he is responsible for 11 additional schools that two other line offices had been responsible for overseeing. According to an administrator in a third line office, located in the Navajo Nation, responsibilities in that office have also changed significantly, and currently one line office administrator is responsible for overseeing 65 Navajo schools’ financial matters, including the tribally-operated schools’ annual single audits. With increased responsibilities and travel budgets constraints, line office administrators in all three BIE regions reported that conducting site visits and maintaining regular interaction with school personnel is difficult. In particular, line office administrators said, among other things, it is challenging to obtain and review school documents, develop working relationships with school officials, and provide technical assistance to schools, all of which are activities that contribute to oversight. For example, one line office administrator reported that she reviews hard- copy special education files during site visits to ensure that funding is used to provide students with needed services. She explained that she is only able to access these files when visiting schools. According to a high-ranking BIE official, increased line office responsibilities can include working outside of one’s assigned region in geographically dispersed areas. For example, a line office administrator in North Dakota also serves as the acting administrator for a line office in Tennessee and is responsible for overseeing and providing technical assistance to schools in five states—Florida, Louisiana, Maine, Mississippi, and North Carolina. Similarly, a line office administrator in New Mexico and another in Arizona are responsible for overseeing school expenditures to schools in Montana. The challenges line office administrators confront in overseeing school expenditures are further exacerbated by a lack of financial expertise and training. For example, although line office administrators make key decisions about single audit report findings, such as whether funds are being spent appropriately, they are not auditors or accountants. Additionally, the administrators responsible for the three line offices we visited said that they did not have the financial expertise to understand the content of single audits. Although Indian Affairs has offered occasional webinars pertaining to single audits in the last two years, some line office administrators have not received this training. In fact, the majority of BIE’s acting line office administrators (4 out of 7), have not attended these webinars, though they may especially need training on their new job responsibilities. Additionally, no BIE staff have attended any in-person single audit training since at least 2011. Although BIE officials reported in September 2013 that eliminating line office positions would create problems if appropriate plans are not developed and implemented, the agency has not developed a plan for meeting its workforce needs. According to BIE officials, they have not hired new line office administrators for 4 years due to budget cuts. As a result of these cuts, Interior had a hiring freeze for about 1.5 years and currently has a cap on hiring. Although BIE can request waivers to hire additional staff, it has not done so for line office positions in this fiscal environment. BIE has a responsibility to employ the staff needed to adequately oversee school expenditures. To the extent that line office administrators are currently stretched thin without an effective plan for realigning staff responsibilities, BIE’s efforts to fulfill its mission of educating Indian students are impaired. BIE’s approach to staffing line offices runs counter to federal internal control standards and key principles for effective strategic workforce planning. Federal internal control standards state that staff need to possess and maintain a level of competence that allows them to accomplish their assigned duties. Additionally, key principles for workforce planning include: (1) aligning an organization’s human capital program with its current and emerging mission and programmatic goals and (2) developing long-term strategies for acquiring, developing, and retaining staff to achieve programmatic goals. The appropriate number and geographic distribution of employees can further support organizational goals and strategies and enable an organization to have sufficient, adequately trained staff. Absent a comprehensive workforce plan that responds to staff shortages, BIE is jeopardizing its ability to oversee both BIE-operated and tribally-operated schools to ensure their funds are being used for their intended purpose to provide students a quality education. Strategic workforce planning for oversight of school expenditures is especially important for BIE as it implements a recently announced restructuring. On June 13, 2014, the Secretary of the Interior issued an Order to restructure BIE using existing resources for the 2014-15 school year. The Order emphasizes the importance of improving academic achievement at BIE schools and creates new offices in BIE as well as transferring responsibilities for certain school support services from other Indian Affairs offices to BIE. However, the Secretarial Order does not address any issues regarding the oversight of school expenditures. For example, although line offices are discussed within the context of restructuring and will still be responsible for providing technical assistance to schools, it is unclear whether they will continue to have a role in monitoring school expenditures. Further, the Order is silent on the status and roles of Performance and Accountability and the Administration office, the two other BIE entities currently involved in monitoring school expenditures. In addition, the Order does not address concerns about the shortage of staff responsible for overseeing school expenditures or gaps in their expertise and training. In late June 2014, a senior BIE official said that the status of Performance and Accountability is still unclear and that the Administration office will become BIE’s School Operations Division, responsible for acquisition and grants, among many other duties. Although the Secretarial Order requires the Assistant Secretary-Indian Affairs to complete an analysis of new work functions and develop workforce plans, it is unclear if the workforce plans will address whether BIE has an adequate number of staff with the required knowledge and skills to oversee BIE school spending. Moreover, the timeframe for completing these activities is limited. Specifically, the Order directs BIE and the Assistant Secretary-Indian Affairs to complete these activities in less than 3 months—from mid June through August 2014. As of mid- August, high-ranking officials reported that BIE was unlikely to meet these timeframes. This compressed timeframe makes it extremely challenging to conduct effective workforce planning. According to our prior work, as part of workforce planning an agency should first identify current and future needs, including the appropriate number of employees, the key competencies and skills for mission accomplishment, and the appropriate deployment of staff across the agency. After completing these activities, the agency should then create strategies for identifying and filling gaps. While BIE is restructuring to improve operational support to schools and enhance school performance, it must also ensure that federal funding to the schools is used for its intended purposes. Therefore, it is critical to ensure that there are sufficient staff assigned to oversee school expenditures and that they have the appropriate expertise and training to do so. If BIE does not develop a detailed workforce plan for staff overseeing school expenditures, its ability to effectively provide technical assistance to tribes and build tribal capacity to operate schools will be impaired. BIE oversees tribally-operated school spending primarily through information provided in the schools’ annual single audits; however, it does not have a process in place for consistently documenting actions it takes to respond to audit findings. For example, when we requested documents describing actions BIE had taken in response to audit findings at six tribally-operated schools, BIE could only produce documents for one of the schools. BIE officials told us they could not produce documents for the remaining five schools because the line office staff assigned to oversee the schools’ spending had either retired or were unavailable. As a result of not having a process to document what steps BIE took to address the issues identified at the schools, BIE staff newly assigned to oversee these schools’ expenditures have no way to determine how their schools’ audit findings were resolved. Consequently, they must start anew when following up on future single audit findings and other oversight activities. Without a mechanism to ensure sustained oversight of school expenditures, BIE is not well-positioned to improve financial management at these schools and ensure they are spending Interior and Education funds to provide Indian students a quality education. According to internal control standards, oversight activities should ensure that the findings of audits are promptly resolved and they should be recorded in an accurate and timely manner. In addition, documents should be readily available for examination. Similarly, BIE does not have a mechanism in place to ensure that tribally- operated schools’ single audits are shared with all of the officials responsible for overseeing school expenditures. Specifically, officials from Performance and Accountability—who are tasked with overseeing schools’ spending for Education programs—reported they do not have access to schools’ single audits, which include information about their use of ESEA and IDEA funds. Performance and Accountability officials told us they have requested access to single audits from Administration officials in the past, but they told us their requests were not honored because of technological challenges related to BIE’s computer network. However, Indian Affairs staff said that if BIE sends them a list of individuals who should have access to the single audits, they can accommodate their requests. Performance and Accountability officials reported that access to these audits would give them a more comprehensive view of tribally-operated schools’ finances. This would help them determine whether schools are complying with Education program requirements, such as whether IDEA funds are being used to provide special education services for students with disabilities. Additionally, the officials said the audits would help them identify tribally-operated schools that have large unexpended IDEA balances from year to year and may not be using funds to provide needed services to students. To the extent that Performance and Accountability staff do not have access to needed documents, it hinders BIE’s ability to hold others accountable for use of government resources. According to internal control standards, program managers need both operational and financial data to meet their goals for accountability for effective and efficient use of resources. BIE does not have written procedures for overseeing BIE-operated and tribally-operated schools’ Indian School Equalization Program (ISEP) expenditures, which is particularly significant since ISEP is the schools’ largest source of funding—about $402 million in fiscal year 2014. Although BIE Administration and line office staff are responsible for overseeing these expenditures, they do not have complete or detailed procedures to guide their work. For example, they do not have a specific procedure for how and when they should conduct desk audits of schools or on-site monitoring visits. Further, the staff lack written procedures— such as a uniform list of documents and other items to review—to help guide their oversight efforts and ensure they are consistent across schools. According to federal internal control standards, management is responsible for developing the detailed policies, procedures, and practices to fit their agency’s operations and to ensure they are built into and an integral part of operations. Instead of using written procedures to oversee expenditures, Administration officials told us they use a case-by-case approach and rely on the “practice history” of staff. Absent written oversight procedures, BIE is at risk of obtaining and relying on varied and incomplete information to determine whether its schools are using funds as intended. Written procedures are particularly important for BIE’s oversight of tribally- operated schools since BIE plans to increase their number in coming years and the Tribally Controlled Schools Act limits the amount of information that tribes must submit to BIE. If funds are not used for their intended purpose, students in BIE schools may not receive the services they need, such as tutoring and other forms of instruction. In contrast to the lack of written procedures for overseeing ISEP expenditures, Performance and Accountability staff have developed draft procedures for overseeing schools’ IDEA spending and are in the process of developing them for ESEA-funded programs (see table 2). The draft procedures for overseeing IDEA funds include detailed written instructions for conducting both fiscal desk audits of schools and on-site oversight reviews. For example, the desk audit instructions include a list of all the financial documents that staff will review, outline a detailed process for determining the risk level of each school for meeting IDEA fiscal requirements, and describe follow-up actions to be taken depending on the schools’ level of risk. In addition to not having comprehensive written procedures for oversight, Administration officials reported they do not consistently document the results of monitoring, including on-site visits, which is particularly important given recent staff departures. In addition, BIE officials reported that a line office administrator had solely conducted monitoring activities in fiscal years 2010 through 2012 at a school with a history of poor management of ISEP funds. When we asked BIE for documentation of the administrator’s activities, we were told that he had retired and that no records were available. In addition, BIE does not have a standard form or template for their staff to document their monitoring activities. Further, when we asked about recent site visits they conducted, Administration officials provided conflicting information. In a May 1, 2014 written response to a question that we posed, Administration officials reported that they had not conducted any recent site visits. However, in an interview on May 2, they stated that a visit had occurred within the previous month. If the Administration office had a process in place to consistently document site visits, the office would have had definitive information on the recent visits that they conducted. BIE also lacks a process to prioritize oversight activities based on a school’s risk of misusing ISEP funds. Rather than using a risk-based approach to guide how it uses limited monitoring resources, BIE officials use an ad hoc approach. BIE officials said they typically wait for suggestions from line office staff to determine which schools to monitor on-site, and they typically visit schools in close proximity to their offices. This approach is consistent with BIE’s tendency to rely on its practice history, rather than standard oversight processes. While this approach may, in isolation, allow BIE to identify some schools that need additional oversight or assistance, federal internal control standards call for a more comprehensive analysis, and they state that management needs to comprehensively identify risks. A line office administrator we interviewed reported that given his increased workload in recent years and travel budget constraints he has been unable to visit schools for which he is responsible and whose single audits have identified serious financial weaknesses. For example, he has been unable to visit one school—which is at a significant distance from his office—whose audit found $1 million or more in questioned costs over multiple years. According to written responses to questions we posed, BIE indicated that monitoring visits to all schools have been infrequent over the past few years due to budget constraints and travel restrictions. Given these budget constraints as well as staff shortages, it is critical for BIE to use its existing resources to target schools for monitoring that have been identified in their single audits as at high risk of misusing federal funds. Internal control standards state that the scope and frequency of monitoring should depend primarily on the assessment of risks and the effectiveness of ongoing monitoring procedures. Absent a risk-based approach, federal funds may continue to be provided to schools with a history of financial weaknesses. For example, as of July 2014, single audits of tribally-operated schools identified $13.8 million in costs that were not allowable at 24 schools, but we found minimal follow- up by BIE with the schools that had misused funds or did not adhere to program or legal requirements. Further, it appeared that BIE took little action to incentivize schools to adhere to financial and program requirements. According to Circular A-133, issued pursuant to the Single Audit Act, if an auditee, such as a tribally-operated school, has not completed corrective action, the agency awarding the auditee’s grant should give it a timetable for follow-up. Further, according to Indian Affairs’ policy manual, if a tribally-operated school fails to take the action necessary to resolve findings in its single audit, BIE should offer technical assistance to the school if the audit findings remain unresolved. In serious situations, BIE may also designate the school as “high risk,” which subjects the school to additional monitoring and restricted payments. If BIE determines that there has been gross negligence or mismanagement in the handling or use of funds, it may initiate procedures to assume control of the school. In our review of single audits of six tribally-operated schools whose audits in fiscal years 2010 through 2012 identified poor financial management of major program funds, we found some occasions where BIE took little follow up action to address serious financial problems that auditors identified at the schools. For example: In 2010, auditors found that one school used $1.2 million of its ISEP funds to provide a no-interest loan to a local public school district, which the auditors found is not permitted by law. In 2011 BIE asked the school to repay the more than $1 million and is still negotiating with the school to recoup the funds. Nevertheless, BIE could not provide us with records that line office staff visited the school or provided additional oversight of school expenditures or technical assistance during the past 3 years. In the meantime, a subsequent audit found that the school has not taken any steps to ensure that its funds are not misused again and that it is still at risk of comingling federal funds with the local school district funds. However, BIE has continued to provide the school its full ISEP funding without additional monitoring or restrictions on those payments. At another school that received an adverse audit opinion 3 years in a row (fiscal years 2010 to 2012), auditors found that the school’s financial statements had to be materially adjusted by as much as nearly $1.9 million. As a result, they found that the financial reports that the school submitted to BIE for those 3 years were unreliable. Despite these problems, BIE was unable to provide any evidence that it took action to increase oversight of the school’s expenditures to ensure that it could accurately account for the federal funds it spends. More recent examples of financial issues at BIE schools include: In February 2014, during our review of the Federal Audit Clearinghouse database, we found that one school had not submitted its required single audits since fiscal year 2010. Officials with BIE and the Office of Internal Evaluation and Assessment were not aware of this, and acknowledged that it was an oversight on their part when we brought it to their attention. According to Indian Affairs, the Office of Internal Evaluation and Assessment subsequently updated this information in its system. However, despite a legal requirement for tribally-operated schools to submit annual single audits, BIE has not imposed sanctions on this school. A March 2014 single audit found that a tribally-operated school lost $1.7 million in federal funds that were illegally transferred to an off- shore bank account. According to the school’s audit, about $500,000 of these funds were subsequently returned to the school’s account, making the net loss around $1.2 million. Interior reported in October 2014 that this incident was “…a result of cybercrimes committed by computer hackers and/or other causes” and that the school is working with tribal authorities to investigate the incident. Nevertheless, the school’s single audit stated that its inadequate cash management and risk assessment procedures contributed to the incident and stated that the school must strengthen these procedures. Additionally, a school administrator reported that the school held at least another $6 million in federal funds in a U.S. bank account. As of June 2014, BIE had not yet determined how the tribe accrued that much in unspent federal funds. Several BIE officials told us that some tribes operating schools have a history of placing Interior and Education funds in savings accounts rather than using them to provide educational services as intended. One official cited an instance of a school accumulating over $900,000 in unspent IDEA funds that were intended to be used to provide special education services to students with disabilities. According to a June 2014 study commissioned by the Secretaries of the Interior and Education, the Tribally Controlled Schools Act provides an incentive for schools not to spend funds they receive from Interior and Education because schools are permitted to retain certain unspent federal funds, and they can also place any current or unspent funds in interest- bearing accounts before they are spent. Based on certain audit information that was available, the study found that approximately 80 tribally-operated schools have retained a total of about $125 million in unspent funds that have accumulated over time. According to the study, BIE has contributed to this problem by not implementing policies that encourage schools to fully utilize their funding and discourage them from planning to have unspent funds. The study stated that BIE and Education should provide tribes with technical assistance and practical guidance about the activities for which federal funds are allowed to be spent under current laws. Education is currently developing this type of guidance and, according to Indian Affairs, it is working with Education to develop this type of guidance. Without using a risk-based approach to monitoring and having written procedures in place to oversee school expenditures, the amount of misused and unspent funds at BIE schools is likely to grow. BIE’s mission is to provide the students attending its schools a quality education. Most of these students are low-income, many have special needs, and their performance and graduation rates are below those of public school students nationwide. These students are in need of instructional, supplemental, and special education services. To ensure that students have access to these services, it is imperative that BIE accurately track and oversee school expenditures to make sure that federal funds are used for their intended purposes. However, BIE staff responsible for oversight currently face multiple challenges, and their monitoring of expenditures is weak. High staff turnover and reductions in the number of education line office administrators as well as their lack of expertise and training have left them struggling to adequately monitor school expenses. In addition, the limited information that BIE officials have about tribally-operated school expenditures is not shared with the BIE staff responsible for overseeing schools’ use of Education funds. Further, BIE does not utilize tools, such as written procedures and a risk- based approach to monitor school expenditures that would help improve the effectiveness of its oversight. Within this environment, BIE is not well positioned to oversee schools that may be at high risk for misusing federal funds. Strong oversight of school expenditures is especially critical since the number of tribally-operated schools is likely to increase over the next several years and limited expenditure information is available from these schools. To this end, BIE’s current restructuring efforts provide officials with a unique opportunity to develop a workforce plan and adopt processes and procedures that create an improved control environment. These actions will help ensure that students receive the quality education and services they deserve. We recommend that the Secretary of the Interior direct the Assistant Secretary-Indian Affairs to take the following four actions: Develop a comprehensive workforce plan to ensure that BIE has an adequate number of staff with the requisite knowledge and skills to effectively oversee BIE school expenditures. Develop a process to share relevant information, such as single audit reports, with all BIE staff responsible for overseeing school expenditures to ensure they have the necessary information to identify schools at risk for misusing funds. Develop written procedures for BIE to oversee expenditures for major programs, including Interior’s Indian School Equalization Program. These procedures should include requirements for staff to consistently document their monitoring activities and actions they have taken to resolve financial weaknesses identified at schools. Develop a risk-based approach to oversee BIE school expenditures to focus BIE’s monitoring activities on schools that auditors have found to be at the greatest risk of misusing federal funds. We provided a draft copy of this report to the Departments of the Interior and Education for review and comment. Education chose not to provide comments. Interior’s comments are reproduced in appendix II. Interior also provided technical comments that we incorporated in the report as appropriate. In its overall comments, Interior stated that our report’s findings and recommendations will be beneficial as the Department moves forward with facilitating improvements in BIE schools and improving the oversight of school spending. For example, Interior noted that strong financial stewardship is essential to achieving its goal to transform BIE into an organization that provides direction and services to tribes to help them attain high levels of student achievement. Interior concurred with our recommendation to develop a workforce plan to ensure that BIE has an adequate number of staff to effectively oversee BIE school expenditures. Interior said that as part of BIE’s restructuring, it plans to increase the number of staff whose main responsibility is to oversee school expenditures. Additionally, the Department stated that new training will be developed for current BIE staff, including line office administrators, mainly in areas related to budget and finance issues. While these are positive steps, we believe it is important for Interior to monitor the manner in which BIE implements these plans to ensure it has staff with the skills needed to provide appropriate oversight of school expenditures. Interior also concurred with our recommendation to develop a process to share relevant information with all BIE staff responsible for overseeing school expenditures. According to Interior, BIE has implemented a process to ensure that relevant information is made available via email to all cognizant officials, including information on schools’ questioned costs and cash deficits. The Department also stated that BIE will convene monthly meetings with high level officials to discuss these issues. While we believe that these are all positive actions, it is important for Interior to ensure that BIE periodically review its approach to disseminating information to make sure that its practices are effective. Interior partially concurred with our recommendation to develop written procedures for BIE to oversee expenditures for its major programs. Interior stated that, in addition to draft Title I and IDEA oversight procedures, BIE also has written procedures in place related to the Indian School Equalization Program (ISEP). Specifically, Interior said that BIE’s newly established School Operations Division has a standard review process in place that is currently being utilized, referred to as the Education Management Assessment Tool. We reviewed this document and found that its main focus is on reviewing Education Line Offices’ operations, management, and program functions. However, none of the BIE officials we interviewed were aware of the document. While oversight of line offices’ operations is important, the specific focus of our recommendation is on BIE’s oversight of school expenditures, including for ISEP, its largest program. As we noted in our report, although BIE Administration and line office staff are responsible for overseeing these expenditures, they do not have complete or detailed procedures to guide their work. For example, they do not have a schedule for conducting audits, a uniform list of documents to review, or procedures for staff to document the actions they have taken to resolve financial weaknesses identified at schools. We believe that rigorous oversight of school expenditures is critical to ensure that schools are spending federal funds for their intended purposes. Lastly, Interior concurred with our recommendation on the need to develop a risk-based approach to oversee BIE school expenditures. To that end, Interior said that BIE, once its restructuring has been fully implemented, will improve coordination with the Office of Internal Evaluation and Assessment on matters regarding financial accountability. In addition, Interior stated that BIE will assign appropriate grant monitoring protocols to schools and tribal grantees based on questioned costs and other risk factors identified in their single audits. The Department further stated that it will use single audits to designate certain schools and tribes as high risk, along with those that are unresponsive to repeated requests for corrective action plans. While we believe that these are all positive steps, it is critical that Interior ensure that BIE follow through to effectively implement these changes. We are sending copies of this report to relevant congressional committees, the Secretaries of the Interior and Education, and other interested parties. In addition, this 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 (617) 788-0534 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Our objectives were to assess (1) how sources of funding for Bureau of Indian Education (BIE) schools compare to those of public schools; (2) how BIE school expenditures compare to those of public schools; (3) the extent to which BIE has the staff and expertise needed to oversee school expenditures; and (4) the extent to which BIE’s processes are adequate for ensuring that school funds are spent appropriately. To address these objectives, we used multiple methodologies. We reviewed relevant federal laws and regulations. Additionally, we reviewed agency documents from BIE, the Office of the Assistant Secretary-Indian Affairs (Indian Affairs), and the Department of Education (Education), including budget justifications, published reports, annual financial audit reports, and other documents. We also conducted interviews with officials at the Department of the Interior (Interior) in Indian Affairs, which includes BIE, as well as with officials at Education. A key component of our methodology was a quantitative analysis of data from various federal sources. For sources of funding, we reviewed budget justifications as well as other financial information. For expenditures, we analyzed agency data systems and followed a methodology similar to our approach in our 2003 report on this topic. Further, we conducted site visits to select BIE schools and nearby public school districts. For BIE oversight of school expenditures, we additionally analyzed data from a federal database on results of annual financial audits. Our methodology is described below in further detail. We conducted this performance audit from January 2014 through November 2014 in accordance with generally accepted government auditing standards. These 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. To address how sources of funding for BIE schools compare to those of public schools, we analyzed the federal funding sources of BIE schools as well as the various sources of funding for public schools. For BIE schools, we reviewed budget justifications of Indian Affairs—which includes BIE—and related information. For public schools, we reviewed data from Education’s National Center for Education Statistics, which maintains the Common Core of Data, including the School District Finance Survey’s final F-33 data. This survey collects financial data from all school districts in the 50 states and the District of Columbia. School districts provide information on funding, expenditures, and enrollment for a particular school year. The data that we analyzed generally applied to school year 2009-10, consistent with our analysis of expenditures, for which the data were from the most recent year available at the time of our analysis. According to Education documents, Education conducted several tests of the data and performed follow-up to ensure that data were complete and accurate. In addition, we performed tests and removed a few additional districts from our analysis to increase the reliability of the data. Thus, we reviewed Education’s data through (1) electronic data tests; (2) a review of related documents about the data and the systems; and (3) interviews with knowledgeable agency officials, and we found that the data were sufficiently reliable for the purposes of this report. We also interviewed officials from BIE, Indian Affairs, and Education. To examine how BIE school expenditures compare to those of public schools, we analyzed expenditures of BIE schools and those of public schools. We began by assessing the reliability of three databases: Interior’s Federal Financial System was the source of expenditure data for BIE schools; BIE’s Native American Student Information System provided enrollment data for BIE schools; and Education’s Common Core of Data, School District Finance Survey’s final F-33 data was the source of data on expenditure and enrollment for public school districts. We focused on school year 2009-10, since it was the most recent year for which data were available from Education at the time of our analysis. We assessed the reliability of data for this school year from these systems in several ways, including (1) electronic data tests, (2) reviews of related documentation about the data and the system, and (3) interviews with knowledgeable agency officials. Based on our assessment, we determined that the relevant data were sufficiently reliable for our purposes. BIE and DOD are the only two federal entities that directly oversee the management and operation of elementary and secondary schools. For this review, we were unable to compare expenditures at schools operated by the Department of Defense (DOD) schools with those of BIE or public schools because DOD’s financial system containing school year 2009-10 data was not sufficiently reliable for our purposes of comparing amounts across departments. Specifically, DOD’s Standard Accounting and Reporting System-Field Level data system contains expenditure data for DOD schools that we determined were not sufficiently reliable for our purposes, based on reviews of related documentation about the data and the system, as well as interviews with knowledgeable agency officials. To compare expenditures at BIE and public schools, we developed estimates of per-pupil expenditures at the national level. Although Interior’s Federal Financial System does not use categories that directly align with Education’s Common Core of Data, we were able to compare broad categories, based on reviews of documentation, professional judgment and interviews with agency officials. We focused our analysis on operating expenditures of elementary and secondary schools in a typical year. We classified BIE expenditure data and Education expenditure data into four broad categories: (1) instruction, (2) transportation, (3) facilities operation and maintenance, and (4) administration. Then, we derived per-pupil expenditures by dividing expenditure amounts by student enrollment. Due to our focus on operating expenditures, we generally excluded certain amounts such as expenditures for food service, capital (i.e., construction), and debt service. Student enrollment is measured differently by BIE and Education. BIE measures enrollment as an average daily membership, or an average over the course of the year. We derived student enrollment by adding average daily membership for students in school year 2009-10 who are eligible Indian students under the Indian School Equalization Program (ISEP) and those who are not eligible Indian students but still attend BIE schools, such as children of BIE staff. Because we used student enrollment in one particular year and we included students who are not eligible under ISEP but still attend BIE schools, our enrollment data may differ somewhat from published data from Interior. Meanwhile, Education’s Common Core of Data measures student enrollment by taking a head count at one point in time in the fall. Consistent with the methodology of our 2003 report, we generally analyzed expenditures of BIE-operated day schools. Thus, we analyzed day schools and excluded boarding schools, which have a boarding as well as an academic component. We also limited our analysis to all 32 day schools that were BIE-operated in school year 2009-10. Of 185 BIE schools and dormitories, BIE-operated day schools represent about 17 percent of the schools and dormitories. As with our 2003 report and Education’s publication on its School District Finance Survey for school year 2009-10, we did not adjust expenditures for geographic variation. We excluded schools that were tribally-operated because BIE has limited expenditure data for tribally-operated schools. In our 2003 report, we recommended, among other things, that the Secretary of the Interior should consider entering into negotiations with tribal entities to acquire detailed expenditure data for the schools they manage for comparison with public schools. However, Indian Affairs, in consultation with the school boards of tribally-operated schools, concluded that this recommendation would not be feasible with the school boards’ existing systems. BIE headquarters officials noted that current law limits the type or format of information that the agency can require from tribes, including data on expenditures. For example, one statutory provision requires a tribal grantee to submit an annual financial statement reporting revenue and expenditures and an annual financial audit, but the grantee has discretion on the specifications of the cost accounting of the statement. Additionally, we reviewed seven reports of Education data on the characteristics of public and BIE schools. These characteristics helped to explain differences in per-pupil expenditures between public and BIE schools. We generally reviewed the most recent version available of these studies. Estimates obtained from reports that used sample data collected using random probability samples are subject to sampling error. We present estimates along with 95 percent confidence intervals to show the precision of those estimates. Further, we interviewed officials at BIE, Indian Affairs, and Education, and reviewed agency documents, including guidance, internal correspondence, and agency-sponsored management studies. We supplemented our analysis of nationwide data with site visits to BIE schools and nearby public school districts. The information from these site visits is not generalizable to all BIE schools or public school districts nationwide. For this and our prior report on BIE management challenges, we visited 16 BIE schools—6 BIE-operated and 10 tribally- operated—as well as 4 nearby public school districts. We conducted site visits to BIE schools that serve the Oglala Sioux Tribe in Pine Ridge, South Dakota; the Mississippi Band of Choctaw Indians; the Navajo Nation in Arizona, New Mexico, and Utah; and various Pueblo Indians in New Mexico, where we interviewed school administrators and observed school conditions. We also requested expenditure data from tribally- operated schools because BIE has limited expenditure data from schools operated by tribes. Further, we interviewed administrators at public school districts in close proximity to the BIE schools we visited. We selected locations to visit to reflect an array of BIE schools that varied in administration type, school and tribal size, and location. For the nearby public school districts, we selected school districts that were in close proximity and also had similar student demographics in terms of the percent of students who were Indian. Our expenditure analysis of schools we visited was limited to four BIE schools—two BIE-operated and two tribally-operated schools—along with two public school districts, all of which were located in New Mexico and South Dakota. We compared expenditure data for the schools we visited with the amount of funding they received to assess the reliability of the expenditure data. We determined that the data for these four BIE schools and two public school districts were sufficiently reliable. We excluded data from the remaining 12 BIE schools and 2 public school districts we visited because we did not receive any expenditure data or were not able to obtain reliable expenditure data for both the BIE schools and the nearby public school districts. In addition, we excluded expenditure data for some BIE schools we visited because the schools were boarding schools and, therefore, their expenditures would not be comparable to those of nearby public schools. To determine the extent to which BIE has the staff and expertise needed to oversee school expenditures, we analyzed BIE data on the number and location of staff currently responsible for overseeing these expenditures as compared to the number of staff in prior years and the location of schools for which they are responsible. We also reviewed BIE data on the types of positions that are currently vacant and interviewed cognizant BIE officials. In addition, we reviewed Indian Affairs records on the training on single audits provided since 2012 to line office administrators and staff. We also interviewed officials at BIE and Indian Affairs who are responsible for overseeing school expenditures about their skill sets and the types of training they have received on overseeing federal grants. To determine the extent to which BIE’s processes are adequate for ensuring that school funds are spent appropriately, we reviewed available oversight tools, including protocols for desk and onsite audits and tracking data. In addition, we reviewed the results of all tribally-operated schools’ single audits for a 3-year period (fiscal year 2010 to fiscal year 2012) in the Federal Audit Clearinghouse. For more analysis of single audit findings, we selected for further review the single audits of six recipients of Indian School Equalization Program (ISEP) funding, the largest funding source of BIE schools. We selected these recipients based on audit opinions of their compliance with program requirements. Specifically, we examined all the single audits in which the auditor found that the school’s records for ISEP compliance either contained significant departures from generally accepted auditing standards or were in a condition that made it impossible for them to be assessed in accordance with generally accepted auditing standards. We also examined the single audits of select tribally-operated schools based on information from BIE officials. Although our non-generalizable sample focused on schools with poor financial management, these schools may have needed the greatest oversight and technical assistance from BIE to correct the audit findings and improve their financial management. We assessed the reliability of the Federal Audit Clearinghouse data on single audits by (1) reviewing existing information about the data and systems that produced them, and (2) obtaining information from U.S. Census Bureau officials knowledgeable about the database. We determined that these data were sufficiently reliable for the purposes of this report. We also obtained documents about other select BIE schools. Additionally, we interviewed officials in Education, Indian Affairs’ Office of Internal Evaluation and Assessment, as well as BIE’s Division of Performance and Accountability, Office of Administration, and education line offices. In addition to the contact named above, Elizabeth Sirois (Assistant Director), Ramona L. Burton (Analyst-in-Charge), Lucas M. Alvarez, Kathleen M. Peyman, and Matthew Saradjian made key contributions to this report. In addition, key support was provided by Hiwotte Amare, James E. Bennett, Deborah Bland, Holly A. Dye, Alexander G. Galuten, LaToya Jeanita King, Ashley L. McCall, Sheila McCoy, Kimberly A. McGatlin, Jean L. McSween, Deborah A. Signer, and John S. Townes. | BIE, within Interior's office of Indian Affairs, oversees 185 schools, serving about 41,000 students on or near Indian reservations. BIE's mission is to provide students with a quality education. However, BIE student performance has been consistently below that of public school students, including other Indian students. Given these challenges, GAO was asked to review BIE school funding and expenditures. This report examines how funding sources and expenditures of BIE schools compare to those of public schools; the extent to which BIE has the staff and expertise needed to oversee school expenditures; and the extent to which BIE's processes for oversight adequately ensure that school funds are spent appropriately. GAO reviewed relevant federal laws, regulations and agency documents, and analyzed BIE and public school expenditure data for school year 2009-10, the most recent year for which data were available. GAO also visited select BIE schools and nearby public schools in four states based on location, school and tribal size, and other factors. Unlike public schools, Bureau of Indian Education (BIE) schools receive almost all of their funding from federal sources. BIE directly operates about a third of its schools, and tribes operate two-thirds. According to BIE data, all of the BIE schools received a total of about $830 million in fiscal year 2014: about 75 percent from the Department of the Interior (Interior), 24 percent from the Department of Education (Education), and 1 percent from the Department of Agriculture and other agencies. Public schools nationwide receive about 9 percent of their funding from federal sources and rely mostly on state and local funding. GAO found that some BIE schools spend substantially more per pupil than public schools nationwide. Specifically, GAO estimates that the average per pupil expenditures for BIE-operated schools—the only BIE schools for which detailed expenditure data are available—were about 56 percent higher than for public schools nationally in school year 2009-10, the most recent year for which data were available at the time of GAO's review. Several factors may help explain the higher per pupil expenditures at BIE-operated schools, such as their student demographics, remote location, and small enrollment. BIE lacks sufficient staff with expertise to oversee school expenditures. Since 2011, the number of BIE full-time administrators located on or near Indian reservations to oversee school expenditures decreased from 22 to 13, due partly to budget cuts. As a result, the 13 administrators have many additional responsibilities and an increased workload, making it challenging for them to provide effective oversight of schools. Additionally, these administrators have received less training in recent years. Further, the three administrators GAO spoke with said they do not have the expertise to fully understand the school audits they are responsible for reviewing. BIE's staffing of these positions runs counter to federal internal controls standards and key principles for effective strategic workforce planning, such as having sufficient, adequately-trained staff. Without adequate staff and training, BIE will not be able to ensure that school funds are spent appropriately. BIE's processes for oversight do not adequately ensure that funds are spent appropriately. BIE lacks written procedures for how and when staff should monitor school spending and does not use a risk-based approach to prioritize how it should use its limited resources for oversight. Instead, BIE told GAO that it relies primarily on ad hoc suggestions by staff regarding which schools to oversee more closely. Meanwhile, some schools have serious financial problems. Notably, external auditors identified $13.8 million in unallowable spending at 24 schools as of July 2014. Further, in March 2014, an audit found that one school lost about $1.2 million in federal funds that were improperly transferred to an off-shore account. Without written procedures and a risk-based approach to overseeing school spending—both integral to federal internal control standards—there is little assurance that federal funds are being used for their intended purpose to provide BIE students with needed instructional and other educational services. Among other things, GAO recommends that Indian Affairs develop a workforce plan to ensure that BIE has the staff to effectively oversee school spending and written procedures and a risk-based approach to guide BIE's oversight of school spending. Indian Affairs generally agreed with GAO's recommendations. |
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To qualify for Medicaid coverage for long-term care, individuals must be within certain eligibility categories, such as children or those who are aged or disabled, and meet functional and financial eligibility criteria. Within broad federal standards, states determine if an individual meets the functional criteria by assessing limitations in an individual’s ability to carry out activities of daily living (ADL) and instrumental activities of daily living (IADL). The financial eligibility criteria are based on individuals’ assets—income and resources together. The Medicaid statute requires states to use specific income and resource standards in determining eligibility; these standards differ based on whether an individual is married or single. If a state determines that an individual has transferred assets for less than FMV, the individual may be ineligible for Medicaid coverage for long-term care for a period of time. Most individuals requiring Medicaid coverage for long-term care services become financially eligible for Medicaid in one of three ways: 1. Individuals who participate in the Supplemental Security Income (SSI) program, which provides cash assistance to aged, blind, or disabled individuals with limited income and resources, generally are eligible for Medicaid. 2. Individuals who incur high medical costs may “spend down” into Medicaid eligibility because these expenses are deducted from their income. Spending down may bring their income below the state- determined income eligibility limit. Such individuals are referred to as medically needy. As of 2000, 36 states had a medically needy option, although not all of these states extended this option to the aged and disabled or to those needing nursing home care. 3. Individuals can qualify for Medicaid if they reside in nursing facilities or other institutions in states that have elected to establish a special income level under which individuals with incomes up to 300 percent of the SSI benefit ($1,737 per month in 2005) are eligible for Medicaid. Individuals eligible under this option must apply all of their income, except for a small personal needs allowance, toward the cost of nursing home care. The National Association of State Medicaid Directors reported that, as of 2003, at least 38 states had elected this option. Medicaid policy bases its characterization of assets—income and resources—on SSI policy. Income is something, paid either in cash or in kind, received during a calendar month that is used or could be used to meet food or shelter needs; resources are cash or things that are owned that can be converted to cash. (Table 1 provides examples of different types of assets.) In establishing policy for determining financial eligibility for Medicaid coverage for long-term care, states can decide, within federal standards, which assets are countable or not. For example, states may disregard certain types or amounts of income and may elect not to count certain resources. In most states, to be financially eligible for Medicaid coverage for long- term care services, an individual must have $2,000 or less in countable resources ($3,000 for a couple). However, specific income and resource standards vary depending on the way an individual becomes eligible for Medicaid (see table 2). The Medicaid statute requires states to use specific minimum and maximum resource and income standards in determining eligibility when one spouse is in an institution, such as a nursing home, and the other remains in the community (referred to as the community spouse). This enables the institutionalized spouse to become eligible for Medicaid while leaving the community spouse with sufficient assets to avoid impoverishment. Resources. The community spouse may retain an amount equal to one- half of the couple’s combined countable resources, up to a state-specified maximum resource level. If one-half of the couple’s combined countable resources is less than a state-specified minimum resource level, then the community spouse may retain resources up to the minimum level. The amount that the community spouse is allowed to retain is generally referred to as the community spouse resource allowance. Income. The community spouse is allowed to retain all of his or her own income. States establish a minimum amount of income—a minimum needs allowance—that a community spouse is entitled to retain. Prior to the DRA, if the community spouse’s income was less than the minimum needs allowance, then states could allow the difference to be made up in one of two ways: by requiring the transfer of income from the institutionalized spouse (called the income-first approach) or by allowing the community spouse to keep resources above the community spouse resource allowance, so that the additional resources could be used to generate more income (the resource-first approach). Under the DRA, states must apply the income-first method. Federal law limits Medicaid payments for long-term care services for persons who transfer assets for less than FMV within a specified time period. As a result, when an individual applies for Medicaid coverage for long-term care, states conduct a review, or “look-back,” to determine whether the individual (or his or her spouse, if married) transferred assets to another person or party and, if so, whether the transfer was for less than FMV. If a transfer of assets for less than FMV is detected, the individual is ineligible for Medicaid coverage for long-term care for a period of time, called the penalty period. The penalty period is calculated by dividing the dollar amount of the assets transferred by the average monthly private-pay rate for nursing home care in the state (or the community, at the option of the state). For example, if an individual transferred $10,000 in assets, and private facility costs averaged $5,000 per month in the state, the penalty period would be 2 months. Federal law exempts certain transfers for less than FMV from the penalty provisions even if they are made within the look-back period. Exemptions include transfers of assets to the individual’s spouse, another individual for the spouse’s sole benefit, or a child who is considered to be disabled under federal law. Additional exemptions from the penalty provisions include the transfer of a home to an individual’s spouse, or minor or disabled child who meets certain criteria; an adult child residing in the home who has been caring for the individual for a specified time period; or a sibling residing in the home who meets certain conditions. Transfers do not result in a penalty if the individual can demonstrate to the state that the transfer was made exclusively for purposes other than qualifying for Medicaid. Additionally, a penalty would not be applied if the state determined that application of the penalty would result in an undue hardship, that is, it would deprive the individual of (1) medical care such that the individual’s health or life would be endangered or (2) food, clothing, shelter, or other necessities of life. Prior to the DRA, the look-back period for asset transfers was generally 36 months. If the state identified transfers for less than FMV during this period, then the state was required to impose a penalty period that began at approximately the date of the asset transfer. As a result, some individuals’ penalty periods had already expired by the time they applied for Medicaid coverage for long-term care and therefore they were eligible when they applied. The DRA modified some of the eligibility requirements for Medicaid coverage for long-term care, including provisions related to asset transfers, and introduced new requirements. Most, but not all, of these DRA provisions became applicable on the date the law was enacted, February 8, 2006. In general, these DRA provisions do not apply to transfers that occurred prior to the law’s enactment. The DRA extended the look-back period, changed the beginning date of the penalty period, and provided additional conditions on the application process for undue hardship waivers. (See table 3.) The DRA also introduced several new provisions, which are summarized in table 4. Nationwide, most elderly individuals had nonhousing resources valued under $70,000 at the time they entered the nursing home; nursing home care is estimated to cost over $70,000 a year for a private-pay patient. In general, Medicaid-covered elderly nursing home residents had lower nonhousing resources and income at the time of entry than non-Medicaid- covered residents. The percentage of Medicaid-covered elderly nursing home residents who reported transferring cash was lower and the median amounts they reported transferring were similar to those for non- Medicaid-covered residents. According to data from the HRS, nursing home residents covered by Medicaid had fewer assets than residents not covered by Medicaid. Over 70 percent of all elderly nursing home residents had nonhousing resources of $70,000 or less at the time they entered the nursing home, which is less than the estimated average annual cost for nursing home care. Median nonhousing resources for all elderly nursing home residents were $5,794 at the time they entered the nursing home. (See fig. 1.) Sixty-two percent of all elderly nursing home residents had nonhousing resources of $25,000 or less while 11 percent had nonhousing resources of $300,000 or above. Median nonhousing resources for Medicaid-covered elderly nursing home residents ($48) were lower than for non-Medicaid-covered residents ($36,123). Approximately 92 percent of Medicaid-covered residents had nonhousing resources of $25,000 or less compared to 46 percent of non- Medicaid-covered residents. Approximately 92 percent of all elderly nursing home residents had an annual income of $50,000 or less at the time they entered the nursing home; about 65 percent of elderly nursing home residents had incomes of $20,000 or less. Median annual income for elderly nursing home residents was $14,480 at the time of entry. (See fig. 2.) Median annual income of Medicaid-covered elderly nursing home residents ($9,719) was about half that of non-Medicaid-covered residents ($18,600). Approximately 90 percent of Medicaid-covered elderly nursing home residents had annual incomes of $20,000 or less compared to approximately 53 percent of non- Medicaid-covered residents. Nationwide, the percentage of Medicaid-covered elderly nursing home residents who reported transferring cash was about half that of non- Medicaid-covered residents at the time they entered the nursing home and during the 4 years prior to entry. For example, at the time they entered the nursing home, 9.2 percent of Medicaid-covered residents reported transferring cash, compared with 23.2 percent of non-Medicaid-covered residents. However, the median amount of cash transferred as reported by Medicaid-covered residents and non-Medicaid-covered residents did not vary greatly. (See table 5.) Similar to the nationwide results, the majority of the 540 applicants whose Medicaid nursing home application files we reviewed in selected counties in three states (Maryland, Pennsylvania, and South Carolina) had few nonhousing resources. The majority of applicants (approximately 65 percent) were single females. About 76 percent of all applicants were approved the first time they applied, while the remaining applicants (23 percent) were initially denied, often for financial reasons—having income or resources that exceeded the states’ financial eligibility standards. About three-quarters of the applicants initially denied only for financial reasons were subsequently approved, primarily after the value of their nonhousing resources decreased. For the applicants who were initially denied for financial reasons, the time span between their initial and subsequent applications averaged a little over 5 months. During this time, their median nonhousing resources decreased from $22,380 to $10,463, with a maximum decrease of $283,075. For about one-third of these applicants who were initially denied for financial reasons and were subsequently approved, at least part of the decrease in their nonhousing resources could be attributed to spending on medical or nursing home care. Of the 540 Medicaid nursing home application files we reviewed in selected counties in three states, about 75 percent of the applicants were female, most of whom were single. Over 80 percent of the applicants were already living in a long-term care facility. These individuals had been living in facilities for an average of a little over 4 months at the time of application. About 90 percent—488 applicants—had total nonhousing resources of $30,000 or less. (See fig. 3.) Eleven percent—59 applicants— did not have any nonhousing resources, while about 5 percent had total nonhousing resources of $60,000 or more. For all applicants whose files we reviewed, median nonhousing resources were $3,365. Married applicants, who made up about 21 percent of the applicants, had higher median nonhousing resources ($8,407) than single applicants. Of the single applicants, females, who made up approximately 65 percent of all applicants, had higher median nonhousing resources ($3,109) than males ($1,628), who made up about 14 percent of all applicants. Eighty-five percent of the Medicaid applicants whose files we reviewed (459 applicants) had annual incomes of $20,000 or less. The median annual income of all applicants was $11,382. (See fig. 4.) Single male applicants generally had higher annual incomes than single females. Applicants had several different types of nonhousing resources, some of which were not counted toward determining eligibility for Medicaid coverage for nursing home care. For example, a little over half (53 percent) of all applicants whose files we reviewed had prepaid burial or funeral arrangements, with a median value of $2,614. Additionally, about 38 percent of the applicants had life insurance. Whether the burial arrangements or life insurance policies counted toward determining Medicaid eligibility depended on their type and value as well as the state in which the applicant applied. Of the 540 applicants whose files we reviewed, 137 applicants (25 percent) owned homes and 83 of the home owners (about 61 percent) were single. Based on the applications we reviewed, home ownership varied by state, with 32 percent of the applicants we reviewed in selected counties in South Carolina owning homes, compared with 28 percent and 16 percent in Pennsylvania and Maryland, respectively. For the 112 applicants in all selected counties for whom we were able to determine a value for their homes, the median value was $52,954. About 76 percent of the Medicaid applicants whose files we reviewed were approved upon initial application (408 applicants), while 23 percent (122 applicants) were denied. The majority of the approved applicants were single and female. Of the 122 applicants who were initially denied, 57 were approved upon submitting a subsequent application. Therefore, 465 applicants, or 86 percent of all applicants whose files we reviewed, were eventually approved. Figure 5 provides a breakdown of applicants by application status. Almost half of the denied applicants (56 of 122) were denied only for financial reasons—having income or resources that exceeded the standards, most having to do with resources exceeding the standards. For those applicants who were denied for having excess resources, their resources exceeded the standards by an average of $25,116; the median amount of excess resources was $13,260. Other reasons for denial included failing to provide the requested documentation, not being in a nursing home or meeting functional eligibility criteria, or a combination of two or more of these reasons. (See fig. 6.) Of the 56 applicants who were initially denied only for financial reasons, 41 (73 percent) reapplied and were later approved. The time span between their initial and subsequent applications averaged a little over 5 months and ranged from less than 1 month to 31 months. Of the 41 applicants who were initially denied only for financial reasons and were subsequently approved, their nonhousing resources generally decreased between the initial and subsequent applications, while their annual incomes stayed about the same. (See fig. 7.) Between the two applications, median nonhousing resources decreased from $22,380 to $10,463, with a maximum decrease of $283,075. For most of these applicants, the overall decrease in nonhousing resources was specifically due to a decrease in financial holdings such as checking or savings accounts, stocks, and mutual funds. For example, a married applicant initially applied and was denied for having countable resources that exceeded the state standards by $51,213. The applicant applied again just over 9 months later and had resources within the state standards. Therefore, the applicant was approved. Some of the files of applicants who were initially denied for financial reasons and were subsequently approved indicated that the applicants spent at least some of their resources on medical expenses or nursing home care, although this was not the case for all of them. In the files we reviewed for 13 of these applicants (32 percent), there were indications that the applicant had spent at least some of his or her resources on medical expenses, nursing home care, or both. For example, one applicant sold stock and received cash in exchange for a life insurance policy, spending about $12,150 for 3 more months of nursing home care before being approved for Medicaid. In the remaining 28 applicants’ files (68 percent), there was no indication that their resources were used for medical or nursing home care. For example, one married applicant was initially denied for having resources of $205,440 above the state’s standard. The file indicated that when the applicant reapplied and was approved about 6 months later, $140,000 of the applicant’s resources was used to purchase an annuity to create an income stream for the community spouse, which was not counted toward the applicant’s eligibility. Few of the approved applicants whose files we reviewed in selected counties in three states were found to have transferred assets for less than FMV during the 36-month look-back period, and those who did transfer assets for less than FMV rarely experienced a delay in eligibility for Medicaid coverage for nursing home care as a result. The proportion of approved applicants found to have transferred assets for less than FMV varied both within and among the three states, and the variation may be due, in part, to counties’ or states’ Medicaid application review procedures. At the time these applicants applied for Medicaid—state fiscal year 2005 or earlier—none of the three states reviewed imposed penalties for partial months, and the penalty period began at the time of the asset transfer; under these circumstances, only two of the applicants received a penalty that delayed their eligibility for Medicaid coverage for nursing home care as a result of transferring assets for less than FMV. The other applicants were either not assessed a penalty, because the penalty would have been for less than 1 month of coverage, or the penalty they were assessed had expired by the time they submitted their Medicaid application. Thus, these applicants did not experience a delay in their Medicaid coverage as a result of transferring assets for less than FMV. The total amount of assets transferred for less than FMV varied by applicant, as did the number of transfers each applicant made. In terms of the kinds of assets transferred for less than FMV, applicants most commonly transferred financial holdings such as cash or stocks, and their children or grandchildren were the most common recipients of the transfer. Of the 465 approved applicants whose files we reviewed from selected counties in three states, the files for 47 applicants (10 percent) indicated that the applicants had transferred assets for less than FMV during the 36-month look-back period. The proportion of approved applicants found to have transferred assets for less than FMV varied both within and among the states reviewed, ranging from a high of approximately 24 percent of approved applicants in Orangeburg County, South Carolina, to a low of approximately 4 percent in Allegheny County, Pennsylvania (see table 6). The variation in the proportion of applicants who were identified as having transferred assets for less than FMV may be due, in part, to states’ ability to identify transfers not reported by the applicant. About half of the assets transferred for less than FMV by applicants in South Carolina were identified by the eligibility workers as opposed to being reported by an applicant. Eligibility workers in Maryland and Pennsylvania identified 9 percent and 4 percent of transfers, respectively. The approved applicants who transferred assets for less than FMV were predominately single females. Although single females accounted for 65 percent of approved applicants, they accounted for over 78 percent of the approved applicants who transferred assets for less than FMV. (See fig. 8.) Additionally, 89 percent of approved applicants who transferred assets for less than FMV resided in a long-term care facility before applying for Medicaid. These individuals were in the facility for an average of over 5 months before they applied for Medicaid coverage. Approved applicants who transferred assets for less than FMV were better off financially (i.e., they had higher income and resources), even after excluding the amount transferred, compared with the universe of approved applicants. For example, approved applicants who transferred assets had higher median nonhousing resources ($8,138) compared with all approved applicants ($2,940). (See fig. 9.) Transfers for less than FMV rarely led to delays in eligibility for Medicaid coverage for nursing home care, as most applicants’ assessed penalty periods expired before they applied for Medicaid. Among the 47 approved applicants who transferred assets for less than FMV, the length of the penalty period assessed averaged about 6 months, with a median penalty period of 2 months. (See fig. 10.) At the time these applicants applied for Medicaid (state fiscal year 2005 or earlier), the three states in which we reviewed applications did not assess penalties for partial months; that is, the length of penalties assessed was rounded down to the closest whole month. As a result, 9 of the 47 approved applicants who transferred assets for less than FMV (about 19 percent) were not assessed a penalty because they transferred assets valued at less than the cost of a month of nursing home coverage for a private-pay patient in their state. Furthermore, because penalty periods began at approximately the date of the asset transfer, 36 applicants’ penalty periods expired prior to the submission of their application for Medicaid coverage for nursing home care. Thus, only 2 applicants experienced delays in Medicaid coverage resulting from their transfers of assets for less than FMV; the delays were for 1 and 6 months, respectively. Among those who transferred assets for less than FMV, the total amount of the assets transferred varied, with a median amount of $15,152. The applicant with the lowest total transfer amount made a onetime cash gift of $1,000 to her child, while the applicant with the highest total transfer amount used funds from a trust established for her care to buy and resell property. Since the trust fund should have only been used for the applicant’s care, the use of the funds to pay real estate fees, which totaled $201,516, was considered a transfer of assets for less than FMV. Figure 11 shows the distribution of the amounts of transfers for less than FMV per approved applicant. Nearly half of the applicants who transferred assets for less than FMV (22 of 47) transferred $10,000 or less; 10 of the 22 applicants transferred $5,000 or less. In contrast, 6 of the 47 applicants (about 13 percent) transferred more than $80,000 in assets. The number of transfers for less than FMV made by applicants also varied, averaging slightly over two transfers per applicant. Specifically, 23 applicants made a single transfer and 1 applicant made eight transfers (see fig. 12). The eight transfers spanned a 1½-year period and ranged from an over $4,000 cash gift to a grandchild to a stock transaction in which the applicant gave a relative over $33,000 of her stock. The majority of asset transfers for less than FMV (approximately 84 percent) involved the transferring of financial holdings such as cash or stocks. However, the types of assets transferred varied by state (see table 7). This variation may be related, in part, to differences in counties’ or states’ Medicaid application review procedures. Specifically, based on our review of the files, county officials in South Carolina conducted searches of real property tax databases, which likely allowed South Carolina eligibility workers to identify property transfers that were not reported by the applicant. For example, a South Carolina applicant was penalized because the eligibility worker identified that the applicant had transferred property for less than FMV—a house valued at $84,700 to her son for $5. In contrast, although Maryland eligibility workers could search the state’s property tax records, state officials told us that workers’ searching abilities were limited because they needed to know the county and street name of the property. As a result, it likely would be difficult for Maryland eligibility workers to identify unreported transfers of property. Applicants most frequently transferred assets to their children and grandchildren. Approximately 47 percent of transferred assets were given to children or grandchildren, 15 percent were given to other relatives, and 38 percent were given to other individuals. The extent to which some DRA long-term care provisions may affect applicants’ eligibility for Medicaid coverage for long-term care is uncertain. Our review of a sample of Medicaid applications indicated that the DRA penalty period provisions could increase the likelihood that individuals who transfer assets for less than FMV on or after the date of enactment will experience a delay in eligibility for Medicaid coverage for long-term care. However, the extent of the delay is uncertain. The effects on eligibility of other DRA provisions—specifically those related to annuities, home equity, the allocation of assets to community spouses, and life estates—may be limited because they only apply to a few applicants, affect applicants in some states but not in others, or both. The DRA requires states to change when a penalty period is applied and how it is calculated. First, the DRA changes the beginning date of a penalty period from approximately the date of the transfer—which could precede the date of a Medicaid application by days, months, or years—to the later of (1) generally the first day of a month during or after which an asset has been transferred for less than FMV or (2) the date on which the individual is eligible for Medicaid and would otherwise be receiving coverage for long-term care services, were it not for ineligibility due to the imposition of the penalty period. All applicants who transfer assets for less than FMV during the look-back period on or after February 8, 2006 (the date the DRA was enacted) will experience a delay in eligibility for Medicaid coverage for long-term care, whereas before that date, some applicants’ penalty periods expired before they applied for Medicaid coverage. Second, regarding the calculation of the penalty period, the DRA prohibits states from “rounding down” or disregarding fractional periods of ineligibility when determining the penalty period. This provision could result in longer penalty periods for some applicants. (See fig. 13, which illustrates the potential effects of the DRA penalty period provisions.) If these DRA penalty period provisions had been in effect for the applicants whose files we reviewed, all 47 approved applicants who transferred assets for less than FMV would have experienced a delay in Medicaid coverage, compared with only 2 who actually experienced a delay. Additionally, the penalty period would have been longer for 45 of the 47 approved applicants. The increase in the penalty period would have ranged from less than 1 day to almost 6 months, with a median increase of about 2½ weeks. As a result, the median delay in eligibility would have been approximately 3 months and ranged from about 1 week to over 47 months. An increase in the number of applicants whose eligibility is delayed may be mitigated by two factors. First, states may see an increase in the number of approved applicants seeking to waive their penalty periods because they would create an undue hardship—that is, the application of the penalty would deprive the applicants of (1) medical care that would endanger the applicants’ health or life or (2) food, clothing, shelter, or other necessities of life. Officials from the three states in which we reviewed applications commented that they received few undue hardship requests prior to the DRA but expected to see an increase in requests as the DRA provisions are implemented. Second, the extent to which individuals are subject to penalty periods may change as individuals may make different decisions regarding the transferring of assets as a result of the DRA. The effects on eligibility for Medicaid coverage for long-term care of other DRA provisions may be limited. This is primarily because few Medicaid applicants appear to have resources that are specifically addressed by the DRA, namely annuities, home equity of more than $500,000, or life estates. Additionally, the provision on allocating income and resources to the community spouse will only affect married applicants in certain states, thus limiting the effects that the DRA might have on eligibility. Annuities. The DRA added requirements for states regarding the treatment of annuities. A state must treat the purchase of an annuity as a transfer for less than FMV unless certain conditions, such as a requirement that the state be named as a remainder beneficiary, are met. However, the effect of this provision may be limited because few Medicaid applicants appear to have annuities. We found that 3 percent of the approved applicants (14 of 465) whose application files we reviewed owned an annuity. These 14 applicants’ annuities would have been considered transfers for less than FMV under the DRA because they did not name the state as a remainder beneficiary, had a balloon payment, or both. While the incidence of annuities among Medicaid beneficiaries is not nationally known, a January 2005 study undertaken at the request of CMS estimated that, among the five states examined, the percentage of Medicaid long- term care beneficiaries who had an annuity ranged from less than 1 percent in two states to more than 3 percent in one state. Home Equity. Under the DRA, certain individuals with home equity greater than $500,000 are not eligible for Medicaid payment for long-term care, including nursing home care. The effect of this provision may be limited because it appears that few individuals who apply for Medicaid coverage for nursing home care have homes valued at more than $500,000. For example, 23 percent of the 465 approved Medicaid nursing home applicants whose files we reviewed owned homes. Of the homes for which we could determine values, the median value was $57,600. Only one approved applicant owned a home valued at more than $500,000. Although we do not know this applicant’s equity interest in the home, the applicant would not have been subject to the DRA home equity provision, since the applicant’s spouse lived in the home. Additionally, our review of 2004 HRS data indicated that no elderly nursing home residents owned a home valued at more than $500,000. Life Estates. The DRA requires states to treat the purchase of certain life estates as a transfer of assets for less than FMV unless the purchaser (the applicant) lived in the house for at least 1 year after the date of purchase. The effect of this provision may be limited because we found that few approved Medicaid nursing home applicants whose files we reviewed had life estates. Specifically, the proportion of approved applicants who owned life estates ranged from zero in Pennsylvania to 2 percent in South Carolina. Income First. The DRA’s income-first provision has the potential to affect married applicants in states that did not already use the income-first methodology. Under the income-first methodology the difference between a community spouse’s income and his or her minimum needs allowance is made up by transferring income from the institutionalized spouse. According to CMS, approximately half of all states did not use the income- first methodology before the passage of the DRA. Of the three states we reviewed, only Pennsylvania will be affected by this provision. Among approved applicants in Pennsylvania, 6 of the 42 married applicants whose files we reviewed would have been affected by this change because these applicants had retained resources in excess of the standards to create income streams for their community spouses. Specifically, they created annuities for the community spouses with values ranging from $7,372 to $77,531, with a median value of $39,912. Pennsylvania officials told us that almost all institutionalized spouses in their state have enough income to supplement the income needs of their community spouses. As a result, under the DRA, applicants would not be allowed to retain resources in excess of the standards as they had previously through the creation of annuities. Rather, resources in excess of those allowed by the Medicaid program would need to be reduced in order for the institutionalized spouse to be eligible for Medicaid. We provided copies of a draft of this report to CMS and the three states in which we reviewed Medicaid nursing home application files: Maryland, Pennsylvania and South Carolina. We received written comments from CMS (see app. II) and South Carolina (see app. III). Maryland provided comments via e-mail, while Pennsylvania did not comment on the draft report. In its written comments, CMS generally agreed with our findings, but noted the limited number of states in which we reviewed applications and that study was done before the effects of the DRA could be assessed. We agree that the actual effects of the DRA are not yet known. However, our findings based on applications submitted prior to the implementation of the DRA provide insight into what its effects may be. CMS also commented that the DRA will be working as Congress intended if applicants experience delays in Medicaid eligibility as a result of transferring assets for less than FMV. Maryland and South Carolina generally agreed with our findings. In addition, Maryland emphasized the difficulties faced by Maryland eligibility workers in identifying unreported transfers of assets due to their limited ability to search the state’s property tax records. South Carolina highlighted our finding that 15.6 percent of the approved applicants whose files we reviewed in South Carolina were found to have transferred assets for less than FMV, as compared to 10.4 percent and 5.4 percent in the other two selected states. The state attributed this difference to the effectiveness of South Carolina’s eligibility process and its training of eligibility workers to enable them to identify transfers of assets not reported by an applicant. In response to our finding that only 2 of the 47 approved applicants who transferred assets for less than FMV experienced a delay in Medicaid eligibility as a result of transferring assets, South Carolina recommended that we clarify that this occurred despite the fact that the states were adhering to federal requirements. We did not make a change, as we believe the report clearly states why the other applicants did not experience a delay in Medicaid eligibility. Technical comments from CMS were incorporated into the report as appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Administrator of the Centers for Medicare & Medicaid Services. We will also provide copies to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7118 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To examine the financial characteristics of elderly nursing home residents nationwide, including the extent to which they transferred cash, we analyzed data from the Health and Retirement Survey (HRS). HRS is a longitudinal national panel survey of individuals over age 50 sponsored by the National Institute on Aging and conducted by the University of Michigan. HRS includes individuals who were not institutionalized at the time of the initial interview and tracks these individuals over time, regardless of whether they enter an institution. Researchers conducted the initial interviews in 1992 in respondents’ homes and follow-up interviews over the telephone every second year thereafter. HRS questions pertain to physical and mental health status, insurance coverage, financial status, family support systems, employment status, and retirement planning. For this analysis, we used HRS data from 1992 to 2004. We limited our analysis to elderly nursing home residents who had been surveyed at least once before they entered a nursing home. We defined an elderly individual as anyone 65 years of age or older. On the basis of individuals’ answers on HRS, we defined a nursing home resident as anyone who met one of the following three criteria: 1. answered “yes” to permanently living in a nursing home; 2. answered “no” to permanently living in a nursing home but spent more than 360 nights in a nursing home; or 3. answered “no” to permanently living in a nursing home but spent 180 to 360 days in one and a. died in a later survey period; b. had three or more limitations in activities of daily living (ADL); or c. had cancer, lung disease, or heart disease and some difficulty (rating of three or more) with mobility. We used the HRS data from the 1,296 individuals who met these criteria; this sample represented a population of 4,217,795 individuals. From these data, we estimated the financial characteristics of elderly nursing home residents as well as the percentage of residents who transferred cash or deeds to their homes, the amount transferred, and whether it varied by how they paid for their care (i.e., Medicaid-covered or non-Medicaid- covered). This analysis underestimates the percentage of elderly households that transferred assets and the amount of assets transferred because HRS data included only transfers of cash and deeds to the home. Additionally, HRS does not assess whether the transfers relate to individuals’ attempts to qualify for Medicaid coverage for nursing home services. In order to assess the reliability of the HRS data, we reviewed related documentation regarding the survey and its methods of administration. We also conducted electronic data tests to determine whether there were missing data or obvious errors. On the basis of this review, we determined that the data were sufficiently reliable for our purposes. To analyze the demographic and financial characteristics of elderly individuals who applied for Medicaid coverage for nursing homes and if they applied more than once, as well as the extent to which they transferred assets for less than fair market value (FMV) and were subject to penalty periods, we reviewed Medicaid eligibility determination practices and Medicaid nursing home application files in three states. To select states, we assessed the ranking of five factors for each of the 51 states. 1. The percentage of the population aged 65 and over, which we determined using 2000 census data from the U.S. Census Bureau. 2. The cost of a nursing home stay for a private room for a private-pay patient based on data from a 2004 survey conducted for the MetLife Company. 3. The proportion of elderly (aged 65 and over) with incomes at or above 250 percent of the U.S. poverty level, which was based on information from the U.S. Census Bureau using the 2000 and 2002 Current Population Surveys. 4. The extent of Medicaid nursing home expenditures as reported by states to the Centers for Medicare & Medicaid Services (CMS). 5. The availability of legal services specifically to meet the needs of the elderly and disabled, based on membership data from the National Academy of Elder Law Attorneys. For each factor, we ranked the states from low to high (1 to 51) and then summed the five rankings for each state. On the basis of these sums, we grouped the states into three clusters (low, medium, and high), using natural breaks in the data as parameters (see table 8). We judgmentally selected one state from each cluster. In making this selection, we excluded some states, such as states that did not have the technical ability to generate the data needed to select Medicaid nursing home application files for review. The states we selected were South Carolina (low), Maryland (medium), and Pennsylvania (high). To choose counties in our selected states, we considered four factors. 1. Number of individuals aged 65 and over who applied for, or were enrolled in, Medicaid coverage for nursing home services. 2. Number of licensed nursing home beds. 3. Population aged 65 and over. 4. Median and range of household income. For the first three factors, we ranked the counties within each selected state from high to low. Separately, we ranked the counties by median household income and split them into low, medium, and high groups, using natural breaks in the data as parameters. Of the counties that appeared in the top 10 ranking of each of the first three factors, we matched them with their respective median household income groups. Based on this assessment, we chose a county from each median household income group for each of the three states (see table 9). We reviewed a total of 180 nursing home application files in each selected state, for a total of 540 files. Within each selected state, we based the number of application files reviewed in each county on the proportion of the county’s population of individuals aged 65 and over. (See table 10.) Each selected state sent us a list of individuals aged 65 or over who submitted an application for Medicaid coverage for nursing home care during state fiscal year 2005. These lists also included individuals who applied in previous years but whose files had activity during fiscal year 2005. For example, an individual may have applied in state fiscal year 2004, but had his or her application approved in state fiscal year 2005. From the lists provided by the states, we randomly selected application files by unique identifying numbers. In order to compensate for application files that would need to be skipped because they did not meet our criteria or lacked adequate information, we requested additional files (10 to 15 percent) in each county. Therefore, when we determined that an application file was unusable, we included the next application file on our randomly generated list. We established a file review protocol whereby we reviewed and recorded the earliest Medicaid application for nursing home services in each file regardless of the date of the application. If the earliest application was denied, then we recorded data from that application as well as data from the earliest subsequently approved application, if there was one. From each application, we collected and analyzed data on the applicants’ demographic characteristics, income, nonhousing resources, and home value. We also collected and analyzed data on the number of applicants who transferred assets for less than FMV and the amount they transferred. Since the selected counties used the information in these application files to determine eligibility for Medicaid coverage for nursing home services, we did not independently verify the accuracy of the information contained in the files. However, to ensure that the information we entered into our data collection instrument was consistent with the information found in the application files, we conducted independent file verifications, which resulted in a total verification of at least 20 percent of entries. Additionally, we conducted electronic tests of the data collected to determine whether there were missing data or obvious errors. In some cases, we combined variables to create new ones. For example, we collected and identified several types of applicant resources but ultimately combined them into two categories—housing and nonhousing resources. Based on these procedures, we determined that the data were sufficiently reliable. Moreover, these data can be generalized to the individual county level but cannot be generalized to the state or national level. To assess the potential effect of provisions of the DRA, we used (1) HRS data and (2) data from our application file reviews. Specifically, we used 2004 HRS data to identify the number of elderly individuals in nursing homes who had houses in excess of $500,000 and could be affected by the DRA home equity provision. Additionally, we used the data from our review of Medicaid application files in three counties in each of the three states to analyze the potential effects of the DRA provisions pertaining to penalty periods, annuities, home equity, and income-first. We performed our work from October 2005 through January 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above Carolyn Yocom, Assistant Director; Kaycee Misiewicz Glavich; Grace Materon; Kevin Milne; Elizabeth T. Morrison; Daniel Ries; Michelle Rosenberg; Laurie Fletcher Thurber; and Suzanne M. Worth made key contributions to this report. | The Medicaid program paid for nearly one-half of the nation's total long-term care expenditures in 2004. To be eligible for Medicaid long-term care, individuals may transfer assets (income and resources) to others to ensure that their assets fall below certain limits. Individuals who make transfers for less than fair market value (FMV) can be subject to a penalty that may delay Medicaid coverage. The Deficit Reduction Act of 2005 (DRA) changed the calculation and timing of the penalty period and set requirements for the treatment of certain types of assets. GAO was asked to provide data on the extent to which asset transfers for less than FMV occur. GAO examined (1) the financial characteristics of elderly nursing home residents nationwide, (2) the demographic and financial characteristics of a sample of Medicaid nursing home applicants, (3) the extent to which these applicants transferred assets for less than FMV, and (4) the potential effects of the DRA provisions related to Medicaid eligibility for long-term care. GAO analyzed data from the Health and Retirement Study (HRS), a national panel survey, and from 540 randomly selected Medicaid nursing home application files from 3 counties in each of 3 states (Maryland, Pennsylvania, and South Carolina). State and county selections were based on the prevalence of several factors, including population, income, and demographics. Nationwide, HRS data showed that, at the time most elderly individuals entered a nursing home, they had nonhousing resources of $70,000 or less--less than the average cost for a year of private-pay nursing home care. Overall, nursing home residents covered by Medicaid had fewer nonhousing resources and lower annual incomes, and were less likely to have reported transferring cash than non-Medicaid-covered nursing home residents. Similar to the nationwide results, GAO's review of 540 Medicaid nursing home applications in three states showed that over 90 percent of the applicants had nonhousing resources of $30,000 or less and 85 percent had annual incomes of $20,000 or less. One-fourth of applicants owned homes, with a median home value of $52,954. Over 80 percent of applicants had been living in long-term care facilities for an average of a little over 4 months at the time of their application. Of the 540 applicants, 408 were approved for Medicaid coverage for nursing home services the first time they applied and 122 were denied. Of the denied applicants, 56 were denied for having income or resources that exceeded the standards, 41 of whom submitted subsequent applications and were eventually approved, primarily by decreasing the value of their nonhousing resources. For about one-third of these applicants, at least part of the decrease in nonhousing resources could be attributed to spending on medical or nursing home care. Approximately 10 percent of approved applicants in the three states (47 of 465) transferred assets for less than FMV, with a median amount of $15,152. The average length of the penalty period assessed for the 47 applicants was about 6 months. However, only 2 of these applicants experienced a delay in Medicaid eligibility as a result of the transfers because many applicants' assessed penalties had expired by the time they applied for coverage. The extent to which DRA long-term care provisions will affect applicants' eligibility for Medicaid is uncertain. DRA provisions regarding changes to penalty periods could increase the likelihood that applicants who transfer assets for less than FMV will experience a delay in Medicaid eligibility, but the extent of the delay is uncertain. Several factors could affect the extent to which DRA penalty period provisions actually delay eligibility for Medicaid. These factors include whether an applicant transferred assets for less than FMV before or after the DRA was enacted and a potential increase in requests for waived penalty periods due to undue hardship--circumstances under which individuals are deprived of medical care, food, clothing, shelter, or other necessities of life. Other DRA provisions may have limited effects on eligibility. For example, provisions pertaining to home equity may have limited impact because few applicants whose files GAO reviewed had home equity of sufficient value to be affected. CMS, Maryland, and South Carolina generally agreed with the report's findings; Pennsylvania did not provide comments. |
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In August 2008, GAO reported on the challenges that the Iraqi government faced in spending resources to finance key reconstruction and stabilization efforts, including those to develop Iraq’s security forces. We also reported that from January 2005 through April 2008, Iraq’s Ministries of Defense and Interior reported spending $2.9 billion of the $12.3 billion they were budgeted for investment expenditures in support of the Iraqi security forces. Iraq and other countries use the DOD-administered FMS program to purchase defense articles, services, and training from the U.S. government. In fiscal year 2009, more than 100 foreign governments spent $38.1 billion through the FMS program. According to State and DOD officials, the United States and Iraq have not yet defined their longer-term security relationship. However, the United States and Iraq signed two bilateral agreements in November 2008 that set the stage for Iraq to assume a greater role in providing for its own security and for cooperation between the two countries. The U.S.-Iraq Security Agreement requires the withdrawal of U.S. forces in Iraq by December 31, 2011, and governs their presence in the interim. Within the security agreement, the Iraqi government requests the temporary assistance of U.S. forces to support its efforts to maintain security and stability in Iraq. According to DOD and State officials, the U.S. and Iraqi governments may amend the security agreement by mutual agreement. Such amendments could include an extension of the withdrawal timetable or an authorization of a residual U.S. force to continue training the Iraqi security forces after 2011. Historically, Congress and U.S. agencies have sought to encourage host nation contributions for U.S. security support activities worldwide. (See app. IV for more information on cost-sharing with other countries for security support activities.) For example, Congress authorized the Secretary of Defense, in consultation with the Secretary of State, to accept contributions from host countries to share in the cost of DOD construction, supplies, and services in the country. Moreover, it is DOD policy to offset the administrative and operating expenses of security support activities to the maximum extent feasible through host country contributions. The Secretary of Defense also provided an annual report to Congress through 2004—under legislative provisions dating back to th Defense Authorization Act of 1981 and in more recent defense authorizations—that compared the defense costs borne by the United States, allies, and partner nations. In these reports, DOD officials stated that they would urge allied and partner nations to increase their cost- sharing contributions. Iraq generated an estimated cumulative budget surplus of $52.1 billion through 2009, according to GAO’s analysis of data provided by the Iraqi government. Adjusting for $40.3 billion in advances that were outstanding as of September 2009 reduces the amount of available surplus to $11.8 billion. Iraq’s Board of Supreme Audit has highlighted weaknesses in Iraq’s accounting for a large and growing amount of advances. Under an arrangement with the IMF, Iraq is conducting a review of its outstanding advances to identify funds that may be available for government spending. A key indicator of a government’s fiscal condition is its annual budget surplus or deficit, measured primarily on a cash basis. According to Iraq’s Board of Supreme Audit, the tracking of revenues and expenditures using Iraq’s amended cash accounting is an important tool for fiscal planning and oversight of budget execution. GAO’s analysis of Iraqi data indicated that Iraq’s revenues exceeded expenditures through the end of 2009, resulting in an estimated cumulative budget surplus of $52.1 billion (see table 1). We calculated this estimate by adding (1) Iraq’s cumulative budget surpluses through the end of 2004, as reported by the Board of Supreme Audit; (2) Iraq’s reported annual surpluses from 2005 through 2008; and (3) an estimated $2.2 billion Iraqi budget surplus through December 2009. The cumulative budget surplus in table 1 differs from the sum of all annual surpluses due to the appreciation of the Iraqi dinar (see table 1 note). Table 1 shows that Iraq’s reported revenues and expenditures increased through 2008, particularly during the rapid increase in oil prices in 2008. (See app. II for more information on Iraq’s oil revenues.) We estimated Iraq’s budget surpluses through the end of 2009 on the basis of revenue and expenditure data obtained from the Ministry of Finance. For 2005 through 2007, we based our analysis of Iraq’s revenues and expenditures on the Board of Supreme Audit’s reports on the annual financial statements of the Iraqi government, which the Ministry of Finance provided to us. For 2008, we based our analysis of revenues and expenditures on the final accounts for the Iraqi government, which the Ministry of Finance submitted to the Board of Supreme Audit for review and subsequently provided to us. For 2009, we based our analysis on monthly revenue and expenditure data obtained from the Ministry of Finance through Treasury. We based budget surpluses accumulated before 2005 on data included in the Board of Supreme Audit’s report on the government’s 2005 financial statements. During April 2010, a senior Ministry of Finance official stated that funds the ministry categorizes as “advances” are encumbered or have been paid out. This official stated that we should therefore deduct these funds from the cash surplus to more accurately represent funds available to the government for future uses. He stated that advances include funds set aside for FMS purchases and letters of credit as well as advance payments to contractors. Our analysis of data provided by the Ministry of Finance showed that the Iraqi government recorded about $40.3 billion in outstanding advances as of September 2009. Deducting these funds reduces Iraq’s available surplus to about $11.8 billion. Prior to February 2010, data provided to us by the Ministry of Finance through Treasury had not included any information on advances. Our analysis of Ministry of Finance data indicated that outstanding advances have grown considerably over time (see fig. 1). According to the Board of Supreme Audit report on Iraq’s 2005 financial accounts, Iraq had about $6.4 billion in outstanding advances through the end of 2004. By September 2009, the amount of outstanding advances had grown to more than $40.0 billion, according to Iraqi government data. The largest increase in the amount of outstanding advances occurred between the end of 2007 and September 2009. Outstanding advances more than doubled over this period from $16.7 billion to $40.3 billion. The Board of Supreme Audit has noted weaknesses in Iraq’s accounting for advances. In a March 2009 report on Iraq’s 2005 financial accounts, the board stated that a failure to settle advances at the end of the fiscal year had resulted in inaccurate expenditure data and created difficulty in settling these increasingly large advances over time. The report also stated that the Iraqi government had failed to comply with legal requirements and regulations in executing advances. In a September 2009 report on Iraq’s 2006 financial accounts, the board again expressed concern about the increase in the government’s use of advances. This 2009 report explained that the increase in advances could indicate weaknesses in the government’s follow-up procedures used to close out advances as expenditures, which could lead to inaccuracies in individual ministries’ expenditure reports. It also noted that advances could provide cover for ministries or other entities to exceed their budget allocations or to hide the misappropriation of government funds. The composition of advances is unclear. A senior Ministry of Finance official stated that advances include funds set aside for FMS purchases and letters of credit as well as advance payments to contractors. In addition, the Board of Supreme Audit identifies 26 categories of advances. However, 40 percent of total outstanding advances through 2008 was categorized as “other temporary advances,” which are not fully defined (see app. III). Furthermore, the board does not include a category of advances that clearly identifies funds transferred for FMS purchases. We did not collect data on which ministries or other entities had received the advances, whether advances were intended for operating or investment activities, and the amount of advances that are recorded as expenditures annually. The senior Ministry of Finance official said that this type of information is housed at more than 250 government spending units in Iraq. Moreover, as part of a $3.6 billion IMF arrangement approved in February 2010, Iraq agreed to reform various aspects of its public finance management system, including strengthening its accounting for advances. For example, Iraq agreed to strengthen reporting and cash management by requiring spending units to submit reports on all spending, including advances, no later than 2 months after the end of each month, and to reconcile these amounts with the cash balances at the beginning and end of the reporting period. Iraq also agreed to follow procedures for approving the release of cash to spending units as a way of reducing idle balances in spending units’ accounts to the minimum required for the continuity of government operations. Furthermore, Iraq agreed to prepare a report on its outstanding advances, identify advances that are recoverable, set a schedule for their recovery, and eventually write off advances that are deemed irrecoverable. Under the terms of the IMF arrangement, Iraq has committed to completing this report by September 30, 2010. GAO’s analysis of Iraqi financial data indicated that Iraqi budgets are unreliable indicators of the country’s fiscal balance at the end of each year. As depicted in figure 2, from 2005 through 2009 Iraq began each year with budgets that projected government spending would exceed government revenue by $3.5 billion (2005) to $15.9 billion (2009). If the government had spent funds in accordance with its budgets, and its revenue projections had proved accurate, the government would have generated more than $35 billion in cumulative deficits through the end of 2009. However, our analysis of Iraqi data showed that actual expenditures for the past 5 years have consistently fallen short of budget projections, while actual revenues, in general, have met or exceeded projections. On a cash accounting basis, Iraq generated budget surpluses in each year from 2005 through 2009, rather than the deficits projected by its budget. Finally, after adjusting for advances, Iraq generated budget surpluses from 2005 through 2007. In 2008 and 2009, Iraq produced adjusted deficits after deducting advances, but these deficits were less than one-half of the amounts that it projected in its budget. In commenting on a draft of this report, DOD acknowledged that Iraq’s budgets serve as imperfect predictors of the country’s year-end fiscal balance. DOD noted that experience from 2008 and 2009 showed that actual deficits were about one-half of what was projected by the budget. Accordingly, DOD concluded that although Iraq budgeted for a $20 billion to $25 billion deficit in 2010, it is more likely that Iraq will generate a $8 billion to $10 billion deficit. Iraqi government data and an independent audit report show that, through the end of 2009, Iraq had accumulated between $15.3 billion and $32.2 billion in financial deposit balances held at the Central Bank of Iraq, the Development Fund for Iraq in New York, and state-owned banks in Iraq. This range does not include approximately $10 billion in JP Morgan Chase and Citibank accounts to cover Iraq’s letters of credit and about $3.2 billion in a Federal Reserve Bank of New York account for Iraq’s FMS purchases. The range reflects a discrepancy between the amount of government-sector deposits reported by the Central Bank of Iraq to the IMF and the amount that the Ministry of Finance asserts is available for government spending. In November 2009, the Ministry of Finance reclassified $16.9 billion held in state-owned banks as unavailable for government spending, stating that these funds belong to state-owned enterprises and government trusts, such as those that were established for orphans and pensioners. Therefore, according to the Ministry of Finance, only $15.3 billion of the $32.2 billion is unencumbered and available for spending. The IMF is seeking additional clarity on the amount of financial deposits that may be available for government spending. Data from the Central Bank of Iraq and the International Advisory and Monitoring Board show that Iraq began 2010 with $32.2 billion in financial deposits held at state-owned banks in Iraq, the Central Bank of Iraq, and the U.S. Federal Reserve Bank’s Development Fund for Iraq account (see table 2). We obtained data on Iraq’s deposit balances in state-owned banks from the Central Bank of Iraq during an April 2010 trip to Baghdad, Iraq. These data separate central ministry accounts from state-owned enterprises’ accounts. However, the Central Bank of Iraq consolidates these categories in its reporting to the IMF. In turn, the IMF publishes the consolidated accounts in its International Financial Statistics. In April 2010, Iraq’s Minister of Finance and a senior Ministry of Finance official stated that not all of the $21.4 billion in financial deposits in state- owned banks was available to the Iraqi government for future expenditures for two reasons. First, according to Ministry of Finance data, only $4.5 billion of the $12.2 billion in central ministries’ accounts at state- owned banks is available to the government (see table 2). Ministry of Finance officials said that the remaining deposits—about $7.6 billion—are set aside as government trust funds for the Iraqi people, such as worker pensions and court funds to support orphaned infants. Second, the senior Ministry official explained that none of the funds in state-owned enterprises’ accounts—which the Iraqi government refers to as self-funded or self-financing entities—belongs to the government, primarily because these enterprises receive few funds, if any, from Iraq’s public Treasury. The Ministry of Finance officials agreed with the Central Bank of Iraq data on the amount of financial deposits in the Central Bank of Iraq and the Federal Reserve Bank’s Development Fund for Iraq. Accordingly, the Ministry of Finance data show that the Iraqi government had about $15.3 billion in financial deposits available for future expenditures through the end of 2009. We sought a more in-depth explanation regarding why the Ministry of Finance excluded $16.9 billion in government-sector deposits as available for governmental spending. According to a Ministry of Finance document, in November 2009, representatives of the Ministry of Finance and Iraq’s two largest state-owned banks—Rafidain and Rasheed—reviewed the government’s deposits at the two banks. To do so, the Ministry of Finance formed a committee that consisted of three officials from its accounting department, one of whom served as the head of the committee; an official from the ministry’s inspector general department; and one official from each of the two banks. During the review process, the Ministry of Finance’s accounting department developed a list of cash balances in accounts that were available to the government for future spending. It then asked the two banks to prepare similar lists for reconciliation purposes. When the committee met in late November 2009, according to the meeting minutes, the balances of the Ministry of Finance and the two banks did not reconcile. The banks’ lists included accounts for state-owned enterprises and others that, according to the committee minutes, were not financed by Iraq’s public Treasury; the Ministry of Finance list did not include those accounts. After the committee agreed to eliminate those accounts from Rafidain’s and Rasheed’s lists of available funds, the Ministry of Finance’s and banks’ balances reconciled. This review process effectively reclassified $16.9 billion in Iraq’s deposit balances as unavailable for government spending. We could not corroborate the Ministry of Finance’s information on the availability of financial deposits or the Central Bank of Iraq’s data on financial deposits in state-owned banks. According to U.S. officials, the government’s accounts in the two largest state-owned banks have not been audited by an independent organization since November 2009, when the Ministry of Finance and the two banks reclassified the deposits. Thus, we did not have an independent audit to corroborate the status of the reported financial deposits in the two banks. We note that an earlier independent audit report on Iraq’s largest state-owned bank—Rafidain bank—found significant deficiencies in the bank’s internal controls. Due to the significance of these problems, the auditors could not validate the existence or value of many of the bank’s account balances, nor could they express an opinion on the bank’s financial statements. Moreover, Ernst and Young independent audits of the Central Bank of Iraq could not confirm or reconcile over $11 billion in the account balances of the Ministry of Finance and other governmental entities as of the end of 2008 and about $800 million as of the end of 2009. Furthermore, we requested other information that might help to clarify the status of funds set aside for trust funds, but a senior Ministry of Finance official did not provide us with any additional information. In addition, we could not corroborate the committee minutes’ statement that state-owned enterprises do not receive funds from Iraq’s public treasury, and, therefore, the funds in their accounts are not available to the Iraqi government. The IMF is seeking greater clarity on the amount of Iraq’s financial deposits that is unencumbered and available for government spending. Under the terms of Iraq’s February 2010 arrangement with the IMF, the Ministry of Finance is required to complete a review of all central government accounts in the banking system, reconcile them with Iraqi Treasury records, and return any idle balances received from the budget to the central Iraqi Treasury. This review was due to be completed by March 31, 2010. However, according to the IMF, the review was still under way as of August 2010. Overall, Iraq’s financial deposits increased by $11.7 billion from 2007 to 2008 and then decreased by $8.9 billion from 2008 to 2009, with most of the fluctuation occurring in deposits in banks in Iraq (see table 3). According to Central Bank of Iraq officials and data, Iraq’s financial deposits at the Central Bank declined by $10.3 billion during 2009 due to the Ministry of Finance transferring funds from the Central Bank to Iraq’s two largest state-owned banks, Rafidain and Rasheed. The Central Bank of Iraq’s data show no corresponding increase in government deposits at state-owned banks. According to these data, government deposits at state- owned banks increased by $1.7 billion from 2008 to 2009, a difference of $8.6 billion. In commenting on a draft of this report, DOD stated that the adjusted deficit in 2009 may explain at least $8 billion of the drawdown in deposits from 2008 to 2009. However, we do not find a consistent relationship between Iraq’s adjusted fiscal balance and fluctuations in Iraq’s financial deposits, as could have been the case for 2009. For example, our analysis of Ministry of Finance data showed that in 2008 Iraq generated a $1.8 billion adjusted deficit, after deducting advances. However, over the same period, Iraq’s financial deposits increased by $11.7 billion, from $29.4 billion to $41.1 billion. These problems are further amplified in independent audits of the Central Bank of Iraq conducted by Ernst and Young. The auditors could not confirm or reconcile over $11 billion in the account balances of the Ministry of Finance and other governmental entities as of the end of 2008 and about $800 million as of the end of 2009. Because the Central Bank of Iraq did not receive statements for these accounts, the auditors could not ensure the completeness, valuation, and accuracy of the balances. As we have previously noted, an Ernst and Young audit report of the 2006 financial statements of Iraq’s largest state-owned bank—Rafidain—found significant deficiencies in the bank’s internal controls. Due to the significance of these problems, the auditors could not validate the existence or value of many of the bank’s account balances, nor could they express an opinion on the bank’s financial statements. Iraqi government data show that the Iraqi security ministries have increased their spending from 2005 through 2009 and set aside about $5.5 billion to purchase equipment, training, and services under the FMS program. The Iraqi government has also funded the Iraq-Commander’s Emergency Response Program (I-CERP) and assumed responsibility for contracts to pay the salaries of the Sons of Iraq. However, we estimate that, during this same period, the Ministries of Defense and Interior did not spend or set aside for FMS and other purchases between $2.5 billion and $5.2 billion of their budgeted funds that could have been used to address security needs. Moreover, the Iraqi government did not provide any additional funding for I-CERP, as originally expected. The administration is seeking $2 billion in additional U.S. funding in its fiscal year 2011 budget request to provide training and equipment to the Iraqi security forces. Data from the Ministries of Finance, Defense, and Interior show that Iraq has increased its security spending under the Ministries of Defense and Interior from $2.0 billion in 2005 to $8.6 billion in 2009 (see table 4). Spending by these ministries reflects the actual value of equipment that has been delivered, buildings constructed, training provided, or salaries paid. The Ministry of Defense, which is responsible for training and equipping Iraq’s army, navy, and air force, increased its spending an average of about 28 percent each year from 2005 through 2009. The Ministry of Interior, which performs similar activities in support of Iraq’s federal police, local police, and border enforcement, increased its spending by 45 percent annually, on average. Iraqi government data also indicate that the Ministries of Defense and Interior have increased their spending as a percentage of budgeted funds from 2005 through 2009 (see table 5). Although the percentages of their budgets that the two ministries were able to spend has fluctuated from year to year, both spent more than 90 percent of the funds made available to them in 2009. By comparison, the Ministry of Defense spent about 64 percent of its budgeted funds from 2005 through 2009, on average; the Ministry of Interior spent about 85 percent of its budgeted funds over the same period. From January 2006 through December 2009, Iraq set aside about $5.5 billion to purchase equipment, training, and services through the FMS program (see table 6). The FMS program provides an established procurement mechanism through which the Ministries of Defense and Interior can spend available Iraqi funds to address security needs. Moreover, according to the Defense Security Cooperation Agency (DSCA); the United States Forces-Iraq (USF-I); and the Iraqi Ministers of Finance, Defense, and Interior, the program provides a way for the security ministries to spend their money without risking the loss of funds to the corruption and mismanagement that hamper Iraqi government contracting. Under FMS, the Ministries of Defense and Interior must identify their equipment or training needs, transfer funds to an account at the Federal Reserve Bank of New York, and sign a purchase agreement. DOD then oversees contracting with suppliers, billing, and delivery of Iraq’s purchases. From January 2006 through December 31, 2009, Iraq signed purchase agreements with the United States to buy an estimated $5.1 billion in equipment, training, and services through the FMS program. This includes purchase agreements with the Ministry of Defense valued at about $4.3 billion and purchase agreements with the Ministry of Interior valued at about $840 million. Through these FMS agreements, Iraq has purchased tanks, helicopters, naval patrol boats, training aircraft, and other equipment to improve the capabilities of its army, navy, and air force. To operate and maintain this equipment, Iraq also has used FMS to purchase training, support equipment, spare parts, and maintenance and repair packages. In addition, Iraq has purchased technical services for the planning, designing, and constructing of security infrastructure, such as buildings to house its General Directorate of Counterterrorism and a pier and seawall for a naval base at Umm Qasr. According to U.S. and Iraqi officials, the security ministries have used FMS transfers as a means of setting aside funds that remained unspent at the end of the fiscal year. For example, in April 2010, officials at the Ministry of Defense said that they had received Ministry of Finance approval to transfer $143 million of their unspent 2009 funds into the FMS account. Similarly, officials from the Ministry of Interior said that they planned to transfer $300 million to $350 million of their unspent 2009 funds into the FMS account, and they noted that, if approved, this would be the 4th consecutive year in which they executed a transfer after the end of the calendar year. The United States is also using U.S. funds to supplement Iraq’s FMS purchases. Under seven arrangements, the United States contributed about $550 million and Iraq contributed more than $880 million to provide Iraq with more than $1.4 billion in equipment and services (see table 7). For example, in June 2009, Iraq’s Ministry of Defense signed and funded a $110 million agreement with the United States to purchase eight T-6A training aircraft for the Iraqi air force. In July 2009, the United States supplemented this purchase by signing an agreement to provide almost $100 million in funding for seven additional training aircraft, spare parts, training, and maintenance. According to officials from USF-I and U.S. Central Command, these arrangements provide an incentive for Iraq to purchase U.S. equipment, rather than equipment from foreign vendors, thereby enhancing military interoperability and reinforcing the strategic partnership between the two countries. Moreover, FMS purchases include training, sustainment, spare parts, and logistics support to help increase the likelihood that equipment will remain functional over time. In addition to spending by the Ministries of Defense and Interior, the Iraqi government also has funded I-CERP and assumed responsibility for paying the salaries of the Sons of Iraq and other security-related support contracts previously paid by the United States. In April 2008, Iraq provided $270 million to fund I-CERP, an Iraqi-funded variation of the Commander’s Emergency Response Program (CERP). CERP is a U.S.- funded and-managed program that enables local commanders to respond to urgent humanitarian relief and reconstruction requirements by carrying out programs that will immediately assist the local population. Although neither I-CERP nor CERP directly supports the Iraqi military or police, these programs contribute to a sustainable security situation and help provincial governments win the support of the local population, according to USF-I. Through I-CERP, Iraq provides funding for projects, which USF-I subsequently carries out using the same procurement, disbursement, and accountability mechanisms that it uses to implement CERP projects. As of September 1, 2009, USF-I had obligated about $229 million of Iraqi funding for I-CERP projects, ranging from road and school improvements to small business grants. Iraq has also assumed responsibility for some security contracts formerly paid by USF-I, most notably, the contracts to pay the salaries of the Sons of Iraq. In June 2007, USF-I incrementally began hiring Sons of Iraq as security contractors to assist the Coalition and Iraqi forces in maintaining security in their local communities. Iraq started to take responsibility for some of the Sons of Iraq contracts in October 2008 and, according to an official from USF-I responsible for monitoring these contracts, assumed full control of almost 90,000 contracts in May 2009. From February 2009 through December 2009, Iraq paid more than $255 million for the salaries of the Sons of Iraq. Before turning the Sons of Iraq contracts over to Iraq, USF-I spent approximately $413 million of CERP funding to pay their salaries. Additionally, Iraq has begun to pay for security-related support contracts previously paid by the United States, and USF-I plans to transfer additional contracts as the United States reduces its presence in Iraq. According to USF-I, the command transferred almost $132 million in security-related contracts to Iraq between September 2008 and October 2009, including a contract to manage the Bayji National Ammunition Depot and a contract to provide maintenance for armored personnel carriers. From November 2009 through April 2010, USF-I planned to transfer another seven contracts valued at about $10 million. These include a contract to provide training for air traffic controllers in the Iraqi air force and a contract to provide maintenance for flight simulators. Our analysis of data from the Iraqi Ministries of Finance, Defense, and Interior; DSCA; and the Trade Bank of Iraq indicated that—despite increases in spending by the security ministries since 2005—the Ministries of Defense and Interior did not spend or set aside between $2.5 billion and $5.2 billion that could have been applied to Iraq’s security needs (see table 8). U.S. officials have cited several reasons that the security ministries have been unable to fully use their budgeted funds, including overly centralized decision making and weak procurement capacity. As displayed in table 8, Iraqi government data show that the Ministries of Defense and Interior spent $28.3 billion of the $38.4 billion they were budgeted from 2005 through 2009, resulting in about $10 billion of unspent funds. These ministries also set aside about $7.5 billion for advances, including FMS purchases and letters of credit. This includes approximately $5.5 billion transferred to an account at the Federal Reserve Bank of New York for FMS purchases and about $1.8 billion in letters of credit for purchases through foreign contracts. It also includes more than $100 million in advances on domestic contracts made by the Ministry of Defense through the end of 2009. With the exception of this Ministry of Defense data on advances for domestic contracts, our analysis does not reflect any additional funding that the security ministries may have set aside to pay advances. We requested this information from the Ministries of Defense and Interior through the USF-I advisors to these ministries, but the ministries did not provide us with any additional data. We report a range for outstanding advances and unused funds to reflect uncertainty regarding what portion of the advances for FMS purchases and letters of credit has been recorded as an expenditure by the Ministry of Finance and is therefore already reflected in total expenditures. Our low estimate for outstanding advances ($4.9 billion) assumes that about $2.6 billion of the $7.5 billion set aside for FMS purchases, letters of credit, or Ministry of Defense advances on domestic contracts is already reflected in total expenditures. Our high estimate for outstanding advances ($7.5 billion) assumes that none of the $7.5 billion set aside for FMS purchases, letters of credit, or other advances has resulted in an expenditure. To determine the portion of funds set aside for FMS purchases that may have resulted in the delivery of equipment or services, and that therefore may have already been recorded as an expenditure by the Ministries of Defense and Interior, we reviewed a report from the Defense Finance and Accounting Service showing the value of FMS deliveries to the security ministries, as of December 31, 2009. Similarly, to determine the value of letters of credit that may have resulted in expenditures, we reviewed data from the Trade Bank of Iraq on letters of credit that were closed as of December 31, 2009. Finally, to determine the portion of other advances that may have been expended, we reviewed data on advances for domestic contracts provided by the Ministry of Defense. We determined that the data used in this analysis were sufficiently reliable and made the assumptions described in this section to generate estimates of unused funds. We also found that the Iraqi government had not provided additional funding for I-CERP, as originally intended. The Memorandum of Understanding between the United States and Iraq, establishing I-CERP, stated that funding for I-CERP would eventually seek to match U.S. funding for the CERP program—more than $1 billion in 2008. However, as of September 1, 2009, USF-I had obligated $229 million of the $270 million in funding provided by Iraq for I-CERP, and Iraq had not provided any additional resources to support the program. By comparison, from fiscal years 2004 through September 2009, USF-I obligated more than $3.6 billion for CERP projects in Iraq and had forecast $300 million in additional CERP needs for Iraq in fiscal year 2010. According to an official from USF-I who is familiar with the negotiations over additional funding for I-CERP, Iraq did not provide additional funding for I-CERP due to limited capital budgets and competing spending priorities. In February 2010, the administration submitted a budget request for $3 billion in additional U.S. funding to provide training, equipment, and other services to the Iraqi military and police forces. This includes a $1 billion request for fiscal year 2010 supplemental funding, which has already been approved by Congress, and a $2 billion request as part of the administration’s fiscal year 2011 budget proposal, which is currently under consideration. According to USF-I, the Iraqi security forces will need additional equipment, training, and sustainment to bolster their capabilities as the United States begins to reduce its troop presence. USF-I plans to meet these needs by transferring U.S. defense articles valued at $600 million to the Iraqi government and using $3 billion in additional U.S. government funds to purchase equipment, training, and services for the Iraqi security forces. Under the administration’s proposal, about $2.4 billion would be used to support Iraqi forces under the Ministry of Defense, and almost $600 million would help to train and equip Ministry of Interior forces. USF-I asserts that these equipment transfers and additional funding will bolster Iraq’s internal security and stability with police training, provide the Ministry of Defense with a foundational capability for external provide the Ministries of Defense and Interior with an institutional and logistic sustainment capability. Specifically, USF-I has stated that the $600 million in U.S. equipment transfers would allow it to modernize one mechanized division and fully equip three infantry divisions of the Iraqi army; provide additional air surveillance capabilities; improve protection for naval infrastructure, such as ports and oil platforms; and provide training and other support for existing equipment. Additional funding would cover the costs of refurbishing and shipping some of the equipment to be transferred to the Iraqi security forces. It would also provide funding for the sustainment of equipment previously purchased by Iraq, including tanks and rotary wing aircraft; pilot training; long-range air defense radars; ammunition; and contracts for advisors to the Ministries of Defense and Interior, among other things. In commenting on a draft of this report, State asserted that U.S. government security assistance is necessary to help the Iraqi security forces meet the minimum essential capability requirements associated with the responsible drawdown of U.S. forces. Furthermore, in the budget justification documentation accompanying its fiscal year 2011 budget request, DOD stated that the United States faces the choice of making additional investments to fill essential gaps in the capabilities of the Iraqi security forces or accept the risk that they will fall short of being able to fully secure Iraq from internal and external threats by the time U.S. forces depart in accordance with the Security Agreement. However, USF-I acknowledges that some equipment necessary for providing Iraq with a set of minimum essential capabilities would not arrive in Iraq before December 31, 2011, the final withdrawal date for U.S. forces. According to USF-I, all purchases made using U.S. funding will be conducted through the FMS process. Depending on the equipment or services being provided, it could take from 6 months to 36 months after an FMS agreement has been implemented for the items to be delivered. Consequently, some equipment and services purchased using fiscal year 2011 funding may not arrive in Iraq until 2013, well after the withdrawal of U.S. forces—with some items, such as tank ammunition, potentially taking even longer to arrive. Congress has instructed the U.S. government to take actions to ensure that Iraqi funds are used to pay for the costs of training, equipping, and sustaining the Iraqi military and police. DOD has encouraged greater Iraqi spending of its own funds, particularly through the FMS program, and Iraq has consistently increased spending on its own security over the past 5 years. However, billions of dollars that Iraq has budgeted for security have gone unused. As U.S. troops withdraw, the Iraqi government must take a larger role in providing security throughout the country. Congress recently provided the administration with $1 billion in new funding to support Iraq’s military and police through its passage of a fiscal year 2010 supplemental appropriation. The administration is currently requesting an additional $2 billion in fiscal year 2011 funding for similar uses. However, our analysis of Iraqi government data showed cumulative budget surpluses of $52.1 billion through December 2009, of which at least $11.8 billion is available for future spending. These surpluses have enabled Iraq to accumulate at least $15.3 billion in financial deposit balances. Moreover, IMF-required reviews of Iraq’s outstanding advances and its balances in government bank accounts will clarify the total resources available for future spending. In light of these resources, Iraq has the potential to further contribute toward its security needs, even as it addresses other competing priorities. To ensure that Iraq continues to spend its own resources on security costs, Congress should consider Iraq’s available financial resources when reviewing (1) a fiscal year 2011 budget request and (2) potential future funding requests to support the Iraqi security forces. We recommend that the Departments of State and the Treasury work with the Iraqi government to further identify Iraqi resources available for future spending. This should include assisting Iraq in completing two reviews required under Iraq’s arrangement with the IMF. First, State and Treasury should assist Iraq in completing a review of its outstanding advances to determine whether some of these advances may be recoverable and available for future spending. Second, State and Treasury should help Iraq complete a review of its central government accounts so that it can return any idle balances to the central Iraqi Treasury. We provided a draft of this report to the Departments of Defense, State, and the Treasury and the U.S. Agency for International Development (USAID). We also provided a draft of this report to the International Monetary Fund through Treasury. We received written comments from State, Treasury, and DOD, which we have reprinted in appendixes V, VI, and VII, respectively. USAID did not provide comments. State, Treasury, and DOD also have provided technical comments, which we incorporated throughout the report as appropriate. In addition, the IMF provided technical comments, which we incorporated in the report as appropriate. State and Treasury concurred with our recommendation. State agreed to work closely with its Iraqi counterparts to identify available financial resources, complete reviews of outstanding advances and central government accounts, and secure Iraqi cost-sharing across a variety of sectors. Treasury agreed, in principle that, while Iraq’s fiscal accounts are not well ordered, Iraq potentially will have financial resources to engage in greater cost-sharing in the future. Furthermore, Treasury asserted that it continues to work with the Ministry of Finance and other Iraqi agencies to obtain more accurate estimates of available fiscal balances and enhance public financial management. However, State, Treasury, and DOD stated that they believe that the Iraqi government’s available funds are closer to the low end of GAO’s range. Given the substantial shortcomings associated with Iraq’s accounting for advances and financial deposits, we report a range for Iraq’s available surplus and financial deposits. We believe that it would be premature to suggest that Iraq’s available resources fall at the low end of this range until Iraq has completed reviews of outstanding advances and central government accounts, as it agreed to in its arrangement with the IMF. These reviews will clarify the total resources available for government spending. State, Treasury, and DOD also stated that Iraq needs to maintain a fiscal reserve, given its dependence on oil revenues and the volatility of oil prices. In its comments, DOD stated that the Iraqi government believes it needs to keep about $10 billion to $12 billion, or about 2 to 3 months of spending, in government accounts as a reserve. Under its arrangement with the IMF, Iraq agreed to maintain $2.6 billion in the Development Fund for Iraq to pay for 2 to 3 months of employee wages. Iraq was capable of maintaining this amount with at least $15.3 billion in financial deposits that it had at the end of 2009. Furthermore, through June 2010, Iraq generated almost $2 billion more in revenue than it had predicted in its budget. If this trend continues, Iraq may have about $4 billion in additional oil export revenues by the end of the year. DOD agreed that there is room for improvement in the Iraqi government’s financial accounting and reporting, and noted that the growing amount of outstanding advances presents a challenge to Iraq’s public financial management. However, DOD also commented that it believes the overall message of our draft report—that the Iraqi government currently has significant cash reserves that would allow it to pay more of its security costs now and in 2011—is inaccurate. We disagree. As our report states, Iraq ended 2009 with at least $15.3 billion in financial deposits. When completed, IMF-required reviews of Iraq’s outstanding advances and central government accounts will clarify total resources available to the government for spending in 2010 and beyond. The review of deposits in central government accounts was due to be completed by March 31, 2010, but, according to the IMF, it was still under way as of August 2010. The review of Iraq’s outstanding advances is to be completed by September 30, 2010. We cannot yet project Iraq’s fiscal position through the end of 2010 or 2011. However, as we note in this report and as DOD acknowledged in its comments to our draft, past data indicate that Iraq’s deficit in 2010 will be far less than is projected in its 2010 budget. We are sending copies of this report to the appropriate congressional committees, the Secretary of State, the Secretary of the Treasury, the Secretary of Defense, the Administrator of the U.S. Agency for International Development, and other interested parties. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8979 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 VIII. Joseph A. Christoff Director, International Affairs and Trade The Honorable Carl Levin Chairman The Honorable John McCain Ranking Member Committee on Armed Services United States Senate The Honorable Kent Conrad Chairman The Honorable Judd Gregg Ranking Member Committee on the Budget United States Senate The Honorable John F. Kerry Chairman The Honorable Richard G. Lugar Ranking Member Committee on Foreign Relations United States Senate The Honorable Joseph I. Lieberman Chairman The Honorable Susan M. Collins Ranking Member Committee on Homeland Security and Government Affairs United States Senate The Honorable Daniel K. Inouye Chairman The Honorable Thad Cochran Ranking Member Subcommittee on Defense Committee on Appropriations United States Senate The Honorable Patrick J. Leahy Chairman The Honorable Judd Gregg Ranking Member Subcommittee on State, Forei and Related Programs Committee on Appropriations United States Senate The Honorable Ike Skelton Chairman The Honorable Howard P. M Ranking Member Committee on Armed Serv House of Representati ves The Honorable John M. Spratt Chairman The Honorable Paul Ryan Ranking Member Committee on the Budget ves House of Representati , Jr. In this report, we provide inform Iraq’s budg balances, and (3) the extent to which on security costs. governments’ contributions to the co countries, which could This report builds on GAO’s e August 2008 report on Ir our March 2009 report in w of 2008. To complete our analysis of the Iraqi government’s estimated actual and available cumulative budget surplus, we analyzed financial data and other information that we obtained from the Iraqi Ministry of Finance, including reports by Iraq’s Board of Supr 2005, 2006, and 2007. During a trip to Baghdad in April 2010, we interviewed the Minister of Finance and a senior Ministry of Finance official to clarify data that we received on Iraq’s revenues, expenditures, and advances. We also interviewed the President of the Trade Bank of Iraq and obtained data on letters of credit issued and closed by the Iraqi government. We a Agency (DSCA) on funds set aside by the Iraqi government for U.S. Foreign Military Sales (FMS) purchases. For this analysis, we also reviewed U.S. agency and Inter and interviewed officials from the Departments of State (State), Defense (DOD), and the Treasury (Treasury); the World Bank; and the IMF. eme Audit on Iraq’s financial accounts for nalyzed data from the U.S. Defense Security Cooperation national Monetary Fund (IMF) documents To determine Iraq’s revenues and expenditures for 2005 through 2007, we obtained translated copies of reports on Iraq’s audited accounts for each of these years. These reports were prepared by Iraq’s Board of Supreme Audit and provided to GAO by the Iraqi Ministry of Finance. The reports include final revenue and expenditure data for each year, including adjustments made by the Ministry of Finance during its end-of-year reconciliation process. To determine Iraq’s revenues and expenditures for 2008, we obtained translations of the final Ministry of Finance account s that it submitted to the Board of Supreme Audit for review. The data ontotal revenues and expenditures contained in Iraq’s final accounts for 2008 also include adjustments made by the Ministry of Finance during its end- of-year reconciliation process. To determine Iraq’s revenues for 2009, we obtained data on Iraq’s monthly revenues and expenditures through Decembe r 2009 from the Ministry of Finance through Treasury. It is unclear whether these data include adjustments made by the Ministry of inance during its end-of-year reconciliation process. We found that the F revenue and expenditure data from the 2005 through 2007 Board of Supreme Audit reports were sufficiently reliable to determine Iraq’s cash- based budget surplus. To corroborate Iraqi oil revenue, we compared the oil revenues data for 2008 and 2009 provided by the Ministry of Finance with Central Bank of Iraq export oil revenue receipts. To determine Iraq’s annual budget surpluses from 2005 through 2009 and cumulative surplus through the end of 2009, we used revenues and expenditures data denominated in Iraqi dinars. For each year, we subtracted total expenditures from total revenues to determine the annual cash surplus. To determine the annual cash surpluses in dollars, we u the annual Iraqi dinar-dollar budget exchange rates to convert each dinar-denominated annual surplus into dollars. To compute the dinar- denominated cumulative cash surplus through the end of 2009, we added rd of the cash surplus accumulated before 2005, as reported by Iraq’s Boa Supreme Audit, to the annual surpluses we calculated for each of the years from 2005 through 2008 and the estimated surplus we calculated for 2009. To calculate Iraq’s dollar-denominated cumulative cash surplus through the end of 2009, we converted the dinar-denominated cumulative cash surplus into dollars using the 2009 dinar-dollar budget exchange rate. Thi dollar-denominated cumulative cash surplus differs from the sum of annual dollar-denominated cash surpluses due to the appreciation of the Iraqi dinar. Ministry of Finance to the Board of Supreme Audit and (2) Ministry o Finance data through September 2009. We interviewed officials from Iraqi Ministry of Finance and Trade Bank of Iraq to try and clarify the composition and disposition of these advances. Finally, to better understand concerns about the way in which the Ministry of Finance accounts for advances, we reviewed reports issued by Iraq’s Board of Supreme Audit and an IMF report on its arrangement with Iraq. To assess the amount of the Iraqi government’s financial deposit bala we interviewed and obtained documentation from the Iraqi Minister of Finance, a senior Ministry of Finance official, the Governor of the Centra ain Bank of Iraq, and staff from the two largest state-owned banks, Rafid and Rasheed. The Iraqi government’s financial deposits are held in Iraq’s state-owned banks Federal Reserve Bank in New York’s Development Fund for Iraq. We also reviewed independent audit reports for the Central Ban largest state-owned bank, Rafidain. as well as in the Central Bank of Iraq and the U.S. According to Central Bank of Iraq data, a small amount of government-sector deposits are also held in private commercial banks. These deposit balances total about $100 million (approximately 0.4 percent of government-sector deposits in commercial banks). held in central government deposits in domestic banks is available for operating and investment purposes. The Ministry of Finance based its claim on a reclassification of accounts done in late November 2009 by representatives from the ministry’s accounting and inspector general departments and the two largest state-owned banks. We were unable t independently verify the statements by the Central Bank of Iraq and th Ministry of Finance; thus, we report a range using both sets of data. he Ministry of Finance and the Central Bank of Iraq agree on the amount T of cash balances available to the central government for operating and investment budgets in the Central Bank of Iraq and the Development Fund for Iraq. The Governor of the Central Bank provided data on the Ministry of Finance’s account balance as of December 2009. For the account balance of the Development Fund for Iraq, we report data through the end of 2009, which are based on the preliminary estimates published by the International Advisory and Monitoring Board in April 2010. We determined that these data were sufficiently reliable to determine the cash balance of central government deposits at the Development Fund for Iraq. To determine the extent to which Iraq has spent its financial resources on security, we analyzed data on amounts budgeted for and spent by the Ministries of Defense and Interior. We determined expenditures by the Ministries of Defense and Interior from 2005 through 2009 on the basis of data from the 2005 through 2007 Board of Supreme Audit reports, 2008 Ministry of Finance accounts submitted to the board, and 2009 data provided by the Ministries of Defense and Interior. Amounts budgeted to the ministries are based on the 2005 through 2007 Board of Supreme Audit reports, Iraq’s 2008 budget law and supplemental budget, and 2009 data from the Ministries of Defense and Interior—the same three sources. We did not receive 2009 data on expenditures by the Ministry of Interior for projects and reconstruction. We therefore assume that all of the $216 million budgeted to the Ministry of Interior for projects and reconstruction in 2009 was spent. We used Iraqi dinar-dollar exchange rates to convert dinar expenditure figures to dollars. However, we calculated average annual growth rates in expenditures for the Ministries of Defense and Interior in Iraqi dinars to eliminate exchange rate effects on the growth rate in expenditures. We determined that these data were sufficiently reliable to describe expenditures and spending rates by the Ministries o Defense and Interior. To determine the value of FMS agreements signed by the Ministries of Defense and Interior, we reviewed information provided by DSCA detailing the value of Iraq’s FMS purchases that had been fully or partially implemented as of December 31, 2009. We corroborated this information by reviewing copies of the Letters of Offer and Acceptance for each of Iraq’s FMS purchases, which we obtained from the Defense Finance and Accounting Service in Indianapolis, Indiana, as of June 22, 2009, and October 1, 2009. To determine the value of deposits made by the Min of Defense and Interior into Iraq’s FMS account from 2006 through 2009, we also reviewed information provided by DSCA. We interviewed the Country Program Director and Country Finance Director for FMS in Iraq at DSCA and the Iraq Country Manager at the Defense Finance and Accounting Service to learn about the FMS program and clarify aspects of the information provided to us. We determined that these data were sufficiently reliable for the purposes of this analysis. To determine the value of Iraq’s FMS purchases in which the United St and Iraq shared the cost, we interviewed officials from DOD’s United States Forces-Iraq (USF-I) during audit trips to Baghdad, Iraq, from September 18 to 25, 2009, and from April 12 to 16, 2010, and reviewed additional documentation provided subsequent to these trips. We interviewed the Country Program Director for FMS in Iraq at DSCA and reviewed the Letters of Offer and Acceptance for Iraq’s FMS purchases to corroborate the accuracy of this information. We determined that these data were sufficiently reliable to determine the value of Iraq’s FMS purchases in which the United States and Iraq shared the cost. To determine the extent to which Iraq has spent its resources through the Iraq-Commander’s Emergency Response Program, Sons of Iraq contracts, and other security contracts, we interviewed officials from and reviewed information provided by USF-I and its subordinate commands. To determine the amounts that the Ministries of Defense and Interior did not spend or set aside for FMS and other purchases from 2005 through 2009, we reviewed data on budgeted expenditures and expenditures from the Board of Supreme Audit and Ministries of Finance, Defense, and Interior, as previously described in this section of the report. We subtracted dinar-denominated expenditures from the amounts budgeted to these ministries in dinars from 2005 through 2009 to determine their annual unspent funds during this period. We then calculated the sum of these annual unspent funds to determine their cumulative unspent resources. Finally, we used the 2009 Iraqi dinar-dollar exchange rates to convert the cumulative total to dollars. To determine the additional amounts set aside by these ministries for FMS purchases, we reviewed a report provided by DSCA detailing the amounts deposited by the Ministries of Defense and Interior in Iraq’s FMS account as of December 31, 2009. To determine amounts that the Ministries of Defense and Interior have set aside to finance purchases from foreign vendors through letters of credit, we obtained data from the Trade Bank of Iraq on letters of cr issued that remained outstanding as of December 31, 2009. Finally, we als received documentation from the Ministry of Defense indicating that it set aside about $100 million for advances on domestic contracts through the end of December 2009. With the exception of these Ministry of Defense data on advances for domestic contracts, our analysis did not reflect any additional funding that the security ministries may have set aside to pay for advances. We requested this information from the Ministries of Defense and Interior through the USF-I advisors to these ministries, but the ministries did not provide us with any additional data. In our analysis, we therefore assumed that other advances for the Ministry of Interior total zero. To calculate the amount of cumulative unused funds by these ministries from 2005 through 2009, we subtracted the cumulative unexpended funds set aside for FMS purchases, letters of credit, and other advances from the total unspent funds over the same period. We calculated a range of unused funds to reflect uncertainty regarding the portion of funds set aside for FMS purchases, letters of credit, and other advances that had been recorded as an expenditure. To determine the portion of funds set aside for FMS purchases that may have resulted in the delivery of equipment or services, and that therefore may have already been recorded as an expenditure by the Ministries of Defense and Interior, we reviewed a report from the Defense Finance and Accounting Service showing the value of FMS deliveries to the security ministries, as of December 31, 2009. Similarly, to determine the value of letters of credit that may have resulted in expenditures, we reviewed data from the Trade Bank of Iraq on letters of credit that were closed as of December 31, 2009. Finally, to determine the portion of other advances that may have been expended, we reviewed data on advances for domestic contracts provided by the Ministry of Defense. Again, we did not receive any additional data on other advances from the Ministries of Defense or Interior. Our low estimate of unused funds assumes that none of the funds set aside for FMS purchases, letters of credit, or Ministry of Defense advances on domestic contracts have resulted in expenditures. Our high estimate assumes that $1.7 billion in FMS deliveries, $0.9 billion in closed letters of credit, and about $0.1 billion in Ministry of Defense advances on domestic contracts are already reflected in Ministry of Finance expenditures. To identify examples of other countries’ contributions to the cost of U.S. security support (see app. IV), we reviewed relevant documents and data, including Letters of Offer and Acceptance for FMS purchases; military assistance; cost-sharing and other implementing agreements that document host country contributions to U.S. security costs; World Bank country economic income classifications; and DOD security assistance organization and security assistance program data. We also interviewed officials from various DOD offices—including the Office of the Under Secretary of Defense for Policy, DSCA, Central Command, European Command, and Pacific Command. In addition, we interviewed officials fic from State, including officials in the Bureaus of East Asian and Paci Affairs, Near Eastern Affairs, and Political and Military Affairs and at U.S embassies in Manila, Seoul, and Tokyo. Furthermore, we interviewed other knowledgeable military and academic experts, such as experts at the Defen Baghdad, Iraq, in September 2009 and April 2010 and interviewed officials from USF-I and the U.S. Embassy Baghdad Office of Political-Military Affairs. . se Institute for Security Assistance Management. We traveled to In selecting countries as illustrative examples of cost-sharing for U.S. security support from the number of U.S. cost-sharing arrangements we ion, reviewed, we considered several factors, including geographic locat economic income classification, whether the U.S. organization that manages security support is under Chief of Mission or military command, and the presence of a major U.S. military force. Although our review is a comprehensive review of all cost-sharing agreements that the United States has negotiated to share in the cost of U.S. security support activities, we provide a range of examples of the type of host country contributions that the United States has received to support security support activities overseas. This appendix provides information on Iraq’s oil revenues. Oil export the Iraqi government’s primary source of revenue. Since 2005, oil exports constituted about 83 to 92 percent of the government’s annual revenues (see table 9). The price of Iraqi oil spiked during the summer of 2008 before dropping precipitously at the end of 2008 and the beginning of 2009. Prices have since rebounded, averaging $74.36 per barrel through the first 3 months of 2010 (see fig. 3). This exceeds the average price for Iraqi oil in 2009 ($56.54 per barrel) as well as the average for 2004 through 2009 ($58.70 per barrel). According to DOD and the IMF, Iraq’s 2010 budget assumes an average oil price of $62.50 per barrel. Iraq possesses an estimated 115 billion barrels of proved crude oil reserves, the world’s third-largest stock (see fig. 4). Iraq’s capacity to further exploit its oil resources underlies the government’s ability to generate additional revenue. According to DOD, since June 2009, the Iraqi cabinet has approved 10 foreign investment contracts to develop or rehabilitate Iraqi oil fields that account for 65 percent of Iraq’s estimated oil reserves. While U.S. officials acknowledge that it will take some time for Iraq to begin exporting oil extracted from these reserves, the contracts offer the Iraqi government the opportunity to significantly increase its exports and generate greater government revenue. This appendix describes cost-sha ng arrangemen for U.S. ecurity support activities in selected partner nations. The United St a range of security support under State and D D authorities to many O countries representing a variety of income levels. To subsidize U.S. activities, several countries share in their costs under bilateral security and cost-sharing agreements with the United States. The United DOD authorities to many countries. per of programs as FMS, Foreign Military Fi Secief of Mission.urity assistance activities include such Ed of and and training through FMS or Direct Commercial Sales channels. The ists of tra. defense articles, servional organizchase U.S to purations internat ining p Int U.S. facili for oreign military personnel in the nited S at and participating countries on a grant basis. States provides a variety of security support under State and ies, U.S. urity assistance under the direction and supervision nancing, and International Military nancing ts and loans to elig ition, In in South Ko support activities, such as organizations reaS. unde and U. Forces uthor y, n, condu t training foreign forces, i cluding joi special oper aining of U. S. For the purposes of this report, we use the term security support to describe a range of Security assistance activities are generally codified in Title 22 of the United States Code. ities are often referred to as Title 22 activities. Security cooperation activities These activ are generally codified in Title 10 of the United States Code. These activities are often referred to as Title 10 activities. logistics support for foreign militaries, including agreements with elig countries and regional or international organizations for the reciprocal provision of logistic support, supplies, and services; and military contact and cooperation, including bilateral and multilateral contacts with foreign militaries and payment of selec for certain training partners. Several countries, represen and assistance-in-kind to share in the cost of U.S. security support activities. According to State and DOD officials, the extent and type of host government contributions for U.S. security support activ o ability and willingness to contribute to U.S. security support costs. The United States and host countries also may renegotiate these cost-sharing arrangements to reflect changes in a host nation’s economic income or the nature of the bilateral security relationship. U.S. cost-sharing arrangements with Kuwait, Saudi Arabia, Japan, The Philippines, South ting a variety of income levels, provide cash ities depend n the U.S. and host country security relationship as well as the country’s Korea, and Thailand represent a range of geographic locations, income levels, U.S. troop levels, and U.S. security support organizations s, U.S. troop levels, and U.S. security support organizations (see fig. 5). (see fig. 5). Because the U.S. government does not centrally collect information on cost-sharing arrangements between the United States and other countries, we could not conduct a comprehensive assessment of the various ways in which other countries subsidize the cost of U.S. security support. These cost-sharing arrangements may be included in U.S. defense assistance, cost-sharing, and implementing agreements or in FMS purchase agreements. DOD last reported to Congress on contributions for defense costs from allied host nations in 2004. See Department of Defense, 2004 Statistical Compendium on Allied Contributions to the Common Defense (2004), which covers allied contributions in 2003. for U.S. military exercises. See table 11 for selected contributions six countries. Under a 2009 agreement, Kuwait, a h istanc $28 million a d ass support the U.S. Office o office administers Kuwait’s FMS program, which totaled nearly $315 million in sales in fi States with a cash transf which DOD reported wa Army and Air Force inst Cooperation Agreement. military Kuwaiti facilities. Saudi Arabia, a high-income economy, provided approximately $35 million in cash and assistance-in-kind in 2009 to support the two U.S. security support organizations operating under State’s authority—the U.S. Military Training Mission and Office of Program Management-Ministry of Interior. The training mission oversees the FMS program in Saudi Arabia, valued at $3.3 bildes training instruction ear 2009, and provin sales in fiscal ylion i and advisory services for Saudi Arabian Armed Forces personnel. The United States established the Office anagement-Ministry of of Program M Interior in 2009 to prond services, including technvide articles aical assistance, to develoudi Arabia Ministry of acity of the Sap the cap Interior’s Facilities Secur ti y Force in the areas of critical infrastructure protection and United States approximately $285 million from 2009 to 2013 to pay for srt activities managed by DOD’s Office of the Program ecurity suppo Manager-Saudi Arabia National Guard. The DOD office provides training and services to assist Saudi Arabia in modernizing its National Guard. public security. Japan, a high-income economy, financially supports two U.S. organizations—State’s Mutual Defense Assistance Office, a security assistance organization that oversees the FMS program, and DOD’s U.S. Forces–Japan, which administers bilateral defense activities. According t a PACOM official, Japan provides the Mutual Defense Assistance Office with five Japanese foreign service employees and several vehicles and drivers under a long-standing agreement to share in the cost of U.S. security support. The office managed FMS cases valued at about $460 million in fiscal year 2009. Japan also provided nearly $6.2 billion in cash and assistance-in-kind to support U.S. Forces-Japan activities in 2009. For example, under a cost-sharing agreement, renewed in 2008, Japan provided the United States with approximately $1.4 billion for labo and utility costs in 2009. South Korea, a high-income economy, contributes cash and assistance-in- kind to support two U.S. organizations—State’s Joint U.S. Military Aff airs Group, a security a ssistance organization, and DOD’s U.S. Forces–Korea, which has thousands of U.S. military personnel on the ground to pursue bilateral defense goals. According to State and DOD officials, South Korea contributes limited assistance-in-kind for housing to support the Joint U.S. Military Affairs Group. The organization manages Korea’s FMS program valued at nearly $720 million in sales in fiscal year 2009. Under a cost- sharing agreement renewed in 2009, South Korea committed to provide approximately $690 million in cash and assistance-in-kind per year from 2009 to 2013 for labor, logistics, and construction costs for U.S. Forces– Korea. According to a State official familiar with the negotiation, this , contribution represents about 40 percent of nonpersonnel stationing costs. nder a long-standing military assistance agreement with the United States. 09 included Thailand, a lower-middle income economy, contributes annual assistance- in-kind and cash payments to support the Joint U.S. Military Advisory Group u The security assistance organization’s activities in fiscal year 20 managing Thailand’s Foreign Military Financing grants, FMS cases, an International Military Education and Training program, which were valued at $1.6 million, almost $53.0 million, and almost $1.5 million, respectively. Thailand provided cash payments of $285,000 for support such as drivers, vehicles, and utilities for the organization in 2009. DOD and State officials reported that Thailand also provides the United States with the use of military grounds for the U.S. military to conduct live-fire exercises a training and the use of a Thai airfield. According to State and DOD officials, Thailand is the only country that provides the United States with live-fir training grounds—a substantial benefit to the United States. The Philippines, a lower-middle income economy, contributes cash payments and assistance-in-kind to the Joint U.S. Military Assistance Group. The security assistance organization administers U.S. security support programs, such as the $28.0 million Foreign Military Financing and the $1.7 million International Military Education and Training programs in fiscal year 2009. To financially support this organization, The Philippines provided cash transfers of approximately $217,000 and assistance-in-kind through office facilities and support personnel in 2009. Although The Philippines provides smaller financial contributions to the United States than other countries, State and DOD officials reported that certain assistance-in-kind, such as training grounds, provide significant additional benefits to the United States. Following are GAO’s comments on the Department of State’s letter dated August 4, 2010. 1. We believe that it is premature to assert that the Iraqi government’s available funds are closer to the low end of the ranges of surplus funds and financial deposits noted in this report. Two reviews required under Iraq’s arrangement with the IMF will clarify the total resources available to the Iraqi government. First, Iraq has agreed to prepare a report on its outstanding advances, identify those that are recoverable, and set a schedule for their recovery. Iraq has committed to completing this report by September 30, 2010. Second, the Ministry of Finance must review all central government accounts in the banking system, reconcile them with Iraqi Treasury records, and return any idle balances received from the budget to the central Iraqi Treasury. This review was due to be completed by March 31, 2010, but, according to the IMF, it was still under way as of August 2010. 2. We agree that it would be sensible for Iraq to maintain a fiscal reserve, and it has agreed to do so under the terms of its February 2010 arrangement with the IMF. Iraq agreed to maintain $2.6 billion in the Development Fund for Iraq to provide sufficient funds to cover 2 to 3 months in employee wages for government workers. Iraq was capable of maintaining this amount with at least $15.3 billion in financial deposits it had at the end of 2009. In addition, through June 2010, Iraq generated almost $2 billion more in revenue than had been predicted in its budget. If this trend continues, Iraq may have about $4 billion in additional oil export revenues by the end of the year. Consequently, Iraq should have sufficient resources at the end of 2010 to provide for the fiscal reserve required by the IMF. Following are GAO’s comments on the Department of the Treasury’s letter dated August 4, 2010. 1. We report a range of available resources to reflect the uncertainty regarding Iraq’s outstanding advances and government deposits. Furthermore, we believe it is premature to assert that the Iraqi government’s available funds are closer to the low end of our ranges until Iraq has completed its IMF-required reviews of advances and government deposits. These reviews will clarify the total resources that are available to the Iraqi government. 2. We agree that Iraq may need a fiscal cushion to address potential variability in its fiscal revenues. As part of its arrangement with the IMF, Iraq agreed to maintain $2.6 billion in the Development Fund for Iraq to cover 2 to 3 months in employee wages for government workers. Iraq was capable of maintaining this amount with at least $15.3 billion in financial deposits it had at the end of 2009. In addition, through June 2010, Iraq generated $2 billion more in revenue than it had predicted in its budget. If this trend continues, Iraq may have about $4 billion in additional oil export revenues by the end of the year. Consequently, Iraq should have sufficient resources at the end of 2010 to provide for the fiscal reserve required by the IMF. 3. Past data indicate that Iraq’s deficit in 2010 will be far less than projected in its 2010 budget. From 2005 through 2009, Iraq began each year with budgets that projected deficits from $3.5 billion to $15.9 billion, but ended each year with surpluses, measured on a cash basis. Even after adjusting for advances, Iraq generated surpluses from 2005 through 2007 and in 2008 and 2009 produced deficits that were less than one-half of the amounts projected in its budgets for those years. Following are GAO’s comments on the Department of Defense’s letter dated August 10, 2010. 1. We have not changed our estimates of Iraq’s cumulative adjusted surplus from $41.1 billion to $11.8 billion. In fact, we have consistently reported a range for Iraq’s available surplus on the basis of Iraq’s cumulative cash-based surplus (high estimate) and Iraq’s budget surplus adjusted for advances (low estimate). In a draft of this report, we stated that we were able to independently corroborate about $15.6 billion of the $40.3 billion in advances that were set aside for FMS purchases and letters of credit, but we were unable to corroborate the remaining $24.7 billion. However, in comments on our draft report, DOD noted that data on all advances are from the Board of Supreme Audit and the Ministry of Finance and should therefore be treated consistently. The Board of Supreme Audit raised concerns about all advances, despite our attempt to independently corroborate a portion of these advances. We therefore modified our report by deducting the full $40.3 billion to estimate the low end of our range, but we also noted that the composition of all the advances was unclear, and the Board of Supreme Audit highlighted weaknesses in Iraq’s accounting for them. Under its arrangement with the IMF, Iraq agreed to conduct a review of all outstanding advances, which should further clarify what portion of them is available for government spending. 2. We disagree with DOD’s assertion that the message of our report is inaccurate and not supported by the financial data. As this report states, Iraq ended 2009 with at least $15.3 billion in financial deposits. Moreover, IMF-required reviews of Iraq’s outstanding advances and central government accounts will clarify the total funds available to the government for spending in 2010 and beyond. The review of deposits in central government accounts was due to be completed by March 31, 2010, but, according to the IMF, it was still under way as of August 2010. The review of Iraq’s outstanding advances is to be completed by September 30, 2010. Furthermore, as we note in this report and as DOD acknowledged in its comments on a draft of this report, past data indicate that Iraq’s deficit in 2010 will be far less than projected in its 2010 budget. From 2005 through 2009, Iraq began each year with budgets that projected deficits from $3.5 billion to $15.9 billion, but ended each year with surpluses, measured on a cash basis. Even after adjusting for advances, Iraq generated surpluses from 2005 through 2007 and in 2008 and 2009 produced deficits that were less than one-half of the amounts projected in its budgets for those years. 3. We report a range for Iraq’s available financial deposits on the basis a discrepancy betwe reported by the Central Bank of Iraq to the IMF and the amount that the Ministry of Finance asserted is available for government spending. Under the terms of Iraq’s February 2010 arrangement with the IMF Ministry of Finance is required to complete a review of all central government accounts in the banking system, reconcile them with Treasury records, and return any idle balances received from the budget to the central Iraqi Treasury. This review was to be completed by March 31, 2010, but was still under way as of August 2010. We believe that it is premature to suggest that Iraq’s available resource fall at the low end of this range until the Ministry of Finance has completed its review, as it will clarify the total resources available fo government spending. en the amount of government-sector deposits 4. We agree that it may be prudent for Iraq to maintain a fiscal reserve t o hedge against volatility in oil prices, its primary source of government revenues. Under the terms of Iraq’s February 2010 arrangement with the IMF, Iraq agreed to maintain $2.6 billion in the Development Fund for Iraq to provide sufficient funds to cover 2 to 3 months in employee wages for government workers. As we note in this report, Iraq ended 2009 with at least $15.3 billion in available financial deposits. This amount should be sufficient to provide for a fiscal reserve and cover an $8 billion to $10 billion deficit DOD predicts Iraq will generate in 2010. 5. We note in this report that the security ministries spent more than 90 percent of the funds made available to them in 2009. This reflects the actual value of equipment that has been delivered and training provided to the security ministries. Data we obtained from the U.S. a Iraqi governments do not allow us to determine amounts disburs advances from these ministries’ budgets on an annual basis, including in 2009. Rather, we accounted for advances on a cumulative basis by estimating the total amount of funding spent or otherwise set asi FMS and other foreign and domestic contracts from 2005 through 2009. 6. As we previously noted, Iraq’s arrangement with the IMF requires that Iraq maintain $2.6 billion in reserve to cover 2 to 3 months of employee wages for government workers. Our analysis of Iraqi financial data indicated that Iraq ended 2009 with at least $15.3 billion in available financial deposits. Furthermore, as DOD acknowledged in its comments, past experience suggests that any potential deficit in 2010 is likely to be far less than predicted by Iraq’s 2010 budget. This is particularly likely given that—based on current oil prices and export volume—Iraq may generate more revenue in 2010 than predicted by its budget. Iraq’s 2010 budget was based on oil selling for $62.50 per barrel. From January through June 2010, oil exported by Iraq average almost $75 per barrel, generating revenues almost $2 billion in excess of that which was predicted by its budget. If this trend continues, Iraq may have about $4 billion in additional oil export revenues by the e nd of the year, even if export volume remains lower than expected. Thus, even if Iraq generates an $8 billion to $10 billion deficit in 2010, as expected by DOD, Iraq should have sufficient resources to provide for a small fiscal reserve. DOD provided no documentation to substan Iraqi officials’ statements that a $10 billion to $12 billion reserve is no needed. The IMF does not require this reserve level, nor did any I raqi official indicate to GAO that such a reserve level was needed. aq has some unsettled foreign debt obligations to neighboring countries. However, according to Treasury data, creditors have forgiven more than one-half of Iraq’s prewar debt since 2003, and continued diplomatic efforts may reduce these obligations further. DOD also stated that Iraq does not act like a country with a large fiscalbalance, since it has drawn upon external financing provided through a s Stand-by Arrangement with the IMF. However, as Treasury noted in it lion comments on this draft, the IMF has only disbursed about $455 mil of the $3.6 billion available to Iraq for budget support. It is unclear whether Iraq will need to use the entire IMF financing arrangement in 2010-2011. 8. We disagree that our report asserts that funds reclassified by the Ministry of Finance are available for budget support. Rather, as we point out in comment 3, we report a range for Iraq’s available financial deposits on the basis of a discrepancy between the amount of government-sector deposits reported by the Central Bank of Iraq to the IMF and the amount that the Ministry of Finance asserted is available for government spending. In our report, we note that in November 2009, the Ministry of Finance reclassified $16.9 billion as unavailable for government spending, including $7.6 billion held in central ministry accounts and $9.3 billion held in state-owned enterprises’ accounts. We also disagree with DOD’s assertion that the Central Bank of Iraq has already recognized that the $9.3 billion held in central ministries’ accounts at state-owned banks does not belong to the central government. The Central Bank of Iraq consolidates these categ its reporting to the IMF, which the IMF in turn reports in its International Financial Statistics. The Ministry of Finance is currently undertaking a review of all central government accounts in ories in the banking system to reconcile them with Iraqi Treasury records and ensure that any idle balances received from the budget are returne the central Iraqi Treasury. This Iraqi review should help to clarify whether some of these government deposits that it reclassified are, in fact, unencumbered and available for future spending. 9. Our draft report clearly stated that, according to the Ministry of Finance, at the end of 2009, outstanding advances should be deduc from available surplus funds, and that $16.9 billion in government deposits that were reclassified by the Ministry of Finance was not available for government spending. However, contrary to that which is implied in DOD’s comment, the Ministry of Finance did not report an amount of outstanding advances in any of the documentation t provided to us, nor did it calculate an adjusted budget balance by subtracting out advances. Rather, GAO estimated outstanding advances to be $40.3 billion as of September 2009 based on our analysis of Ministry of Finance data and deducted these advances estimate Iraq’s adjusted surplus. Furthermore, we disagree with DOD’s suggestion that the potential future availability of these funds—as determined by the results of IMF- required reviews of Iraq’s central government accounts and outstanding advances—is separate from the question of whether Ira capable of additional cost-sharing. When completed, these reviews will clarify the total resources available for cost-sharing. 10. We modified the section referencing a decrease in deposits from 2008 2009 by explicitly citing the independent Ernst and Young audit reports that have identified problems verifying deposit balances at the Central Bank of Iraq and Iraq’s largest state-owned bank—Rafidain bank. Furthermore, we note in our report that the amount of outstanding advances increased by about $10 billion from the end of 2008 through September 2009, which may offer an explanation for why we did not observe an increase in the deposits of state-owned banks that corresponds to the decrease in deposits at the Central Bank of Iraq over this period. However, we also note in this report that the data on financial deposits do not illustrate a clear relationship between Iraq’s fiscal balance, adjusted for advances, and financial deposits. For example, Ministry of Finance data show that in 2008 Iraq generated a $1.8 billion deficit, after adjusting for advances. However, over the same period, Iraq’s financial deposits increased by $11.7 billion, from $29.4 billion to $41.1 billion. Accordingly, there is no clear relationship between Iraq’s adjusted fiscal balance and financial deposits, as DOD asserts. 11. | Since 2003, the United States has reported obligating $642 billion for U.S. military operations in Iraq and provided about $24 billion for training, equipment, and other services for Iraqi security forces. To assist Congress in overseeing efforts to encourage the Iraqi government to contribute more toward the cost of securing and stabilizing Iraq, this report provides information on (1) the amount and availability of Iraq's budget surplus or deficit, (2) the amount of Iraq's financial deposit balances, and (3) the extent to which Iraq has spent its financial resources on security costs. To conduct this audit, GAO analyzed Iraqi financial data, reviewed U.S. and Iraqi documents, and interviewed U.S. and Iraqi officials. GAO analysis of Iraqi government data showed that Iraq generated an estimated cumulative budget surplus of $52.1 billion through the end of 2009. This estimate is consistent with the method that Iraq uses to calculate its fiscal position. Adjusting for $40.3 billion in estimated outstanding advances as of September 2009 reduces the amount of available surplus funds to $11.8 billion. In April 2010, a senior Ministry of Finance official stated that advances should be deducted from the budget surplus because they are committed for future expenditures or have been paid out. According to this official and Board of Supreme Audit reports on Iraq's financial statements, advances include funds for letters of credit, advance payments on domestic contracts, and other advances. However, Iraq's Board of Supreme Audit has raised concerns that weaknesses in accounting for advances could result in the misappropriation of government funds and inaccurate reporting of expenditures. Furthermore, the composition of some of these advances is unclear; about 40 percent of the outstanding advances through 2008 are defined as "other temporary advances." Under the terms of a February 2010 International Monetary Fund (IMF) arrangement, Iraq agreed to prepare a report on its outstanding advances, which will identify those advances that are recoverable and could be used for future spending, and set a time schedule for their recovery. This Iraqi report is to be completed by September 30, 2010. Another means of assessing Iraq's fiscal position is to examine its financial deposit balances. Iraqi government data and an independent audit report show that, through the end of 2009, Iraq had accumulated between $15.3 billion and $32.2 billion in financial deposit balances held at the Central Bank of Iraq, the Development Fund for Iraq in New York, and state-owned banks in Iraq. This range reflects a discrepancy between the amount of government-sector deposits reported by the Central Bank of Iraq to the IMF and the amount that the Ministry of Finance asserts is available for government spending. In November 2009, the Ministry of Finance reclassified $16.9 billion in state-owned banks as belonging to state-owned enterprises and trusts, leaving $15.3 billion of $32.2 billion available to the Iraqi government for other spending. The IMF is seeking clarification on the amount of financial deposits that is available for government spending. Under the terms of Iraq's 2010 arrangement with the IMF, the Ministry of Finance is required to complete a review of all central government accounts and return any idle balances received from the budget to the central Iraqi Treasury by March 31, 2010. As of August 2010, according to the IMF, this review was still under way. Iraqi government data show that Iraq's security ministries--the Ministries of Defense and Interior--increased their spending from 2005 through 2009 and set aside about $5.5 billion for purchases through the U.S. Foreign Military Sales program. However, over this 5-year period, these ministries did not use between $2.5 billion and $5.2 billion of their budgeted funds that could have been used to address security needs. The administration is requesting $2 billion in additional U.S. funding in its fiscal year 2011 budget request to support the training and equipping of Iraq's military and police. GAO believes that Congress should consider Iraq's available financial resources when reviewing the administration's fiscal year 2011 budget request and any future funding requests for securing and stabilizing Iraq. Also, GAO recommends that the Departments of State and the Treasury work with the Iraqi government to further identify available resources. |
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Through its disability compensation program, VBA pays monthly benefits to veterans with service-connected disabilities (injuries or diseases incurred or aggravated while on active military duty) according to the severity of the disability. VBA’s pension benefit program pays monthly benefits to wartime veterans who have low incomes and are permanently and totally disabled for reasons not service-connected. In addition, VBA pays dependency and indemnity compensation to some deceased veterans’ spouses, children, and parents and to survivors of service members who died on active duty. In fiscal year 2002, VBA paid over $22 billion in disability compensation to an average of about 2.4 million veterans and over 300,000 survivors. VBA also paid over $3 billion in pensions to an average of about 580,000 veterans and survivors. The amount of disability compensation largely depends on the degree to which a veteran is disabled. VBA determines the degree to which veterans are disabled in 10 percent increments on a scale of 0 to 100 percent. Basic monthly payments range from $104 for 10 percent disability to $2,193 for 100 percent disability. About 65 percent of veterans receiving disability compensation have disabilities rated at 30 percent and lower; about 8 percent have disabilities rated at 100 percent. The most common impairments for veterans who began receiving compensation in fiscal year 2001 were tinnitus (ex., a ringing in the ear), auditory acuity impairment rated at 0 percent (i.e., mild hearing difficulties), skeletal conditions, arthritis due to trauma, post-traumatic stress disorder, and scars. Eligibility and priority for other Department of Veterans Affairs (VA) benefits and services such as health care and vocational rehabilitation are affected by these VA disability ratings. When a veteran submits a claim to any of VBA’s 57 regional offices, a veterans service representative (VSR) is responsible for obtaining the relevant evidence to evaluate the claim. Such evidence includes veterans’ military service records, medical examinations and treatment records from VA medical facilities, and treatment records from private medical service providers. Once a claim is developed (i.e., has all the necessary evidence), a rating VSR, also called a rating specialist, evaluates the claim, determines whether the claimant is eligible for benefits, and assigns a rating based on degree of disability. Veterans with multiple disabilities receive a single composite rating. For veterans claiming pension eligibility, the regional office determines if the veteran served in a period of war, is permanently and totally disabled for reasons not service-connected, and meets the income thresholds for eligibility. A veteran who disagrees with the regional office’s decision for either program can appeal sequentially to VA’s Board of Veterans’ Appeals (BVA), the U.S. Court of Appeals for Veterans Claims, and the U.S. Court of Appeals for the Federal Circuit. In fiscal year 1999, VBA implemented a quality review system to improve the measurement of the accuracy of its claims decisions. Under STAR, VBA selects a random sample of completed claims decisions each month from each of its 57 regional offices. STAR quality review staff review these claims using a standard checklist. If a claim has any error, VBA counts the entire claim as incorrect for accuracy rate computation purposes. STAR then returns the case file and the results of the review to the regional office that made the decision. If an error was found, the regional office is required to either correct it or request reconsideration of the error by STAR. VBA made several significant changes to its STAR system in fiscal year 2002. First, in response to our March 1999 recommendation, VBA made the STAR review staff organizationally independent of the regional offices to ensure the independence of the reviews. Second, VBA more than doubled the number of rating decisions it reviewed (from 3,209 in fiscal year 2001 to 6,646 in fiscal year 2002) in order to obtain more precise regional office level accuracy scores. Third, VBA improved its key measure to focus more on whether decisions to grant or deny benefits were correct. Previously, VBA’s key measure also included decision documentation and notification issues. Figure 1 shows the areas covered by the checklist used to measure accuracy in fiscal year 2001. The revised key accuracy measure includes only the first four areas of the checklist. From fiscal years 2001 to 2002, VBA’s accuracy of decision making in the compensation and pension programs declined from 89 percent to 81 percent. We determined these accuracy rates by comparing substantially similar questions for the 2 fiscal years that focused on whether the decision to grant or deny benefits was correct. However, the agency reported that it had improved its accuracy for that period. This discrepancy occurred because VBA did not report comparable accuracy data for the 2 fiscal years. VBA reported its fiscal year 2002 accuracy based on a revised measure that excluded two areas of the checklist—reasons and bases and notification. VBA then compared this to its fiscal year 2001 accuracy, which included these two areas of the checklist. VBA officials attributed the decline in accuracy during this period to several factors. We were not able to quantify the relative contribution of these factors. These factors included headquarters emphasis on production, the specific processing requirements of the Veterans Claims Assistance Act of 2000, and the relative inexperience of VBA’s claims processing staff. In fiscal year 2002, VBA made progress in increasing production of claims decisions and reducing inventory. The number of claims decisions rose substantially from about 481,000 in fiscal year 2001 to about 797,000 in fiscal year 2002. During the same time period, the number of claims VBA received increased from about 674,000 to 722,000. The higher level of production permitted VBA to reduce its inventory of pending claims by 18 percent from about 421,000 to about 346,000. Although accuracy actually declined, VBA reported in its performance report to the Congress for fiscal year 2002 that the accuracy of its rating decisions for compensation and pension benefits had improved slightly. VBA reported that accuracy improved from 78 percent in fiscal 2001 to 80 percent in fiscal 2002. However, these rates were not comparable because the new “benefit entitlement accuracy” rate for fiscal year 2002 was based on fewer areas of the checklist that focused on whether and to what extent the claimant received a benefit. In its fiscal year 2002 performance report, VA made note of this change but did not recalculate the fiscal 2001 rate to provide a correct comparison. When we recomputed the agency’s accuracy rate for fiscal 2001 using its revised criteria, the result was 89 percent, not 78 percent as reported. As a result, the correct comparison showed a decline in accuracy from 89 percent to 81 percent. The agency corroborated our finding after performing its own computation at our request. VBA officials we spoke with cited a number of factors that affected accuracy over the fiscal years 2001 to 2002 period. A key factor cited was VBA’s emphasis on production, such that accuracy became a lesser priority. In 2001, the Secretary of Veterans Affairs set an ambitious goal to reduce the agency’s average time to complete a rating decision from 173 days (in fiscal year 2000) to 100 days by the end of fiscal year 2003. Also, the Secretary tasked VBA with reducing the inventory of rating claims to 250,000 by the end of September 2003. VBA managers responded by emphasizing the completion of more rating cases each month. The result has been a significant increase in production and a significant reduction in the rating inventory since the end of fiscal year 2001. In fiscal year 2002, VBA incorporated its new production targets into its measures for regional office performance. Regional office directors became accountable for specific targets for production, inventory reduction, and timeliness improvement. The agency also established regional office performance award criteria that gave more weight to efficiency than accuracy. Three of the four criteria for cash awards were based on production and timeliness and one on accuracy; bonuses could be received without meeting the accuracy criteria. VBA officials also attributed accuracy problems to the addition of more specific processing requirements under the Veterans Claims Assistance Act (VCAA) of 2000. The act broadened VBA’s responsibility to assist veterans — such as notifying them of needed evidence and helping them develop that evidence for their claims. VBA incorporated VCAA requirements into its STAR rating accuracy checklist in fiscal year 2002. In the first 4 months of fiscal year 2002, VCAA errors accounted for almost half of all errors identified by STAR rating reviewers. In April 2002, VBA required each regional office to re-train its claims processing staff on the new requirements. Over the last 8 months of fiscal year 2002, the proportion of VCAA-related errors declined to about one-third of all errors. VBA officials also cited the relative inexperience of VBA’s claims processing staff. Regional office officials noted that they had many VSRs and rating specialists with insufficient training and experience to be fully proficient at developing and making decisions on claims. For example, officials at two offices we visited noted that their accuracy was affected by large numbers of inexperienced staff, due to a large increase in staff size or a relatively high rate of turnover. VBA has found that attrition rates for new claims processing staff hired over a 3-year period ranged from 0 percent to 49 percent at some regional offices. While VBA has established accuracy standards for its regional offices, it has not made the best use of its accuracy data on regional offices. VBA collected regional office accuracy data in fiscal year 2002 but has not fully used the information to evaluate regional office performance, correct errors, and identify needed training that could reduce errors. Unless VBA better uses these data to hold regional offices accountable for accuracy, it cannot ensure that as decisions become timelier, they also become more accurate. VBA is developing an agencywide system for evaluating individual claims processing employees’ performance against VBA’s individual accuracy standards. In fiscal year 2002, VBA improved its STAR review system to provide independent review of decisions and more precise accuracy data at the regional office level. Regional accuracy scores are estimates based on samples of cases and revealed high and low performers relative to the agency’s fiscal year 2002 accuracy goal of 85 percent. Eleven regional offices clearly failed to meet the goal while 3 clearly met or exceeded the goal. However, VBA managers did not fully use the regional office- specific information generated by the STAR unit as a basis for improving accuracy at the regional office level. For example, VBA did not require regional offices that failed to meet the national accuracy goal of 85 percent to prepare strategies for improvement. In contrast, in fiscal year 2002, 13 regional offices that did not meet established targets for production, inventory, and timeliness were required to develop corrective action plans. Also, as noted earlier, VBA did not make rating accuracy a prerequisite for receiving a performance award. Three of the four criteria for cash awards were based on production and timeliness and one on accuracy; a bonus could be received without meeting the accuracy criteria. In fiscal year 2002, 2 offices received performance awards despite clearly not meeting VBA’s accuracy goal. These offices had accuracy rates of 71 percent and 75 percent, respectively. VBA’s regional offices did not always properly address STAR errors that were returned to them, a violation of VBA policy that regional offices either correct errors or formally request that the STAR unit reconsider its error call. VBA survey teams, which review judgmental samples of STAR cases with errors, found that the 18 regional offices they visited from October 2001 through December 2002 had failed to respond properly to over 40 percent of the errors reviewed. At 14 of the 18 offices, the survey teams found problems significant enough to recommend improvements in STAR error handling. For example, teams recommended that several offices establish management controls to ensure that they properly address all errors identified by the STAR unit. Effective April 1, 2003, VBA established a new tracking system that required regional offices to report to headquarters on actions taken to address all errors identified by the STAR unit. In addition to not correcting all errors, several of the regional offices visited by the survey teams were not making adequate use of STAR errors to identify trends that could be used to provide feedback and training to claims processing staff. Officials at regional offices we visited commented that this information is useful for identifying trends for feedback and training purposes. For example, in fiscal year 2002, the results of STAR reviews helped to alert management of the Boston Regional Office that many of its claims processors were having difficulties with the new VCAA legislation, permitting management to provide special training for the Boston staff. The agency survey teams recommended that 7 of the regional offices reviewed between October 2001 and December 2002 take steps to use STAR reviews for feedback and training. In addition to regional office-level accuracy standards, VBA has also established quantifiable accuracy standards for its experienced claims processing employees, as part of these employees’ annual performance evaluations.The accuracy standards for experienced rating specialists require that they correctly decide 85 percent of 60 randomly selected rating decisions per year (5 decisions per month). VBA is developing an agencywide review process, the Systematic Individual Performance Assessment (SIPA), to assess compliance with the individual accuracy standards. VBA developed a uniform checklist, similar to the STAR checklist for reviewing rating decisions, which offices could use to assess rating specialists’ accuracy. Unlike the STAR system, reviews are conducted before decisions are finalized. In April 2003, VBA surveyed regional offices to determine the status of their efforts to measure individual accuracy and assess the staff resources needed to implement SIPA VBA-wide. Individual reviews were being conducted by supervisors, such as team coaches, and nonsupervisory staff, such as Decision Review Officers, who are responsible for handling appeals. At the time of our review, VBA was in the process of deciding who would perform the reviews. In its efforts to develop SIPA as a consistent review process, VBA is considering issues such as ensuring that consistent feedback is provided to the employees and all regional offices are using the same review checklists. While VBA’s emphasis on production succeeded in increasing the number of claims decisions made during fiscal year 2002, the accuracy of those decisions declined. Because VBA did not report comparable accuracy rates for fiscal years 2001 and 2002 in its performance and accountability report, Members of Congress, Department of Veterans Affairs management, and claimants did not know of this decline in accuracy. The lack of accurate performance data hampers stakeholders’ ability to monitor VBA’s performance in serving the nation’s veterans. In addition, VBA could better use the accuracy data it has to hold its regional offices more accountable for accuracy. While VBA has made progress in measuring regional office accuracy, it has not made full use of the results to reward high performing offices or to improve poorly performing offices. VBA has made significant progress in getting its compensation and pension claims workload under control to improve timeliness for veterans waiting for decisions on their claims. However, VBA’s accuracy has declined. Unless VBA balances its emphasis on producing more and faster decisions with an increased emphasis on accuracy, it will be difficult to ensure that veterans are getting the benefits to which they are entitled in a timely manner. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Benefits to report the accuracy of VBA disability compensation and pension claims decisions to the Congress and other stakeholders in a manner that allows for valid comparisons of accuracy across fiscal years and better hold regional offices accountable for the accuracy of their claims decisions, by increasing the use of its regional office accuracy data, while at the same time maintaining an appropriate emphasis on production. In its written comments on a draft of this report (see app. I), VBA concurred with our recommendations. However, VBA suggested that more effective use of STAR had been made to improve performance than our report concludes. We did note that VBA used STAR data to improve accuracy. Specifically, we noted in our report that VCAA-related errors declined to about one-third of all errors after VBA identified the errors through STAR and required retraining. We support VBA’s continued efforts to emphasize accuracy and timeliness as critical components of quality. We will send copies of this report to the Secretary of Veterans Affairs, appropriate congressional committees, and other interested parties. We will also make copies of this report available to others on request. The report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions regarding this report, please call me at (202) 512-7215 or Irene Chu, Assistant Director, at (202) 512-7102. In addition to those named, Susan Bernstein, Kristine Braaten, Kevin Jackson, Joseph Natalicchio, Martin Scire, and Greg Whitney made key contributions to this report. | The Veterans Benefits Administration (VBA) has a large inventory of claims for benefits under its compensation and pension programs. The Secretary of the Department of Veterans Affairs has pledged to substantially reduce this inventory in order to improve timeliness. In response, VBA emphasized producing more claims decisions per year. GAO was asked to ascertain how accuracy has changed since VBA increased its emphasis on production and to report on the agency's efforts to ensure the accuracy of its decisions. From fiscal years 2001 to 2002, VBA's accuracy of decision-making in the disability compensation and pension benefit programs declined from 89 percent to 81 percent. The agency had reported a slight improvement in accuracy between fiscal years 2001 and 2002--from 78 percent to 80 percent. However, we found that these two annual figures were not comparable because the agency had substantially changed the way it measured accuracy for fiscal year 2002. Although VBA acknowledged a change in its accuracy measure in its annual report to the Congress, the agency did not revise its 2001 figure to allow for an appropriate comparison with 2002. VBA officials GAO spoke with suggested several factors that may have contributed to the decline in accuracy. We were not able to quantify the relative contribution of these factors. These factors included VBA's emphasis on increasing claims decisions, the specific processing requirements of the Veterans Claims Assistance Act (VCAA) of 2000, and the relative inexperience of VBA's claims processing staff. To help ensure accountability for accuracy, VBA set accuracy standards for its regional offices. Although VBA has regional office-level accuracy data, it has not made full use of this information to encourage better performance from regional offices with low accuracy scores. For example, in fiscal year 2002, VBA did not require offices with poor accuracy to prepare improvement plans and gave performance awards to two offices that clearly failed to meet VBA's accuracy goal. |
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During the three decades in which uranium was used in the government’s nuclear weapons and energy programs, for every ounce of uranium that was extracted from ore, 99 ounces of waste were produced in the form of mill tailings—a finely ground, sand-like material. By the time the government’s need for uranium peaked in the late 1960s, tons of mill tailings had been produced at the processing sites. After fulfilling their government contracts, many companies closed down their uranium mills and left large piles of tailings at the mill sites. Because the tailings were not disposed of properly, they were spread by wind, water, and human intervention, thus contaminating properties beyond the mill sites. In some communities, the tailings were used as building materials for homes, schools, office buildings, and roads because at the time the health risks were not commonly known. The tailings and waste liquids from uranium ore processing also contaminated the groundwater. Tailings from the ore processing resulted in radioactive contamination at about 50 sites (located mostly in the southwestern United States) and at 5,276 nearby properties. The most hazardous constituent of uranium mill tailings is radium. Radium produces radon, a radioactive gas whose decay products can cause lung cancer. The amount of radon released from a pile of tailings remains constant for about 80,000 years. Tailings also emit gamma radiation, which can increase the incidence of cancer and genetic risks. Other potentially hazardous substances in the tailings include arsenic, molybdenum, and selenium. DOE’s cleanup authority was established by the Uranium Mill Tailings Radiation Control Act of 1978. Title I of the act governs the cleanup of uranium ore processing sites that were already inactive at the time the legislation was passed. These 24 sites are referred to as Title I sites. Under the act, DOE is to clean up the Title I sites, as well as nearby properties that were contaminated. In doing so, DOE works closely with the affected states and Indian tribes. DOE pays for most of this cleanup, but the affected states contribute 10 percent of the costs for remedial actions. Title II of the act covers the cleanup of sites that were still active when the act was passed. These 26 sites are referred to as Title II sites. Title II sites are cleaned up mostly at the expense of the private companies that own and operate them. They are then turned over to the federal government for long-term custody. Before a Title II site is turned over to the government, NRC works with the sites’ owners/operators to make sure that sufficient funds will be available to cover the costs of long-term monitoring and maintenance. The cleanup of surface contamination consists of four key steps: (1) identifying the type and extent of contamination; (2) obtaining a disposal site; (3) developing an action plan, which describes the cleanup method and specifies the design requirements; and (4) carrying out the cleanup using the selected method. Generally, the primary cleanup method consists of enclosing the tailings in a disposal cell—a containment area that is covered with compacted clay to prevent the release of radon and then topped with rocks or vegetation. Similarly, the cleanup of groundwater contamination consists of identifying the type and extent of contamination, developing an action plan, and carrying out the cleanup using the selected method. According to DOE, depending on the type and extent of contamination, and the possible health risks, the appropriate method may be (1) leaving the groundwater as it is, (2) allowing it to cleanse itself over time (called natural flushing), or (3) using an active cleanup technique such as pumping the water out of the ground and treating it. Mr. Chairman, we now return to the topics discussed in our report: the status and cost of DOE’s surface and groundwater cleanup and the factors that could affect the federal government’s costs in the future. Since our report was issued on December 15, 1995, DOE has made additional progress in cleaning up and licensing Title I sites. As of February 1996, DOE’s surface cleanup was complete at 16 of the 24 Title I sites, under way at 6 additional sites, and on hold at the remaining 2 sites.Of the 16 sites where DOE has completed the cleanup, 4 have been licensed by NARC as meeting the standards of the Environmental Protection Agency (EPA). Ten of the other 12 sites are working on obtaining such a license, and the remaining two sites do not require licensing because the tailings were relocated to other sites. Additionally, DOE has completed the surface cleanup at about 97 percent of the 5,276 nearby properties that were also contaminated. Although DOE expects to complete the surface cleanup of the Title I sites by the beginning of 1997, it does not expect all of Narc activities to be completed until the end of 1998. As for the cleanup of groundwater at the Title I sites, DOE began this task in 1991 and currently estimates completion in about 2014. Since its inception in 1979, DOE’s project for cleaning up the Title I sites has grown in size and in cost. In 1982, DOE estimated that the cleanups would be completed in 7 years and that only one pile of tailings would need to be relocated. By 1992, however, the Department was estimating that the surface cleanup would be completed in 1998 and that 13 piles of tailings would need to be relocated. The project’s expansion was caused by several factors, including the development of EPA’s new groundwater protection standards; the establishment or revision of other federal standards addressing such things as the transport of the tailings and the safety of workers; and the unexpected discovery of additional tailings, both at the processing sites and at newly identified, affected properties nearby. In addition, DOE made changes in its cleanup strategies to respond to state and local concerns. For example, at the Grand Junction, Colorado, site the county’s concern about safety led to the construction of railroad transfer facilities and the use of both rail cars and trucks to transport contaminated materials. The cheaper method of simply trucking the materials would have routed extensive truck traffic through heavily populated areas. Along with the project’s expansion came cost increases. In the early 1980s, DOE estimated that the total cleanup cost—for both the surface and groundwater—would be about $1.7 billion. By November 1995, this estimate had grown to $2.4 billion. DOE spent $2 billion on surface cleanup activities through fiscal year 1994 and expects to spend about $300 million more through 1998. As for groundwater, DOE has not started any cleanup. By June 1995, the Department had spent about $16.7 million on site characterization and various planning activities. To make the cleanup as cost-effective as it can, DOE is proposing to leave the groundwater as it is at 13 sites, allow the groundwater to cleanse itself over time at another 9 sites, and to use an active cleanup method at 2 locations in Monument Valley and Tuba City, Arizona. The final selection of cleanup strategies depends largely on DOE’s reaching agreement with the affected states and tribes. At this point, however, DOE has yet to finalize agreements on any of the groundwater cleanup strategies it is proposing. At the time we issued our report, the cleanups were projected to cost at least another $130 million using the proposed strategies, and perhaps as much as $202 million. More recently, a DOE groundwater official has indicated that the Department could reduce these costs by shifting some of the larger costs to earlier years; reducing the amounts built into the strategies for contingencies, and using newer, performance-based contracting methods. Once all of the sites have been cleaned up, the federal government’s responsibilities, and the costs associated with them, will continue far into the future. What these future costs will amount to is currently unknown and will depend largely on how three issues are resolved. First, because the effort to clean up the groundwater is in its infancy, its final scope and cost will depend largely on the remediation methods chosen and the financial participation of the affected states. It is too early to know whether the affected states or tribes will ultimately persuade DOE to implement more costly remedies than those the Department has proposed or whether any of the technical assumptions underlying DOE’s proposed strategies will prove to be invalid. If either of these outcomes occurs, DOE may implement more costly cleanup strategies than it has proposed, thereby increasing the final cost of the groundwater cleanup. DOE has already identified five sites where it believes it may have to implement more expensive alternatives than the ones it initially proposed. In addition, the final cost of the groundwater cleanup depends on the affected states’ ability and willingness to pay their share of the cleanup costs. According to a DOE official, Pennsylvania, Oregon, and Utah may not have funding for the groundwater cleanup program. DOE believes that it is prohibited from cleaning up the contamination if the states do not pay their share. Accordingly, as we noted in our report, we believe that the Congress may want to consider whether and under what circumstances DOE can complete the cleanup of the sites if the states do not provide financial support. Second, DOE may incur further costs to dispose of uranium mill tailings that are unearthed in the future in the Grand Junction, Colorado, area. DOE has already cleaned up the Grand Junction processing site and over 4,000 nearby properties, at a cost of about $700 million. Nevertheless, in the past, about a million cubic yards of tailings were used in burying utility lines and constructing roads in the area and remain today under the utility corridors and road surfaces. In future years, utility and road repairs will likely unearth these tailings, resulting in a potential public health hazard if the tailings are mishandled. In response to this problem, DOE is working with NRC and Colorado officials to develop a plan for temporarily storing the tailings as they are unearthed and periodically transporting them to a nearby disposal cell—referred to as the Cheney cell, located near the city of Grand Junction—for permanent disposal. Under this plan, the city or county would be responsible for hauling the tailings to the disposal cell, and DOE would be responsible for the cost of placing the tailings in the cell. The plan envisions that a portion of the Cheney disposal cell would remain open, at an annual cost of several hundred thousand dollars. When the cell is full, or after a period of 20 to 25 years, it would be closed. However, DOE does not currently have the authority to implement this plan because the law requires that all disposal cells be closed upon the completion of the surface cleanup. Accordingly, we suggested in our report that the Congress might want to consider whether DOE should be authorized to keep a portion of the Cheney disposal cell open to dispose of tailings that are unearthed in the future in this area. Finally, DOE’s costs for long-term care are still somewhat uncertain. DOE will ultimately be responsible for long-term custody, that is, the surveillance and maintenance, of both Title I and Title II sites, but the Department only bears the financial responsibility for these activities at Title I sites. For Title II sites, the owners/operators are responsible for funding the long-term surveillance and maintenance. Although NRC’s minimum one-time charge to site owners/operators is supposed to be sufficient to cover the cost of long-term custody so that they, not the federal government, bear these costs in full, NRC has not reviewed its estimate of basic surveillance costs since 1980, and DOE is currently estimating that basic monitoring will cost about 3 times more than NRC estimates. Moreover, while DOE maintains that ongoing routine maintenance will be needed at all sites, NRC’s charge does not provide any amount for ongoing maintenance. In light of the consequent potential shortfall in maintenance funds, our report recommended that NRC and DOE work together to update the charge for basic surveillance and determine if routine maintenance will be required at each site. On the basis of our recommendations, NRC officials agreed to reexamine the charge and determine the need for routine maintenance at each site. They also said that they are working with DOE to clarify the Department’s role in determining the funding requirements for long-term custody. Mr. Chairman, this concludes our prepared statement. We will be pleased to answer any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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. | GAO discussed the status and cost of the Department of Energy's (DOE) uranium mill tailings cleanup program and the factors that could affect future costs. GAO noted that: (1) surface contamination cleanup has been completed at two-thirds of the identified sites and is underway at most of the others; (2) if DOE completes its surface cleanup program in 1998, it will have cost $2.3 billion, taken 8 years longer than expected, and be $261 million over budget; (3) DOE cleanup costs increased because there were more contaminated sites than anticipated, some sites were more contaminated than others, and changes were needed to respond to state and local concerns; (4) the future cost of the uranium mill tailings cleanup will largely depend on the future DOE role in the program, the remediation methods used, and the willingness of states to share final cleanup costs; and (5) the Nuclear Regulatory Commission needs to ensure that enough funds are collected from the responsible parties to protect U.S. taxpayers from future cleanup costs. |
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Missile defense is important because at least 25 countries now possess or are acquiring sophisticated missile technology that could be used to attack the United States, deployed troops, friends, and allies. MDA’s mission is to develop and field an integrated, layered BMDS capable of defending against enemy ballistic missiles launched from all ranges and during all phases of the missiles’ flight. DOD has spent and continues to spend large sums of money to defend against this threat. Since the mid-1980s, about $107 billion has been spent, and over the next 5 years, another $49 billion is expected to be invested. While the initial set of BMDS assets was fielded during 2004-2005, much of the technical and engineering foundation was laid by this prior investment. DOD also expects to continue investing in missile defense for many more years as the system evolves into one that can engage an enemy ballistic missile launched from any range during any phase of the missile’s flight. To enable MDA to field and enhance a missile defense system quickly, the Secretary of Defense, in 2002, directed a new acquisition strategy. The Secretary’s strategy included removing the BMDS program from DOD’s traditional acquisition process until a mature capability was ready to be handed over to a military service for production and operation. Therefore, development of the BMDS program is not segmented into concept refinement, technology development, and system development and demonstration phases, as other major defense acquisition programs are. Instead, MDA initiates one development phase that incorporates all acquisition activities and that is known simply as research and development. MDA also has approval to use research and development funds, rather than procurement funds, to acquire assets that could be made available for operational use. To carry out its mission, MDA is fielding missile defense capabilities in 2-year increments known as blocks. The first block—Block 2004—fielded a limited initial capability that included early versions of GMD, Aegis BMD, PAC-3, and C2BMC. This was the capability that was put on alert status in 2006. MDA formally began a second BMDS block on January 1, 2006, that will continue through December 31, 2007. This block is expected to provide protection against attacks from North Korea and the Middle East. During the 2-year block timeframe, MDA is focusing its program of work on the enhancement and fielding of additional quantities of the GMD, Aegis BMD, and C2BMC elements, as well as fielding a Forward-Based X- Band radar that is part of the Sensors element. When MDA defined the block in March 2005, shortly after submitting its fiscal year 2006 budget request to Congress, it also included three other elements—Airborne Laser (ABL), Space Tracking and Surveillance System (STSS), and Terminal High Altitude Area Defense (THAAD)—that are primarily developmental in nature. According to MDA, these elements were included in the block even though they were not expected to be operational until future blocks because the elements offered some emergency capability during the block timeframe. In March 2006, MDA removed THAAD from Block 2006. According to MDA, this action better aligned resources and fielding plans. The development of two other elements—Multiple Kill Vehicle (MKV) and Kinetic Energy Interceptor (KEI)—also continued in fiscal year 2006, but these elements were not considered part of Block 2006 because, according to MDA officials, the elements provide no capability—emergency or operational—during the block. The bulk of the funding that MDA requests for the BMDS each fiscal year is for the development, fielding, and sustainment of BMDS elements. For example, in fiscal year 2006, funding for the nine BMDS elements collectively accounted for 72 percent of MDA’s research and development budget. MDA requests funds for each of these elements, with the exception of C2BMC and THAAD, under separate budget line items. In addition, MDA issues separate contracts for each of the nine elements. Prior to beginning each new block, MDA establishes and submits block goals to Congress. These goals present the business case for the new block. MDA presented its Block 2006 goals to Congress in March 2005, shortly after submitting its fiscal year 2006 budget. At that time, MDA told Congress that the agency expected to field the following assets: up to 15 GMD interceptors, an interim upgrade of the Thule Early Warning Radar, a Forward-Based X-Band radar, 19 Aegis BMD missiles, 1 new Aegis cruiser for the missile defense mission, 4 new Aegis destroyers capable of providing long-range surveillance and tracking, and 8 Aegis destroyers upgraded for the engagement mission. MDA’s cost goal for the development of the six elements that compose the block, the manufacture of assets being fielded, and logistical support for fielded assets was $19.3 billion. MDA also notified Congress of the Block 2006 performance goals established for the BMDS. These goals were composed of numerical values for the probability of engagement success, the land area from which the BMDS could deny a launch, and the land area that the BMDS could defend. Fiscal year testing goals were also established by element program offices, but these goals were not formally reported to Congress. We examined numerous documents and held discussions with agency officials. In determining the elements’ progress toward Block 2006 goals, we looked at the accomplishments of six BMDS elements—ABL, Aegis BMD, BMDS Sensors, C2BMC, GMD, and STSS—that compose the Block 2006 configuration. Our work included examining System Element Reviews, test plans and reports, production plans, and Contract Performance Reports. We also interviewed officials within each element program office and within MDA functional offices. In assessing whether MDA’s flexibility impacts BMDS oversight and accountability, we examined documents such as those defining MDA’s changes to Block 2006 goals, acquisition laws for major DOD programs, and BMDS policy directives issued by the Secretary of Defense. We examined the current status of MDA’s quality assurance program by visiting various contractor facilities and holding discussions with MDA officials, such as officials in the Office of Quality, Safety, and Mission Assurance. We performed our work from June 2006 through March 2007 in accordance with generally accepted government auditing standards. MDA made progress during fiscal year 2006, but it will not achieve the goals it set for itself in March 2005. One year after establishing its Block 2006 goals, the agency informed Congress that it planned to field fewer assets, reduce performance goals, and increase the block’s cost goal. It is also likely that in addition to fielding fewer assets, other Block 2006 work will be deferred to offset growing contractor costs. MDA is generally on track to meet its revised quantity goals, but the performance of the BMDS cannot yet be fully assessed because there have been too few flight tests conducted to anchor the models and simulations that predict overall system performance. Several elements continue to experience technical problems that pose questions about the performance of the fielded system and could delay the enhancement of future blocks. In addition, the Block 2006 cost goal cannot be reconciled with actual costs because work travels to and from other blocks and individual element program offices report costs inconsistently. During the first year of Block 2006, MDA continued to improve the BMDS by enhancing its performance and fielding additional assets. In addition, the BMDS elements achieved some notable test results. For example, the GMD element completed its first successful intercept attempt since 2002. The test was also notable because it was an end-to-end test of one engagement scenario, the first such test that the program has conducted. Also, the Aegis BMD element conducted a successful intercept test of its more capable Standard Missile-3 design that is being fielded for the first time during Block 2006. In March 2006, soon after the formal initiation of Block 2006, MDA announced that events such as hardware delays, technical challenges, and budget cuts were causing the agency to field fewer assets than originally expected. MDA’s goal now calls for fielding 3 fewer GMD interceptors; deferring the upgrade of the Thule radar until Block 2008, when it can be fully upgraded; producing 4 fewer Aegis BMD missiles; upgrading 1 less Aegis destroyer for the engagement mission; and delivering 3 C2BMC Web browsers rather than the more expensive C2BMC suites. With the exception of the GMD interceptors, MDA is on track to deliver the revised quantities. The GMD program planned to emplace 8 interceptors during calendar year 2006, but was only able to emplace 4. Program officials told us that the contractor has increased the number of shifts that it is working and that this change will accelerate deliveries. However, to meet its quantity goal, the GMD program will have to more than double its interceptor emplacement rate in 2007. MDA also reduced the performance expected of Block 2006 commensurate with the reduction in assets. However, insufficient data are available to determine whether MDA is on track to meet the new goal. Although the GMD test program has achieved some notable results, officials in DOD’s Office of the Director of Operational Test and Evaluation told us that the element has not completed sufficient tests to provide a high level of confidence that the BMDS can reliably intercept intercontinental ballistic missiles. Further testing is needed as well to confirm that GMD can use long-range tracking data developed by Aegis BMD to prepare—in real time—a weapon system task plan for GMD interceptors. Delayed testing and technical problems may also impact the performance of the current and future configurations of the BMDS. For example, the performance of the Block 2006 configuration of the Aegis BMD missile is unproven because design changes in the missile’s solid attitude and divert system and one burn pattern of the third stage rocket motor were not flight-tested before they were cut into the production line. The current configuration of the GMD interceptor also continues to struggle with an anomaly that has occurred in each of the element’s flight tests. The anomaly has not yet prevented the program from achieving its primary test objectives, but neither its source nor a solution has been clearly identified or defined. The reliability of some GMD interceptors remains uncertain as well because inadequate mission assurance/quality control procedures may have allowed less reliable or inappropriate parts to be incorporated into the manufacturing process. Program officials plan to introduce new parts into the manufacturing process, but not until interceptor 18. MDA also plans to retrofit the previous 17 interceptors, but not until fiscal year 2009. In addition to the performance problems with elements being fielded, the ABL element that is being developed to enhance a future BMDS configuration experienced technical problems with its Beam Control/Fire Control component. These problems have delayed a lethality demonstration that is needed to demonstrate the element’s leading-edge technologies. ABL is an important element because if it works as desired, it will defeat enemy missiles soon after launch, before decoys are released to confuse other BMDS elements. MDA plans to decide in 2009 whether ABL or KEI, whose primary boost phase role is to mitigate the risk in the ABL program, will become the BMDS boost phase capability. While MDA reduced Block 2006 quantity and performance goals, it increased the block’s cost goal from about $19.3 billion to approximately $20.3 billion. The cost increases were caused by the addition of previously unknown operations and sustainment requirements, realignment of the GMD program to support a successful return to flight, realignment of the Aegis BMD program to address technical challenges and invest in upgrades, and preparations for round-the-clock operation of the BMDS. Although MDA is expected to operate within its revised budget of $20.3 billion, the actual cost of the block cannot be reconciled with the cost goal. To stay within its Block 2004 budget, MDA shifted some of that block’s work to Block 2006 and is counting it as a cost of Block 2006, which overstates Block 2006 cost. In addition, MDA officials told us that it is likely that some Block 2006 work will be deferred until Block 2008 to cover the $478 million fiscal year 2006 budget overruns experienced by five of the six element prime contractors. If MDA reports the cost of deferred work as it has in the past, the actual cost of Block 2006 will be complicated further. Another factor complicating the reconciliation of Block 2006 cost is that the elements report block cost inconsistently. Some elements appropriately include costs that the program will incur to reach full capability, while others do not. Because the BMDS has not formally entered the system development and demonstration phase of the acquisition cycle, it is not yet required to apply several important oversight mechanisms contained in certain acquisition laws that, among other things, provide transparency into program progress and decisions. This has enabled MDA to be agile in decision making and has facilitated fielding an initial BMDS capability quickly. On the other hand, MDA operates with considerable autonomy to change goals and plans, making it difficult to reconcile outcomes with original expectations and to determine the actual cost of each block and of individual operational assets. Over the years, a framework of laws has been created that make major defense acquisition programs accountable for their planned outcomes and cost, give decision makers a means to conduct oversight, and ensure some level of independent program review. The application of many of these laws is triggered by a program’s entry into system development and demonstration. To provide accountability, once major defense programs cross this threshold, they are required by statute to document program goals in an acquisition program baseline that as implemented by DOD has been approved by a higher-level DOD official prior to the program’s initiation. The baseline provides decision makers with the program’s best estimate of the program’s total cost for an increment of work, average unit costs for assets to be delivered, the date that an operational capability will be fielded, and the weapon’s intended performance parameters. Once approved, major acquisition programs are required to measure their program against the baseline, which is the program’s initial business case, or obtain the approval of a higher-level acquisition executive before making significant changes. Programs are also required to regularly provide detailed program status information to Congress, including information on cost, in Selected Acquisition Reports. In addition, Congress has established a cost-monitoring mechanism that requires programs to report significant increases in unit cost measured from the program baseline. Other statutes provide for independent program verifications and place limits on the use of appropriations. For example, 10 U.S.C. § 2434 prohibits the Secretary of Defense from approving system development and demonstration unless an independent estimate of the program’s life-cycle cost has been conducted by the Secretary. In addition, 10 U.S.C. § 2399 requires completion of initial operational test and evaluation before a program can begin full-rate production. These statutes ensure that someone external to the program examines the likelihood that the program can be executed as planned and will yield a system that is effective and suitable for combat. The use of an appropriation is also controlled so that it will not be used for a purpose other than the one for which it was made, except as otherwise provided by law. Research and development appropriations are typically specified by Congress to be used to pay the expenses of basic and applied scientific research, development, test, and evaluation. On the other hand, procurement appropriations are, in general, to be used for production and manufacturing. In the 1950s, Congress established a policy that items being purchased with procurement funds be fully funded in the year that the item is procured. This is meant to prevent a program from incrementally funding the purchase of operational systems. Full funding ensures that the total procurement costs of weapons and equipment are known to Congress up front and that one Congress does not put the burden on future Congresses of deciding whether they should appropriate additional funds or expose weapons under construction to uneconomic start-up and stop costs. The flexibility to defer application of specific acquisition laws has benefits. MDA can make decisions faster than other major acquisition programs because it does not have to wait for higher-level approvals or independent reviews. MDA’s ability to quickly field a missile defense capability is also improved because assets can be fielded before all testing is complete. MDA considers the assets it has fielded to be developmental assets and not the result of the production phase of the acquisition cycle. Additionally, MDA enjoys greater flexibility than other programs in the use of its funds. Because MDA uses research and development funds to manufacture assets, it is not required to fully fund those assets in the year of their purchase. Therefore, as long as its annual budget remains fairly level, MDA can request funds to address other needs. On the other hand, the flexibilities granted MDA make it more difficult to conduct program oversight or to hold MDA accountable for the large investment being made in the BMDS program. Block goals can be changed by MDA, softening the baseline used to assess progress toward expected outcomes. Similarly, because MDA can redefine the work to be completed during a block, the actual cost of a block cannot be compared with the original cost estimate. MDA considers the cost of deferred work, which may be the delayed delivery of assets or other work activities, as a cost of the block in which the work is performed even though the work benefits or was planned for a prior block. Further, MDA does not track the cost of the deferred work and, therefore, cannot make adjustments that would match the cost with the block that is benefited. For example, during Block 2004, MDA deferred some planned development, deployment, characterization, and verification activities until Block 2006 so that it could cover contractor budget overruns. The costs of the activities are now considered part of the cost of Block 2006. Also, although Congress provided funding for these activities during Block 2004, MDA used these funds for the overruns and will need additional funds during Block 2006 to cover their cost. Planned and actual unit costs of fielded assets are equally difficult to reconcile. Because MDA is not required to develop an approved acquisition program baseline, it is not required to report the expected average unit cost of assets. Also, because MDA is not required to report significant increases in unit cost, it is not easy to determine whether an asset’s actual cost has increased significantly from its expected cost. Finally, using research and development funds to purchase fielded assets further reduces cost transparency because these dollars are not covered by the full-funding policy as are procurement funds. Therefore, when a program for a 2-year block is first presented in the budget, Congress is not necessarily fully aware of the dimensions and cost of that block. For example, although a block may call for the delivery of a specific number of interceptors, the full cost of those interceptors is requested over 3 to 5 years. Calculating unit costs from budget documents is difficult because the cost of components that will become fielded assets may be spread across 3 to 5 budget years—a consequence of incremental funding. During Block 2004, poor quality control procedures caused the missile defense program to experience test failures and slowed production. MDA has initiated a number of actions to correct quality control weaknesses, and the agency reports that these actions have been largely successful. Although MDA continues to identify quality assurance procedures that need strengthening, recent audits by MDA’s Office of Quality, Safety, and Mission Assurance show such improvements as increased on-time deliveries, reduced test failures, and sustained improvement in product quality. MDA has taken a number of steps to improve quality assurance. These include developing a teaming approach to restore the reliability of key suppliers, conducting regular quality inspections to quickly identify and find resolutions for quality problems, adjusting award fee plans to encourage contractors to maintain a good quality assurance program and encourage industry best practices, as well as placing MDA-developed assurance provisions on prime contracts. For example, as early as 2003, MDA made a critical assessment of a key supplier’s organization and determined that the supplier’s manufacturing processes lacked discipline, its corrective action procedures were ineffective, its technical data package was inadequate, and personnel were not properly trained. The supplier responded by hiring a Quality Assurance Director, five quality assurance professionals, a training manager, and a scheduler. In addition, the supplier installed an electronic problem-reporting database, formed new boards—such as a failure review board—established a new configuration management system, and ensured that manufacturing activity was consistent with contract requirements. During different time periods between March 2004 and August 2006, MDA measured the results of the supplier’s efforts and found a 64 percent decrease in open quality control issues, a 43 percent decline in test failures, and a 9 percent increase in on-time deliveries. MDA expanded its teaming approach in 2006 to another problem supplier and reports that many systemic solutions are already underway. During fiscal year 2006, MDA’s audits continued to identify both quality control weaknesses and quality control procedures that contractors are addressing. During 2006, the agency audited six contractors and identified 372 deficiencies and observations. As of December 2006, the six contractors had collectively closed 157, or 42 percent, of the 372 audit findings. MDA also reported other signs of positive results. For example, in 2006, MDA conducted a follow-on audit of Raytheon, the subcontractor for GMD’s exoatmospheric kill vehicle. A 2005 audit of Raytheon had found that the subcontractor was not correctly communicating essential kill vehicle requirements to suppliers, did not exercise good configuration control, and could not build a consistent and reliable product. The 2006 audit was more positive, reporting less variability in Raytheon’s production processes, increasing stability in its statistical process control data, fewer test problem reports and product waivers, and sustained improvement in product quality. In our March 15, 2007, report, we made several recommendations to DOD to increase transparency in the missile defense program. These included: Develop a firm cost, schedule, and performance baseline for those elements considered far enough along to be in system development and demonstration, and report against that baseline. Propose an approach for those same elements that provides information consistent with the acquisition laws that govern baselines and unit cost reporting, independent cost estimates, and operational test and evaluation for major DOD programs. Such an approach could provide necessary information while preserving the MDA Director’s flexibility to make decisions. Include in blocks only those elements that will field capabilities during the block period and develop a firm cost, schedule, and performance baseline for that block capability, including the unit cost of its assets. Request and use procurement funds, rather than research, development, test, and evaluation funds, to acquire fielded assets. DOD partially agreed with the first three recommendations and recognized the need for greater program transparency. It committed to provide information consistent with the acquisition laws that govern baselines and unit cost reporting, independent cost estimates, and operational test and evaluation. DOD did not agree to use elements as a basis for this reporting, expressing its concern that an element-centric approach to reporting would have a fragmenting effect on the development of an integrated system. We respect the need for the MDA Director to make decisions across element lines to preserve the integrity of the system of systems. We recognize that there are other bases rather than elements for reporting purposes. However, we believe it is essential that MDA report in the same way that it requests funds. Currently MDA requests funds and contracts by element, and at this time, that appears to be the most logical way to report. MDA currently intends to modify its current block approach. We believe that a management construct like a block is needed to provide the vehicle for making system-of-system decisions and to provide for system-wide testing. However, at this point, the individual assets to be managed in a block—including quantities, cost, and delivery schedules—can only be derived from the individual elements. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or members of the subcommittee may have. For future questions about this statement, please contact me at (202) 512- 4841 or [email protected]. Individuals making key contributions to this statement include Barbara H. Haynes, Assistant Director; LaTonya D. Miller; Michael J. Hesse; Letisha T. Jenkins; Sigrid L. McGinty; Kenneth E. Patton; and Steven B. Stern. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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. | Over the next 5 years the Missile Defense Agency (MDA) expects to invest $49 billion in the Ballistic Missile Defense (BMD) system's development and fielding. MDA's strategy is to field new capabilities in 2-year blocks. In January 2006, MDA initiated its second block--Block 2006--to protect against attacks from North Korea and the Middle East. Congress requires GAO to assess MDA's progress annually. GAO's March 2007 report addressed MDA's progress during fiscal year 2006 and followed up on program oversight issues and the current status of MDA's quality assurance program. GAO assessed the progress of each element being developed by MDA, examined acquisition laws applicable to major acquisition programs, and reviewed the impact of implemented quality initiatives. During fiscal year 2006, MDA fielded additional assets for the Ballistic Missile Defense System (BMDS), enhanced the capability of some assets, and realized several noteworthy testing achievements. For example, the Ground-based Midcourse Defense (GMD) element successfully conducted its first end-to-end test of one engagement scenario, the element's first successful intercept test since 2002. However, MDA will not meet its original Block 2006 cost, fielding, or performance goals because the agency has revised those goals. In March 2006, MDA: reduced its goal for fielded assets to provide funds for technical problems and new and increased operations and sustainment requirements; increased its cost goal by about $1 billion--from $19.3 to $20.3 billion; and reduced its performance goal commensurate with the reduction of assets. MDA may also reduce the scope of the block further by deferring other work until a future block because four elements incurred about $478 million in fiscal year 2006 budget overruns. With the possible exception of GMD interceptors, MDA is generally on track to meet its revised quantity goals. But the deferral of work, both into and out of Block 2006, and inconsistent reporting of costs by some BMDS elements, makes the actual cost of Block 2006 difficult to determine. In addition, GAO cannot assess whether the block will meet its revised performance goals until MDA's models and simulations are anchored by sufficient flight tests to have confidence that predictions of performance are reliable. Because MDA has not formally entered the Department of Defense (DOD) acquisition cycle, it is not yet required to apply certain laws intended to hold major defense acquisition programs accountable for their planned outcomes and cost, give decision makers a means to conduct oversight, and ensure some level of independent program review. MDA is more agile in its decision-making because it does not have to wait for outside reviews or obtain higher-level approvals of its goals or changes to those goals. Because MDA can revise its baseline, it has the ability to field fewer assets than planned, defer work to a future block, and increase planned cost. All of this makes it hard to reconcile cost and outcomes against original goals and to determine the value of the work accomplished. Also, using research and development funds to purchase operational assets allows costs to be spread over 2 or more years, which makes costs harder to track and commits future budgets. MDA continues to identify quality assurance weaknesses, but the agency's corrective measures are beginning to produce results. Quality deficiencies are declining as MDA implements corrective actions, such as a teaming approach designed to restore the reliability of key suppliers. |
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In determining whether to provide testing accommodations, testing companies are required to adhere to Section 309 of the ADA and, in some circumstances, Section 504 of the Rehabilitation Act of 1973, as amended (the Rehabilitation Act), as well as regulations implementing those laws. Section 309 of the ADA provides that “ny person that offers examinations or courses related to applications, licensing, certification, or credentialing for secondary or post-secondary education, professional, or trade purposes” must offer them “in a place and manner accessible to persons with disabilities or offer alternative accessible arrangements…” Section 504 prohibits discrimination against individuals with disabilities by entities receiving federal financial assistance. Persons requesting accommodations are entitled to them only if they have a disability as defined by those statutes. Both the ADA and the Rehabilitation Act define individuals with disabilities as those who have a physical or mental impairment that substantially limits one or more major life activities, have a record of such impairment, or are regarded as having such an impairment. Justice is charged with enforcing testing company compliance within Section 309 of the ADA, and the Departments of Education and HHS are responsible for enforcing compliance with Section 504 of the Rehabilitation Act for any testing companies that receive federal financial assistance from them. In 2008, concerned that judicial interpretations had limited the scope of protection it had intended under the ADA, Congress enacted the ADA Amendments Act of 2008 (ADAAA), rejecting several Supreme Court interpretations that had narrowed the definition of an individual with disabilities. The ADA Amendments Act set out guidelines for determining who qualifies as an individual with disabilities and provided a nonexhaustive list of “major life activities,” which includes learning, reading, concentrating, and thinking. In the ADAAA, Congress also stated that it found the U.S. Equal Employment Opportunity Commission (EEOC) regulation regarding the definition of an individual with a disability inconsistent with congressional intent and directed the EEOC to revise that regulation. On March 25, 2011, the EEOC issued final regulations, implementing Title I of the ADAAA. Those regulations, which went into effect on May 24, 2011, provide that the term “substantially limits” should be construed broadly in favor of expansive coverage to the maximum extent permitted by the ADA and is not meant to be a demanding standard; that when determining if an individual is substantially limited in performing a major life activity, the determination of disability should not require extensive analysis and should be compared with that of “most people in the general population;” and that the comparison to most people will not usually require scientific, medical, or statistical analysis. The regulations provide that, in applying these principles, it may be useful to consider, as compared with most people in the general population, the condition under which the individual performs the major life activity; the manner in which the individual performs the major life activity; and/or the duration of time it takes the individual to perform the major life activity.” In 1991, Justice issued regulations implementing Section 309 which, among other things, provide that any private entity offering an examination must assure that “he examination is selected and administered so as to best ensure that, when the examination is administered to an individual with a disability that impairs sensory, manual, or speaking skill, the examination results accurately reflect the individual’s aptitude, achievement level or whatever other factor the examination purports to measure, rather than reflecting the individual’s impaired sensory, manual or speaking skills…..” Under the regulations, such entities are also required to provide individuals with disabilities appropriate auxiliary aids unless the entity can demonstrate that a particular auxiliary aid would fundamentally alter what the examination is intended to measure or would result in an undue burden. On September 15, 2010, Justice issued a final rule adding three new provisions to its regulations, stating that, through its enforcement efforts, it had addressed concerns that requests by testing entities for documentation regarding the existence of an individual’s disability and need for accommodations were often inappropriate and burdensome. The first new provision requires that documentation requested by a testing entity must be reasonable and limited to the need for the accommodation. The second new provision states that a testing entity should give considerable weight to documentation of past accommodations received in similar testing situations, as well as those provided under an Individualized Education Program (IEP) provided under the Individuals with Disabilities Education Act (IDEA), or a plan providing services pursuant to Section 504 of the Rehabilitation Act (a Section 504 plan). The third new provision provides that a testing entity must respond to requests for accommodation in a timely manner. Since the ADAAA and EEOC regulations have broadened the definition of an individual with disabilities, it is possible that the focus for determining eligibility for testing accommodations will shift from determining whether a person requesting testing accommodations is an individual with a disability for purposes of the ADA to what accommodations must be provided to meet the requirements of Section 309 and its implementing regulations. Several recent cases that address the type of accommodations that must be provided under Section 309 will likely impact the latter determination. In Enyart v. National Conference of Bar Examiners, the U.S. Court of Appeals for the Ninth Circuit rejected the argument that Section 309 requires only “reasonable accommodations” and adopted the higher “best ensure” standard for determining accessibility that Justice included in its regulations. The court found that the requirement in Section 309, that testing entities offer examinations in a manner accessible to individuals with disabilities, was ambiguous. As a result, it deferred to the requirement in Justice’s regulations providing that testing entities must offer examinations “so as to best ensure” that the exam results accurately reflect the test takers aptitude rather than disabilities. Applying that standard, the court found that NCBE was required to provide Enyart, a blind law school graduate, with the accommodations she had requested rather than the ones offered by NCBE based on evidence that her requested accommodations were necessary to make the test accessible to her given her specific impairment and the specific nature of the exam. Extra time represented approximately three-quarters of all accommodations requested and granted in the most recent testing year, with 50 percent extra time representing the majority of this category (see fig. 1). According to researchers, one explanation for the high incidence of this accommodation is that students with the most commonly reported disabilities—learning disabilities, such as dyslexia; attention deficit disorder (ADD); or attention deficit/hyperactivity disorder (ADHD)—may need extra time to compensate for slower processing or reading speeds. In addition, extra time may be needed to support other accommodations, such as having a person read the test to a test taker or write down the responses. The remaining quarter of accommodations that students requested and testing companies granted in the most recent testing year include changes in the testing environment, extra breaks, alternate test formats, and auditory or visual assistance. Changes to the testing environment might involve preferential seating or testing in a separate room to minimize distractions. The accommodation of extra breaks could be an extension of the scheduled break time between test sections or breaks when needed, depending on students’ individual circumstances. For example, students might need more than the allotted break time if they have a medical condition that requires them to test their blood sugar or use the restroom. Requests for auditory or visual assistance might entail having a “reader” to read the test aloud, whereas alternate test formats include large type, Braille, or audio versions. Additionally, students requested some other types of accommodations, including being allowed to have snacks as needed or using various types of assistive technology to take the test, such as computer software to magnify text or convert it into spoken language. For example, one blind individual we interviewed described using Braille to take tests and screen reading software to complete assignments when she was an undergraduate student. When it came time to request accommodations for a graduate school admissions test, she requested use of screen reading software because it helps her read long passages more quickly than with Braille alone. However, she also requested use of Braille because it allows her to more closely study a passage she did not initially comprehend. Students and disability experts we spoke with also told us that students may need multiple accommodations to help them overcome their disabilities, and that their requests reflect the accommodations that have previously worked for them. For example, in addition to using screen reading software and Braille, the blind student mentioned above was also allowed extra time, use of a computer, breaks in between test sections, a scribe, and a few other accommodations. An estimated 179,000 individuals with disabilities—approximately 2 percent—of about 7.7 million test takers took an exam with an accommodation in the most recent testing year, according to data provided to us. Approximately half of all accommodations requested and granted were for applicants with learning disabilities, and one-quarter was for those with ADD or ADHD. The remainder of accommodations requested and granted was for applicants with physical or sensory disabilities, such as an orthopedic or vision impairment; or psychiatric disabilities, such as depression; and other disabilities, such as diabetes and autism spectrum disorders (see fig. 2). High schools help students apply for accommodations on undergraduate admissions tests in several ways. According to disability experts and a few high schools we interviewed, school counselors alert students to the need to apply for accommodations and advise them about what to request. Additionally, school officials play an important role in helping students with the application. For certain types of requests, school officials can submit the application on the student’s behalf, requiring minimal student involvement. One testing company reported that 98.5 percent of new accommodation requests for a postsecondary admissions test were submitted this way in the most recent testing year. Alternatively, when students submit the application themselves, school officials can provide copies of the disability documentation on file with the school. In addition to helping students with the application process itself, high school officials can also facilitate communications between the student and testing company after the application has been submitted. For example, one high school administrator we interviewed reported contacting a testing company about an accommodation application that had been submitted past the deadline for a specific test date. In this case, the student’s recent health diagnosis and treatment necessitated accommodations, and the administrator helped explain why it was important for the student to take the test when originally scheduled. Postsecondary Schools’ Services for Students with Disabilities Postsecondary schools provide an array of services to help ensure that students have equal access to education. School officials we interviewed work closely with students who self-identify as having a disability and request services to provide accommodations, coordinate with faculty and campus services, meet periodically with students to monitor their progress, and adjust accommodations as necessary. Schools are required to identify an individual who coordinates the school’s compliance with the Rehabilitation Act and the ADA. Some schools also have a centralized disability services office to coordinate these services. The transition from high school to postsecondary school can present challenges for all students, and especially for students with disabilities because they must assume more responsibility for their education by identifying themselves as having a disability, providing documentation of their disability, and requesting accommodations and services. For example, students must decide whether or not to use accommodations in their postsecondary courses and, if needed, obtain any new documentation required to support a request for accommodations. Consequently, postsecondary schools play an important role in advising students with disabilities to help them achieve success both in school and when applying for testing accommodations. Generally, when postsecondary students apply for testing accommodations, school officials provide a letter documenting the accommodations students have used in school. In addition to providing these letters, postsecondary officials we interviewed described several ways they advise students who apply for testing accommodations, including the following: Counseling students about what accommodations best meet their needs—Postsecondary school officials play an important role in helping students adapt to the new academic environment and in determining the best accommodations to use in school and for standardized tests to achieve success at this level. For example, at one postsecondary school, a committee consisting of two learning specialists, a psychologist, two administrative staff, and the director of the disability services office meet to review each student’s request for accommodations and discuss the appropriate services to provide for his or her courses. With technological advances, an official at another school has advised some students to reconsider requesting the accommodation of extra time as they may be better served by other accommodations, such as screen readers, to address their disability. According to the official, using certain technologies has decreased the need for extra time for some students as they have been able to complete more of their work on time. Explaining application requirements—Postsecondary school officials advise students about the need to apply for testing accommodations and help them understand application requirements, which can be extensive. For example, several postsecondary officials we interviewed said they alerted students to the need to apply for testing accommodations and to allow sufficient time for the application process. One official reported sending reminders to students about the need to apply for accommodations if they are considering graduate school, and another official reported advising students to begin the process 4 to 6 months in advance, in case the testing company requests additional information. Another school official described helping a student interpret the testing company’s instructions for the accommodation application, including what documentation is required. One school official said that she helps students understand more subtle aspects of preparing a successful application by, for example, recommending the use of consistent terminology to describe the disability throughout the application to make it easier for reviewers to understand. Several postsecondary officials we interviewed reported advising students about the likelihood of a testing company granting accommodations based on a review of their existing documentation. For example, a psychoeducational evaluation that was current when a student enrolled in postsecondary study might need to be updated by the time a student applies for testing accommodations. At one school, an official estimated that about 30 percent of the students served by the school’s disability service office would need to update their documentation if they decide to apply for testing accommodations. Providing resources to obtain evaluations—A few postsecondary officials we interviewed reported referring students to a variety of resources when they need an updated or new evaluation, sometimes at substantial savings to the student. Two schools we interviewed make campus resources available to students, such as providing grants or scholarships to help students who demonstrate financial need to offset the cost of evaluations. Schools also reported helping students by providing a mechanism for them to obtain the necessary evaluations on campus. For example, students can obtain an evaluation from the campus health and counseling center at one school for about $700, while the psychology clinic and the Department of Neuropsychology at another school provide these evaluations on a sliding fee basis. Additionally, officials said that they provide students with a list of area professionals who conduct evaluations, although such outside sources could cost several thousand dollars and may not be covered by health insurance. In reviewing requests for accommodations, testing companies included in our study reported considering a number of factors to determine whether applicants have a disability that entitles them to accommodations under the ADA. As part of their review process, the testing companies included in our study typically look for a current disability diagnosis made by a qualified professional. However, seven testing companies included in our study either state in their guidance for requesting accommodations or told us that the presence of a disability diagnosis does not guarantee an accommodation will be granted because they also need to consider the impact of the disability. Testing companies included in our study reported reviewing applications to understand how an applicant’s current functional limitations pose a barrier to taking the exam under standard conditions. As an example, one testing company official stated that someone with limited mobility might meet the ADA definition of a disability but not need an accommodation if the testing center is wheelchair accessible. To understand an applicant’s current functional limitations, testing companies may request documentation that provides evidence of how an applicant’s disability currently manifests itself, such as the results of diagnostic tests. For example, several testing companies included in our study request that applications for accommodations include the results of a psychoeducational test to support a learning disability diagnosis. As another example, applicants who have a hearing impairment would be asked to provide the results of a hearing test to document their current condition. Officials from most testing companies included in our review said that, for some types of disabilities, it is important to have documentation that is current to help them understand the functional limitations of an applicant’s disability. For example, one testing company official told us that disabilities of an unchanging nature, such as blindness or deafness, could be documented with evaluations from many years ago, whereas psychiatric conditions, learning disabilities, and ADHD would need more current evaluations. For applicants who may not have a formal disability diagnosis or recent medical evaluations, some testing company officials told us that they will look at whatever information applicants can provide to show how they are limited. For example, testing company officials said they will consider report cards or letters from teachers to obtain information about an applicant’s condition. Another factor that several testing companies consider is how an applicant’s functional ability compares to that of most people. For example, officials from one testing company told us that before granting an accommodation on the basis of a reading-related disability, they would review the applicant’s reading scores to make sure they were lower than those of the average person. Several testing company officials also told us that while reviewing information within an application for accommodations, they may reach a different conclusion about an applicant’s limitations and necessary accommodations than what the applicant requested. For example, one testing company initially denied an applicant’s request, in part, because the testing company’s comparison of the applicant’s diagnostic test scores with the average person his age led them to different conclusions about the applicant’s ability to function than those of the medical evaluator who performed the tests. As described previously, Justice recently added new requirements to its Section 309 regulations to further define the parameters of appropriate documentation requests made by testing companies in reviewing requests for accommodations. One of those amendments provides that a testing entity should give considerable weight to documentation of past accommodations received in similar testing situations, as well as those provided under an IEP or Section 504 plan. In discussing the regulations, most testing company officials we spoke with told us that they consider an applicant’s history of accommodations; however, they also told us they may require more information to make a decision. For example, officials from one testing company said they may want information, such as documentation from a medical professional and a personal statement from the applicant, to explain the need for the accommodation if it had not been used previously or in recent years. In guidance on its revised regulations, Justice states that when applicants demonstrate a consistent history of a diagnosis of a disability, testing companies generally should accept without further inquiry documentation provided by a qualified professional who has made an individualized assessment of the applicant and generally should grant the requested accommodation. Testing company officials also told us they sometimes ask for more information than provided by a licensed professional in order to understand an applicant’s disability and limitations. For example, for certain disabilities, such as learning disabilities or ADHD, officials from two testing companies told us they may request evidence dating back to childhood since these disabilities are considered developmental. While Justice states in its guidance that the amendments to the regulation were necessary because its position on the bounds of appropriate documentation had not been implemented consistently and fully by testing entities, officials from almost all of the testing companies included in our study stated that they did not need to change any of their practices for granting accommodations to be in compliance. Testing companies included in our study also consider what accommodations are appropriate for their tests. In doing so, some testing company officials told us that they may grant an accommodation that is different from what an applicant requested. Based on their assessment of how an applicant is limited with respect to the exam, testing company officials told us they make a determination as to which accommodations they believe will address the applicant’s limitations. For example, one testing company official told us that three applicants with ADHD all might apply for extra time to complete the exam, but the testing company may decide different accommodations are warranted given each applicant’s limitations––extra time for an applicant unable to maintain focus; extra breaks for an applicant who has difficulty sitting still for an extended time period; preferential seating for the applicant who is easily distracted. Even though one testing company official told us that evidence of a prior history of accommodations can be helpful in understanding how accommodations have been used in the past, having a history of prior accommodations in school does not guarantee that those accommodations will be appropriate for the test. For example, according to one testing company, some students with hearing impairments who need accommodations such as a note taker in school may not need accommodations on a written standardized test. In reviewing requests for accommodations, several testing company officials told us they try to work with applicants when they do not grant the specific accommodations requested. For example, one testing company official told us that if an applicant has a qualifying disability and she could not grant the requested accommodation because it would alter the test, she will try to work with an applicant to determine an appropriate accommodation. In addition, all of the testing companies included in our study have a process by which applicants can appeal the decision if they disagree with the outcome. Based on their reviews, testing companies reported granting between 72 and 100 percent of accommodations that were requested in the most recent testing year for 6 of the 10 tests for which we received data. However, these testing companies counted an accommodation as granted even if it was different from what was requested. For example, testing companies told us that they would have counted an accommodation request for extra time as granted, even if the applicant requested more than what was granted. Some disability experts and applicants told us that one of the challenges in applying for accommodations was understanding how testing companies made their decisions, especially with relation to how much weight certain aspects of the application appeared to carry. Most of the applicants we spoke with told us that they requested accommodations that they were accustomed to using and were often frustrated that testing companies did not readily provide those accommodations. These applicants had gone through a process for requesting classroom accommodations and had documentation supporting those accommodations, and two applicants told us that they did not believe testing companies deferred to those documents in the way they would expect. Some disability experts expressed concern that testing companies rely heavily on scores that are perceived to be more objective measures, such as psychometric assessments, and two of these experts said they believe that, in addition to scores, testing companies should also consider the clinical or behavioral observations conducted by qualified professionals or school counselors. While testing companies provide guidance outlining their documentation requirements, some applicants and disability experts we spoke with told us that knowing what documentation to provide to a testing company can be a challenge in applying for accommodations. Two applicants told us it was unclear what and how much information to submit to support their requests. According to one of the applicants, the testing company asked for additional information to substantiate his request for additional time and a separate room to accommodate a learning disability, but was not specific about which documents it wanted or why. Four applicants told us they hired an attorney to help them determine what to submit in response to testing companies’ requests for additional information or to appeal a denial. According to one of the applicants, the attorney helped him find the right balance of documentation to submit to successfully obtain accommodations, something he was not able to do when he first applied without legal assistance. School officials we spoke with said documenting the need for an accommodation can be particularly challenging for gifted students ––those who demonstrate high levels of aptitude or competence—because they may not have a history of academic difficulty or accommodations. As a result, it can be more difficult to know what documentation to provide to support their requests. Disability experts and applicants also told us that, in some instances, they found testing companies’ documentation requirements on providing a history of the disability to be unreasonable. Two applicants told us that they found it unreasonable to be asked to provide a lengthy history of their disability. For example, one student we spoke with who was diagnosed with a learning disability in college provided the testing company with the results of cognitive testing and documentation of the accommodations he received in college, but the testing company also requested records of his academic performance going back to elementary school. He did not understand how such information was relevant to document his current functioning and found the request to be unreasonable since he was 30 years removed from elementary school. Some applicants also found it frustrating to have to update medical assessments for conditions that had not changed. For example, one applicant was asked to obtain a new evaluation of her disability even though school evaluations conducted every 3 years consistently showed that she has dyslexia. Applicants and disability experts we spoke with told us that obtaining these assessments can be cost prohibitive, and applicants reported costs for updating these assessments ranging from $500 to $9,000. For blind applicants, access to familiar assistive technology, such as screen-reading or screen-magnification software, was particularly challenging, according to applicants and disability experts. Two blind applicants told us they faced difficulty with being allowed to use the specific technology they requested for the test. One of the applicants told us the testing company required him to use its screen-reading software rather than the one he used regularly, resulting in greater anxiety on the day of the test since he had to learn how to use a new tool. Similarly, this applicant told us he faced similar challenges in working with readers provided by different testing companies rather than readers of his own choosing, since he was not comfortable with the reader’s style. While most of the applicants we spoke with eventually received one or more of their requested accommodations, several of them reported having to postpone their test date as a result of the amount of time the accommodations approval process took. Some applicants told us that they also experienced delays in achieving their educational or professional goals. Additionally, some applicants who were denied their accommodations told us that when they elected to take the test without accommodations, they felt that their exam results did not fully demonstrate their capabilities. For example, one applicant told us that he took a licensing exam a few times without the accommodations he requested over a two-year period while appealing the testing company’s decision, but each time his scores were not high enough for licensure nor did they reflect his academic performance. As a result, the applicant was two years behind his peers. Another applicant told us that she did not receive the requested accommodations for one of the licensing exams she applied for and decided not to take the exam for the time being because it wasn’t necessary for her to practice in the state she was living in. However, she anticipates needing to take the test as she furthers her career because the license will be needed for her to practice in surrounding states. Testing companies we interviewed reported challenges with ensuring fairness to all test takers when reviewing applications for accommodations. Officials from three testing companies expressed concern that some applicants may try to seek an unfair advantage by requesting accommodations they do not need. For example, officials from two of the companies said some applicants may see an advantage to getting an accommodation, such as extra time, and will request it without having a legitimate need. Officials from the other testing company told us that they do not want to provide accommodations to applicants who do not need them because doing so could compromise the predictive value of their tests and unfairly disadvantage other test takers. Officials from several testing companies told us that ensuring the reliability of their test scores was especially important since so many colleges, universities, and licensing bodies rely on them to make admissions and licensing decisions. Testing company officials told us that reviewing requests that contain limited information can be challenging because they do not have sufficient information to make an informed decision. One testing company official told us she received an accommodation request accompanied by a note on a doctor’s prescription pad that indicated the applicant had ADHD without any other information to document the applicant’s limitations on the test, thereby making it difficult to grant an accommodation. Officials from three testing companies also told us that an applicant’s professional evaluator may not have provided enough information to explain why the applicant needs an accommodation. They reported receiving evaluations without a formal disability diagnosis or evaluations with a diagnosis, but no information as to how the diagnosis was reached, leaving them with additional questions about the applicant’s condition. In addition, some testing company officials said it can be difficult to explain to applicants that having a diagnosis does not mean they have a qualifying disability that entitles them to testing accommodations under the ADA. One testing company official said she spends a great deal of time explaining to applicants that she needs information on their functional limitations in addition to a disability diagnosis. Testing company officials also told us that evaluating requests for certain types of disabilities or accommodations can be difficult. Some testing company officials told us that evaluating requests from gifted applicants or those with learning disabilities are among the most challenging. Such applicants may not have a documented history of their disability or of receiving accommodations, making it more difficult to determine their current needs. One testing company official told us that greater scrutiny is applied to requests from applicants without a history of accommodations because they question why the applicant was not previously diagnosed and suddenly requests accommodations for the test. Officials from two testing companies stated that determining whether to provide for the use of assistive technologies or certain formats of the test can be difficult. One testing company official stated that allowing test takers to use their own software or laptop might result in information, such as test questions, being left on a test taker’s computer, which could compromise future administrations of the test since some questions may be reused. The official from the other company stated that providing the exam in a nonstandard format may change the exam itself and make the comparability of scores more difficult. Officials from two testing companies and an attorney representing some of the testing companies included in our study also told us they have concerns about testing companies being required to provide accommodations that best ensure that applicants’ test results reflect the applicants’ aptitudes rather than their disabilities since they believe the ADA only requires testing companies to provide reasonable accommodations. In a brief filed by several testing companies and professional licensing boards supporting NCBE’s request that the Supreme Court review the Court of Appeals decision in the Enyart case, they stated that a “best ensure” standard would fundamentally alter how standardized tests are administered since they would have to provide whatever accommodation the test taker believes will best ensure his or her success on the test. They stated this would skew nationwide standardized test results, call into question the fairness and validity of the tests, and impose new costs on testing organizations. Federal enforcement of laws and regulations governing testing accommodations primarily occurs in response to citizen complaints that are submitted to federal agencies. While Justice has overall responsibility for enforcement of Title III of the ADA, which includes Section 309 that is specifically related to examinations offered by private testing companies, other federal agencies such as Education and HHS have enforcement responsibilities under the Rehabilitation Act for testing companies that receive federal financial assistance from them. Justice can pursue any complaints it receives alleging discrimination under the ADA, regardless of the funding status of the respondent, but Education and HHS can only pursue complaints filed against entities receiving financial assistance from them at the time the alleged discrimination occurred. Education and HHS provided financial assistance to 4 of the 10 testing companies included in our study in at least 1 of the 4 fiscal years included in our analysis, fiscal years 2007 to 2010. When Justice receives a complaint that alleges discrimination involving testing accommodations it may investigate the complaint, refer it to another federal agency that has jurisdiction, or close it with no further action. After Justice reviews the complaint at in-take, it advises complainants that it might not make a determination about whether or not a violation has occurred in each instance. Justice officials explained that the department does not have the resources to make a determination regarding each complaint given the large volume and broad range of ADA complaints the agency receives. Specifically, Justice’s Disability Rights Section of the Civil Rights Division reported receiving 13,140 complaints, opening 3,141 matters for investigation, and opening 41 cases for litigation related to the ADA in fiscal years 2007 to 2010. Due to the limitations of Justice’s data systems, it is not possible to systematically analyze Justice’s complaint data to determine the total related to testing accommodations. However, using a key word search, Justice identified 59 closed complaints related to testing accommodations involving 8 of the 10 testing companies included in our study for fiscal years 2007 to 2010. Based on our review of available complaint information, we found that Justice closed 29 complaints without action, 2 were withdrawn by the complainant, and 1 was referred to a U.S. Attorney. However, we were unable to determine the final disposition of 27 complaints given information gaps in Justice’s data systems and paper files. In addition to identifying closed complaints, Justice identified five closed matters related to testing accommodations for three of the testing companies included in our study for fiscal years 2007 to 2010. One of these resulted in a settlement with the testing company that would allow the complainant to take the exam with accommodations, two were closed based on insufficient evidence provided by the complainant, and the outcome of the remaining two could not be determined based on limited information in Justice’s files. Education and HHS officials told us they review each incoming complaint to determine whether it should be investigated further. For Education and HHS to conduct further investigations, the complaint must involve an issue over which the agencies have jurisdiction and be filed in a timely manner. Eligible complaints are then investigated to determine whether a testing company violated the Rehabilitation Act. Similar to Justice, Education did not track complaints specifically involving testing accommodations. However, Education was able to identify a subset of complaints related to testing accommodations for the testing companies included in our sample by comparing our list of testing companies against all of their complaints. For fiscal years 2007 to 2010, Education identified 41 complaints related to testing accommodations involving six of the testing companies included in our study. Based on a review of closure letters sent to complainants, we found that Education did not consider testing company compliance for most complaints. Specifically, Education determined that it did not have the authority to investigate 14 complaints involving testing companies that were not receiving federal financial assistance at the time of the alleged violation. Education closed 14 other complaints without making a determination about compliance because the complaint was not filed on time, was withdrawn, or involved an allegation pending with the testing company or the courts. Based on its investigation of the remaining 13 complaints, Education did not identify any instances in which testing companies were not in compliance with the Rehabilitation Act. HHS identified one complaint against a testing company included in our study, but it was withdrawn by the complainant prior to a determination being made. Justice’s regulations implementing Section 309 of the ADA provide the criteria for its enforcement efforts, and it has recently taken steps to clarify ADA requirements pertaining to testing accommodations by adding new provisions to regulations. In June 2008—prior to passage of the ADA Amendments Act, Justice issued a notice of proposed rulemaking, and issued final regulations in September 2010 following a public hearing and comment period. In issuing those regulations, Justice stated that it relied on its history of enforcement efforts, research, and body of knowledge regarding testing accommodations. Justice officials told us they added new provisions to the regulations based on reports—detailed in complaints and anecdotal information from lawyers and others in the disability rights community—that raised questions about what documentation is reasonable and appropriate for testing companies to request. The final regulations, which took effect in March 2011, added provisions clarifying that testing companies’ requests for documentation should be reasonable and limited to the need for the accommodation, that testing companies should give considerable weight to documentation showing prior accommodations, and they should respond in a timely manner to accommodations requests. Justice provided further clarification of these provisions in the guidance that accompanied the final rule. Since the final regulations took effect, Justice has also filed statements of interest in two recent court cases to clarify and enforce its regulations. In both of these cases, test takers with visual disabilities filed lawsuits seeking to use computer assistive technology to take a standardized test, rather than other accommodations that the testing company thought were reasonable, including Braille, large print, and audio formats. In these statements of interest, Justice discussed the background of the ADA and its regulations and stated that the accommodations offered to those test takers should be analyzed under the “best ensure” standard. Justice also pointed out that Congress intended for the interpretation of the ADA to evolve over time as new technology was developed that could enhance options for students with disabilities. In addition, Justice stated that it had made clear in regulatory guidance that appropriate auxiliary aids should keep pace with emerging technology. While these actions may help clarify what is required under the ADA, we found that Justice is not making full use of available data and other information to target its enforcement activity. For example, incoming complaints are the primary mechanism Justice relies on to focus its enforcement efforts, and it makes decisions on which complaints to pursue primarily on a case-by-case basis. However, Justice does not utilize information gathered on all its complaints to develop a systematic approach to enforcement that would extend beyond one case. Officials told us that the facts and circumstances of every complaint are unique, but that in determining whether to pursue a particular complaint, they consider a number of factors, including available resources and the merits of the complaint. Officials also said they may group complaints, for example, waiting until they receive a number of complaints related to the same testing company before deciding whether to pursue them. They also told us they may pursue a complaint if it highlights an aspect of the ADA that has not yet been addressed. For example, Justice officials told us the department investigated one recent complaint because it demonstrated how someone who was diagnosed with a disability later in life and did not have a long history of receiving classroom accommodations was eligible for testing accommodations under the ADA. While these may be the appropriate factors for Justice to consider in determining whether to pursue each individual complaint, we found that the agency has not given sufficient consideration to whether its enforcement activities related to all complaints, when taken in the aggregate, make the most strategic use of its limited resources. In addition, although Justice collects some data on the ADA complaints it receives, it does not systematically utilize these data to inform its overall enforcement activities in this area. Information on incoming complaints are entered into the Justice’s Correspondence Tracking System, and data on complaints that it pursues, also known as matters, are entered into its Interactive Case Management system. Justice officials told us that they do not systematically review information from these data systems given system limitations. For example, Justice is able to generate reports on complaints and matters associated with a specific statute (e.g., Title II or III of the ADA), but because no additional data on the type of complaint are entered into their systems it is not possible to generate a list of complaints and matters related to specific issues, such as testing accommodations. Additionally, because the two systems do not interface, Justice is unable to determine the disposition of all complaints. Of the five closed matters we reviewed, we were only able to track one back to the original complaint in the Correspondence Tracking System. In the absence of data that can be systematically analyzed, Justice relies on its institutional knowledge of complaints and matters to inform its enforcement efforts. For example, Justice officials told us they know which testing companies are more frequently cited in complaints. While institutional knowledge can be a useful tool to inform decisions, it may leave the agency at risk of losing critical knowledge. For example, with the recent retirement of two key officials from the Civil Rights Division’s Disability Rights Section, Justice has lost a major component of its institutional knowledge related to testing accommodations. We provided Justice with the names of testing companies included in our review to identify complaints and matters in their systems related to these companies. While Justice officials said they have conducted similar searches in reference to a specific complaint, they have not conducted systematic searches of their data systems to inform their overall enforcement efforts. In the absence of systematic reviews of information on complaints within their data systems, Justice may be missing out on opportunities to be strategic in identifying enforcement actions that would extend beyond one complaint or that would address widespread issues related to how testing accommodations decisions are made by testing companies. In addition to not making full use of its complaint data, Justice has not effectively coordinated with other agencies to inform its enforcement efforts. While Justice has broad responsibility for enforcing compliance with the ADA, Justice officials told us that they were not aware that Education and HHS were receiving and pursuing testing accommodations complaints for testing companies that were recipients of federal funding. Justice officials stated that they have not had regular meetings or exchanges related to testing accommodations with officials from Education or HHS. Officials from HHS also told us that relevant federal agencies provide expertise to one another when necessary, but that no formal or regular coordination meetings related to testing accommodations have been held with Justice or Education. By not coordinating with other federal agencies, Justice is limiting its ability to assess the full range of potential compliance issues related to testing accommodations. As part of its enforcement authority, the ADA authorizes Justice to conduct periodic compliance reviews. Justice reviews testing company compliance with the ADA in the course of investigating complaints, and officials said they could conduct a compliance review if they received a series of complaints against a particular company. However, Justice officials told us they have not initiated any compliance reviews that include a thorough examination of a testing company’s policies, practices, and records related to testing accommodations. Justice officials said it would be difficult to undertake a thorough compliance review because testing companies are not required to cooperate with such a review, and the agency lacks the authority to subpoena testing companies. However, in the absence of attempting to conduct such a compliance review, Justice is not in a position to fully assess whether this enforcement mechanism could prove beneficial to them. In its 2007-2012 Strategic Plan, Justice states that “outreach and technical assistance will continue to play a vital role to ensure compliance with the civil rights statutes.” However, Justice’s efforts to provide technical assistance related to testing accommodations have been limited. Justice officials told us they provide technical assistance by responding to calls that come into the ADA hotline or directly to the Disability Rights Section. For example, a disability advocate may reach out to an attorney to discuss a particular student’s situation. Justice officials told us they have discussed testing accommodations at meetings and conferences when invited to attend, although they have not made any presentations in recent years. Justice provides some guidance regarding testing accommodations in its ADA Title III Technical Assistance Guide. However, since the guide was last updated in 1993, it does not reflect recent ADA amendments, regulatory changes, or changes in accommodations available to test takers based on advances in technology. Justice officials also told us that they have not recently conducted outreach with testing companies. They reported that their resources have been focused on issuing regulations related to both testing accommodations and other topic areas. Testing company officials we interviewed reported that they had limited or no interaction with Justice, and one official said she would welcome more interaction with Justice to ensure the company was interpreting the laws correctly. An attorney who works with multiple testing companies included in our study told us that, because Justice only reviews complaints, which represent a small fraction of all testing accommodations requested, it may not have an accurate view of how often testing companies grant accommodations. Similarly, Justice has not leveraged its complaint and case data to target outreach and technical assistance based on the types of complaints most frequently filed. For example, Justice has not analyzed its complaint files to determine if multiple complaints filed had similar themes so that they could target their outreach to testing companies to clarify how to apply the regulations in these cases. Without targeted outreach, Justice misses opportunities to limit or prevent testing company noncompliance with the ADA. Given the critical role that standardized tests play in making decisions on higher education admissions, licensure, and job placement, federal laws require that individuals with disabilities are able to access these tests in a manner that allows them to accurately demonstrate their skill level. While testing companies reported providing thousands of test takers with accommodations in the most recent testing year, test takers and disability advocates continue to raise questions about whether testing companies are complying with the law in making their determinations. Justice, as the primary enforcement agency under the ADA, has taken steps to clarify how testing companies should make their determinations, but its enforcement lacks the strategic and coordinated approach necessary to ensure compliance. Without a systematic approach to reviewing complaints that it receives, Justice cannot assure that all complaints are consistently considered and that it is effectively targeting its limited resources to the highest priority enforcement activities. Continuing to target enforcement on a case-by-case basis does not allow Justice to consider what enforcement activities could extend beyond one case. Additionally, in the absence of coordination with other federal agencies, Justice is missing opportunities to strengthen enforcement by assessing the full range of potential compliance issues related to testing accommodations. Justice’s largely reactive approach to enforcement in this area may also limit its ability to address problems before trends of noncompliance are well established. After revising its testing accommodations regulations, Justice did not conduct outreach to testing companies or update its technical assistance materials to ensure the requirements were being applied consistently. Since we found testing companies believe their practices are already in compliance with the new regulatory requirements, it is unclear whether these changes will better protect the rights of students with disabilities. In order to ensure individuals with disabilities have equal opportunity to pursue their education and career goals, it is imperative for Justice to establish a credible enforcement presence to detect, correct, and prevent violations. We recommend to the Attorney General that Justice take steps to develop a strategic approach to target its enforcement efforts related to testing accommodations. For example, the strategic approach could include (1) analyzing its complaint and case data to prioritize enforcement and technical assistance, (2) working with the Secretaries of Education and HHS to develop a formal coordination strategy, and (3) updating technical assistance materials to reflect current requirements. We provided a draft of this report to Justice, Education, and HHS for review and comment. In written comments, Justice agreed with our recommendation, stating that its efforts to ensure the rights of individuals with disabilities are best served through a strategic use of its authority to enforce the ADA’s testing provisions. Justice highlighted some actions the agency will pursue to enhance enforcement in this area. With regard to analyzing its data, Justice stated that it utilizes complaint and case data through all stages of its work and makes decisions about which complaints to pursue based on ongoing and prior work. Also, Justice stated that it is looking for ways to improve its recordkeeping with respect to completed investigations and cases. While improving its recordkeeping is a positive action, we believe it is important for Justice to systematically review its data to strategically enforce the law. As we stated in our report, Justice has not utilized its data to develop a systematic approach to enforcement that would extend beyond one case, nor has it given sufficient consideration to whether its enforcement activities, when taken in the aggregate, make the most strategic use of its limited resources. Justice agreed to pursue discussions with both Education and HHS on the investigation and resolution of complaints about testing accommodations, and agreed to develop additional technical assistance materials on testing accommodations in the near future. Justice’s written comments appear in appendix II. In written comments, Education committed to working with Justice to coordinate efforts to ensure equity in testing for all students, including students with disabilities, consistent with the laws they enforce. Education’s written comments appear in appendix III. Justice and Education also provided technical comments, which were incorporated into the report as appropriate. HHS had no comments on the draft report. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to relevant congressional committees, the Attorney General, the Secretary of Education, the Secretary of Health and Human Services, and other interested parties. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. The objectives of this report were to determine (1) what types of accommodations individuals with disabilities apply for and receive, and how schools assist them; (2) what factors testing companies consider when making decisions about requests for testing accommodations; (3) what challenges students and testing companies experience in receiving and granting testing accommodations; and (4) how federal agencies enforce compliance with relevant federal disability laws and regulations. For our study, we focused our review on a nongeneralizeable sample of 11 tests administered by 10 testing companies. We chose tests that are commonly used to gain admission into undergraduate, graduate, and professional programs and to obtain professional certification or licensure. We included the SAT and ACT in our study as these are the 2 most commonly used standardized tests for admission into undergraduate programs. To determine which graduate level and certification or licensure tests to include in our study, we reviewed data from the Integrated Postsecondary Education Data System (IPEDS) to establish the fields of study with the largest populations of students graduating with a masters or first professional degree. We also reviewed IPEDS data to determine the top three fields of study in which students with disabilities are enrolled. Based on these data, we identified 5 graduate and professional admissions tests, and 4 corresponding professional certification tests that could be required of students graduating with degrees in these fields. The fields of study included business, education, law, medicine, and pharmacy. To inform our findings, we interviewed officials from seven of the testing companies included in our study, and two companies submitted written responses to questions we provided. One testing company declined to participate in our study. (See table 1 for a list of the testing companies and tests included in our study.) The views of the testing company officials we spoke with or received responses from cannot be generalized to all testing companies that provide accommodations to applicants with disabilities. To determine the types of accommodations requested by individuals with disabilities and granted by testing companies, we reviewed data provided by testing companies on accommodations requested and granted, interviewed testing company officials, interviewed disability experts, and reviewed literature to understand the types of accommodations applicants with disabilities might require. GAO provided testing companies with a standardized data collection instrument that covered a range of topics including the types of disabilities students have and the types of accommodations they requested and were granted in the most recent testing year. We asked for data on the number of accommodations requested and granted by type of accommodation and type of disability. In some cases, testing companies did not collect data in the manner requested by GAO and instead provided alternate data to help inform our study. Because of the variance in how testing companies collect data on disability type, we aggregated data into broad disability categories. We identified the following limitations with data provided by the testing companies, in addition to those noted throughout the report. We excluded data testing companies provided on applicants with multiple disabilities because these data were reported differently across testing companies. For example, one testing company provided a disability category called multiple disabilities while another told us that, in cases where an applicant has more than one disability, they capture in their data the disability most relevant to the accommodation. In general, testing companies’ data reflect those requests that were complete, not those for which a decision was pending in the testing year for which data were provided. In our data request, we asked questions about the reliability of the data, such as whether there are audits of the data or routine quality control procedures in place. Based on their responses to these questions, we believe the data provided by the testing companies were sufficiently reliable for the purposes of this report. To understand how schools assist individuals in applying for accommodations, we interviewed officials from a nongeneralizable sample of 8 high schools and 13 postsecondary schools and eight individuals with disabilities who had applied for testing accommodations. (See table 2 for a complete list of schools.) To select schools, we reviewed data from Education’s Common Core of Data and IPEDS databases and chose a nongeneralizable sample based on characteristics such as sector (public and private, including nonprofit and for-profit postsecondary), geographic diversity (including urban, suburban, and rural settings for high schools), total enrollment, and size of population of students with disabilities. We also reviewed publicly available lists of colleges and universities to identify postsecondary schools that offered academic programs in the fields corresponding to the tests we chose. We identified individuals with disabilities to interview based on referrals from experts and school officials and selected them based on their representation of a range of disabilities and tests for which they sought accommodations. To determine the factors testing companies consider when making their decisions, we reviewed policies and procedures for requesting accommodations found on testing companies’ Web sites and reviewed relevant federal laws and regulations pertaining to testing companies. However, we did not evaluate whether these policies and procedures as written or described to us in interviews—either on their face or as applied in the context of responding to individual requests for accommodations— were in compliance with relevant laws or regulations. Accordingly, statements in this report that describe the policies and procedures used by testing companies to review and respond to requests for accommodations, should not be read as indicating that testing companies are either in or out of compliance with applicable federal laws. We also conducted interviews with seven testing companies and reviewed written responses to our questions from two companies that declined our request for an interview. One company declined to participate in our study. To identify the challenges that applicants and testing companies may experience in receiving and granting accommodations, we interviewed eight individuals with disabilities to learn about their experiences in obtaining accommodations, interviewed testing company officials and reviewed written responses from testing companies about the challenges they face in granting accommodations, interviewed disability advocacy groups and researchers with expertise in various types of disabilities, and reviewed literature. The testing companies that participated in our study reviewed draft statements in this report, and their comments were incorporated as appropriate. To determine how federal agencies enforce compliance with relevant federal laws and regulations, we reviewed pertinent laws and regulations to identify the responsibilities of federal agencies and interviewed officials from Justice, Education, and HHS to learn about the actions these agencies take to enforce compliance. In addition, we obtained data from Justice, Education, and HHS on the number of closed complaints they received between fiscal years 2007 and 2010 related to testing accommodations for the 10 testing companies included in our study. We also reviewed selected court cases regarding testing accommodations. Since Justice receives the majority of complaints, we reviewed all of Justice’s available paper files associated with complaints and matters pertaining to the testing companies in our study. We reviewed the paper files to better understand what action Justice takes in responding to complaints and enforcing testing company compliance. We also reviewed all of Education’s closure letters and HHS’ complaint and closure letters, pertaining to testing companies in our study from fiscal years 2007 to 2010, to better understand what action these agencies take. We reviewed existing information about the data and interviewed agency officials knowledgeable at Justice, Education, and HHS. We identified some limitations with the data as we described in our report. Justice reported receiving 13,140 ADA-related complaints between fiscal years 2007 and 2010. Justice used key word searches of the data to identify 59 closed complaints related to testing accommodations involving 8 of the 10 testing companies included in our study. Justice also identified five closed matters. We were unable to determine the final disposition of 27 complaints due to gaps in Justice’s data systems and paper files. By comparing our list of testing companies against their complaints, Education was able to identify 41 complaints. HHS was able to identify only 1 complaint that was later withdrawn. Due to limitations with the data, we cannot generalize the results of our file review. We conducted this performance audit from October 2010 to November 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 above, Debra Prescott (Assistant Director), Anjali Tekchandani (Analyst-in-Charge), Jennifer Cook, Nisha Hazra, and Justine Lazaro made significant contributions to this report. Jean McSween provided methodological support; Jessica Botsford provided legal support; Susan Bernstein assisted in report development; and Mimi Nguyen assisted with graphics. | Standardized tests are often required to gain admission into postsecondary schools or to obtain professional certifications. Federal disability laws, such as the Americans with Disabilities Act (ADA) require entities that administer these tests to provide accommodations, such as extended time or changes in test format, to students with disabilities. GAO examined (1) the types of accommodations individuals apply for and receive and how schools assist them, (2) factors testing companies consider when making decisions about requests for accommodations, (3) challenges individuals and testing companies experience in receiving and granting accommodations, and (4) how federal agencies enforce compliance with relevant disability laws and regulations. To conduct this work, GAO interviewed disability experts; individuals with disabilities; officials from high schools, postsecondary schools, testing companies; and officials from the Departments of Justice (Justice), Education, and Health and Human Services (HHS). GAO also reviewed testing company policies and data, federal complaint and case data for selected testing companies, and relevant laws and regulations. Among accommodations requested and granted in the most recent testing year, approximately three-quarters were for extra time, and about half were for applicants with learning disabilities. High school and postsecondary school officials GAO interviewed reported advising students about which accommodations to request and providing documentation to testing companies, such as a student's accommodations history. Testing companies included in GAO's study reported that they grant accommodations based on their assessment of an applicant's eligibility under the ADA and whether accommodation requests are appropriate for their tests. Testing companies look for evidence of the functional limitations that prevent the applicant from taking the exam under standard conditions. They also consider what accommodations are appropriate for their tests and may grant accommodations that were different than those requested. For example, one testing company official told GAO that applicants with attention deficit/hyperactivity disorder all might request extra time, but may be granted different accommodations given their limitations--extra time for an applicant unable to maintain focus; extra breaks for an applicant unable to sit still for an extended time period; a separate room for an easily distracted applicant. Documenting need and determining appropriate accommodations can present challenges to students and testing companies. Some applicants GAO interviewed found testing companies' documentation requirements difficult to understand and unreasonable. Most applicants GAO spoke with said they sought accommodations that they were accustomed to using, and some found it frustrating that the testing company would not provide the same accommodations for the test. Testing companies reported challenges with ensuring fairness to all test takers and maintaining the reliability of their tests when making accommodations decisions. Testing company officials said that reviewing requests that contain limited information can make it difficult to make an informed decision. Some testing company officials also expressed concern with being required to provide accommodations that best ensure an applicant's test results reflect the applicant's aptitude rather than providing what they consider to be reasonable accommodations. Federal enforcement of laws and regulations governing testing accommodations is largely complaint-driven and involves multiple agencies. While Justice has overall responsibility for enforcing compliance under the ADA, Education and HHS have enforcement responsibilities under the Rehabilitation Act for testing companies that receive federal financial assistance from them. Education and HHS officials said that they investigate each eligible complaint. Justice officials said they review each complaint at in-take, but they do not make a determination on every complaint because of the large volume of complaints it receives. Justice has clarified ADA requirements for testing accommodations primarily by revising its regulations, but it lacks a strategic approach to targeting enforcement. Specifically, Justice has not fully utilized complaint data--either its own or that of other agencies--to inform its efforts. Justice officials said that they reviewed complaints on a case-by-case basis but did not conduct systematic searches of their data to inform their overall approach to enforcement. Additionally, Justice has not initiated compliance reviews of testing companies, and its technical assistance on this subject has been limited. GAO recommends that the Department of Justice take steps to develop a strategic approach to enforcement such as by analyzing its data and updating its technical assistance manual. Justice agreed with GAO's recommendation. GAO recommends that the Department of Justice take steps to develop a strategic approach to enforcement such as by analyzing its data and updating its technical assistance manual. Justice agreed with GAOs recommendation. |
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Air cargo ranges in size from 1 pound to several tons, and in type from perishables to machinery, and can include items such as electronic equipment, automobile parts, clothing, medical supplies, fresh produce, and human remains. Cargo can be shipped in various forms, including large containers known as unit loading devices (ULD) that allow many packages to be consolidated into one container that can be loaded onto an aircraft, wooden crates, consolidated pallets, or individually wrapped/boxed pieces, known as loose or bulk cargo. Participants in the air cargo shipping process include shippers, such as individuals and manufacturers; freight forwarders; air cargo handling agents, who process and load cargo onto aircraft on behalf of air carriers; and air carriers that load and transport cargo. A shipper may take or send its packages to a freight forwarder who in turn consolidates cargo from many shippers onto a master air waybill—a manifest of the consolidated shipment—and delivers it to air carriers for transport. A shipper may also send freight by directly packaging and delivering it to an air carrier’s ticket counter or sorting center, where the air carrier or a cargo handling agent will sort and load cargo onto the aircraft. According to TSA, the mission of its air cargo security program is to secure the air cargo transportation system while not unduly impeding the flow of commerce. TSA’s responsibilities for securing air cargo include, among other things, establishing security requirements governing domestic and foreign passenger air carriers that transport cargo and domestic freight forwarders. TSA is also responsible for overseeing the implementation of air cargo security requirements by air carriers and freight forwarders through compliance inspections, and, in coordination with DHS’s Directorate for Science and Technology (S&T Directorate), for conducting research and development of air cargo security technologies. Of the nearly $4.8 billion appropriated to TSA for aviation security in fiscal year 2009, approximately $123 million is directed for air cargo security activities. TSA was further directed to use $18 million of this amount to expand technology pilots and for auditing participants in the CCSP. Air carriers and freight forwarders are responsible for implementing TSA security requirements. To do this, they utilize TSA-approved security programs that describe the security policies, procedures, and systems they will implement and maintain to comply with TSA security requirements. These requirements include measures related to the acceptance, handling, and screening of cargo; training of employees in security and cargo screening procedures; testing for employee proficiency in cargo screening; and access to cargo areas and aircraft. Air carriers and freight forwarders must also abide by security requirements imposed by TSA through security directives and amendments to security programs. The 9/11 Commission Act defines screening for purposes of the air cargo screening mandate as a physical examination or nonintrusive methods of assessing whether cargo poses a threat to transportation security. The act specifies that screening methods include X-ray systems, explosives detection systems (EDS), explosives trace detection (ETD), explosives detection canine teams certified by TSA, physical search together with manifest verification, and any additional methods approved by the TSA Administrator. For example, TSA also recognizes the use of decompression chambers as an approved screening method. However, solely performing a review of information about the contents of cargo or verifying the identity of the cargo’s shipper does not constitute screening for purposes of satisfying the mandate. TSA has taken several key steps to meet the 9/11 Commission Act air cargo screening mandate as it applies to domestic cargo. TSA’s approach involves multiple air cargo industry stakeholders sharing screening responsibilities across the air cargo supply chain. TSA, air carriers, freight forwarders, shippers, and other entities each play an important role in the screening of cargo, although TSA has determined that the ultimate responsibility for ensuring that screening takes place at mandated levels lies with the air carriers. According to TSA officials, this decentralized approach is expected to minimize carrier delays, cargo backlogs, and potential increases in cargo transit time, which would likely result if screening were conducted primarily by air carriers at the airport. Moreover, because much cargo is currently delivered to air carriers in a consolidated form, the requirement to screen individual pieces of cargo will necessitate screening earlier in the air cargo supply chain—before cargo is consolidated. The specific steps that TSA has taken to address the air cargo screening mandate are discussed below. TSA revised air carrier security programs. Effective October 1, 2008, several months prior to the first mandated deadline, TSA established a new requirement for 100 percent screening of nonexempt cargo transported on narrow-body passenger aircraft. Narrow-body flights transport about 26 percent of all cargo on domestic passenger flights. According to TSA officials, air carriers reported that they are currently meeting this requirement. Effective February 1, 2009, TSA also required air carriers to ensure the screening of 50 percent of all nonexempt air cargo transported on all passenger aircraft. Although screening may be conducted by various entities, each air carrier must ensure that the screening requirements are fulfilled. Furthermore, effective February 2009, TSA revised or eliminated most of its screening exemptions for domestic cargo. As a result, most domestic cargo is now subject to TSA screening requirements. TSA created the Certified Cargo Screening Program (CCSP). TSA also created a program, known as the CCSP, to allow screening to take place earlier in the shipping process and at various points in the air cargo supply chain. In this program, air cargo industry stakeholders—such as freight forwarders and shippers—voluntarily apply to become Certified Cargo Screening Facilities (CCSF). This program allows cargo to be screened before it is consolidated and transported to the airport, which helps address concerns about the time-intensive process of breaking down consolidated cargo at airports for screening purposes. TSA plans to inspect the CCSFs in order to ensure they are screening cargo as required. TSA initiated the CCSP at 18 major airports that, according to TSA officials, account for 65 percent of domestic cargo on passenger aircraft. TSA expects to expand the CCSP nationwide at a date yet to be determined. CCSFs in the program were required to begin screening cargo as of February 1, 2009. While participation in the CCSP is voluntary, once an entity is certified by TSA to participate it must adhere to TSA screening and security requirements and be subject to annual inspections by TSIs. To become certified and to maintain certification, TSA requires each CCSF to demonstrate compliance with increased security standards to include facility, personnel, procedural, perimeter, and information technology security. As part of the program, and using TSA-approved screening methods, freight forwarders must screen 50 percent of cargo being delivered to wide-body passenger aircraft and 100 percent of cargo being delivered to narrow-body passenger aircraft, while shippers must screen 100 percent of all cargo being delivered to any passenger aircraft. Each CCSF must deliver the screened cargo to air carriers while maintaining a secure chain of custody to prevent tampering with the cargo after it is screened. TSA conducted outreach efforts to air cargo industry stakeholders. In January 2008, TSA initiated its outreach phase of the CCSP in three cities and subsequently expanded its outreach to freight forwarders and other air cargo industry stakeholders in the 18 major airports. TSA established a team of nine TSA field staff to conduct outreach, educate potential CCSP applicants on the program requirements, and validate CCSFs. According to TSA officials, in February 2009, the agency also began using its cargo TSIs in the field to conduct outreach. In our preliminary discussions with several freight forwarders and shippers, industry stakeholders reported that TSA staff have been responsive and helpful in answering questions about the program and providing information on CCSP requirements. TSA established the Air Cargo Screening Technology Pilot and is conducting additional technology pilots. To operationally test ETD and X-ray technology among CCSFs, TSA created the Air Cargo Screening Technology Pilot in January 2008, and selected some of the largest freight forwarders to use the technologies and report on their experiences. TSA’s objectives for the pilot are to determine CCSFs’ ability to screen high volumes of cargo, test chain of custody procedures, and measure the effectiveness of screening technology on various commodity classes. TSA will provide each CCSF participating in the pilot with up to $375,000 for purchasing technology. As of February 26, 2009, 12 freight forwarders in 48 locations are participating in the pilot. The screening they perform as part of the operational testing also counts toward meeting the air cargo screening mandate. TSA expanded its explosives detection canine program. To assist air carriers in screening consolidated pallets and unit loading devices, TSA is taking steps to expand the use of TSA-certified explosives detection canine teams. TSA has 37 canine teams dedicated to air cargo screening— operating in 20 major airports—and is in the process of adding 48 additional dedicated canine teams. TSA is working with the air carriers to identify their peak cargo delivery times, during which canines would be most helpful for screening. In addition, we reported in October 2005 and April 2007 that TSA, working with DHS’s S&T Directorate, was developing and pilot testing a number of technologies to screen and secure air cargo with minimal effect on the flow of commerce. These pilot programs seek to enhance the security of cargo by improving the effectiveness of screening for explosives through increased detection rates and reduced false alarm rates. A description of several of these pilot programs and their status is included in table 1. TSA estimates that it achieved the mandate for screening 50 percent of domestic cargo transported on passenger aircraft by February 2009, based on feedback from air cargo industry stakeholders responsible for conducting screening. However, TSA cannot yet verify that screening is being conducted at the mandated level. The agency is working to establish a system to collect data from screening entities to verify that requisite screening levels for domestic cargo are being met. Effective February 2009, TSA adjusted air carrier reporting requirements and added CCSF reporting requirements to include monthly screening reports on the number of shipments screened at 50 and 100 percent. According to TSA officials, air carriers will provide to TSA the first set of screening data by mid-March 2009. By April 2009, TSA officials expect to have processed and analyzed available screening data, which would allow the agency to determine whether the screening mandate has been met. Thus, while TSA asserts that it has met the mandated February 2009, 50 percent screening deadline, until the agency analyzes required screening data, TSA cannot verify that the mandated screening levels are being achieved. In addition, although TSA believes its current screening approach enables it to meet the statutory screening mandate as it applies to domestic cargo, this approach could result in variable percentages of screened cargo on passenger flights. This variability is most likely for domestic air carriers that have a mixed-size fleet of aircraft because a portion of their 50 percent screening requirement may be accomplished through the more stringent screening requirements for narrow-body aircraft, thus allowing them more flexibility in the amount of cargo to screen on wide-body aircraft. According to TSA, although this variability is possible, it is not a significant concern because of the small amount of cargo transported on narrow-body flights by air carriers with mixed-size fleets. However, the approach could result in variable percentages of screened cargo on passenger flights regardless of the composition of the fleet. As explained earlier, TSA is in the process of developing a data reporting system that may help to assess whether some passenger flights are transporting variable percentages of screened cargo. This issue regarding TSA’s current air cargo security approach will be further explored during our ongoing review. Lastly, TSA officials reported that cargo that has already been transported on one passenger flight may be subsequently transferred to another passenger flight without undergoing additional screening. According to TSA officials, the agency has determined that this is an approved screening method because an actual flight mimics one of TSA’s approved screening methods. For example, cargo exempt from TSA screening requirements that is transported on an inbound flight can be transferred to a domestic aircraft without additional screening, because it is considered to have been screened in accordance with TSA screening requirements. According to TSA, this scenario occurs infrequently, but the agency has not been able to provide us with data that allows us to assess how frequently this occurs. TSA reported that it is exploring ways to enhance the security of cargo transferred to another flight, including using canine teams to screen such cargo. This issue regarding TSA’s current air cargo security approach will be further explored during our ongoing review. Although industry participation in the CCSP is vital to TSA’s approach to spread screening responsibilities across the supply chain, it is unclear whether the number and types of facilities needed to meet TSA’s screening estimates will join the CCSP. Although TSA is relying on the voluntary participation of freight forwarders and shippers to meet the screening goals of the CCSP, officials did not have precise estimates of the number of participants that would be required to join the program to achieve 100 percent screening by August 2010. As of February 26, 2009, TSA had certified 172 freight forwarder CCSFs, 14 shipper CCSFs, and 17 independent cargo screening facilities (ICSF). TSA estimates that freight forwarders and shippers will complete the majority of air cargo screening at the August 2010 deadline, with shippers experiencing the largest anticipated increase when this mandate goes into effect. According to estimates reported by TSA in November 2008, as shown in figure 1, the screening conducted by freight forwarders was expected to increase from 14 percent to 25 percent of air cargo transported on passenger aircraft from February 2009 to August 2010, while the screening conducted by shippers was expected to increase from 2 percent to 35 percent. For this reason, increasing shipper participation in the CCSP is necessary to meet the 100 percent screening mandate. As highlighted in figure 1, TSA estimated that, as of February 2009, screening of cargo delivered for transport on narrow-body aircraft would account for half of the mandated 50 percent screening level and 25 percent of all cargo transported on passenger aircraft. TSA expected screening conducted on cargo delivered for transport on narrow-body passenger aircraft to remain stable at 25 percent when the mandate to screen 100 percent of cargo transported on passenger aircraft goes into effect. TSA anticipated that its own screening responsibilities would grow by the time the 100 percent mandate goes into effect. Specifically, TSA anticipated that its canine teams and transportation security officers would screen 6 percent of cargo in August 2010, up from 4 percent in February 2009. It is important to note that these estimates—which TSA officials said are subject to change—are dependent on the voluntary participation of freight forwarders, shippers, and other screening entities in the CCSP. If these entities do not volunteer to participate in the CCSP at the levels TSA anticipates, air carriers or TSA may be required to screen more cargo than was projected. Participation in the CCSP may appeal to a number of freight forwarders and shippers, but industry participants we interviewed expressed concern about potential program costs. In preliminary discussions with freight forwarders, shippers, and industry associations, stakeholders told us that they would prefer to join the CCSP and screen their own cargo in order to limit the number of entities that handle and open their cargo. This is particularly true for certain types of delicate cargo, including fresh produce. Screening cargo in the CCSP also allows freight forwarders and shippers to continue to consolidate their shipments before delivering them to air carriers, which results in reduced shipping rates and less potential loss and damage. However, TSA and industry officials with whom we spoke agreed that the majority of small freight forwarders—which make up approximately 80 percent of the freight forwarder industry—would likely find prohibitive the costs of joining the CCSP, including acquiring expensive technology, hiring additional personnel, conducting additional training, and making facility improvements. TSA has not yet finalized cost estimates for industry participation in air cargo screening, but is in the process of developing these estimates and is planning to report them later this year. As of February 26, 2009, 12 freight forwarders in 48 locations have joined TSA’s Air Cargo Screening Technology pilot and are thus eligible to receive reimbursement for the technology they have purchased. However pilot participants, to date, have been limited primarily to large freight forwarders. TSA indicated that it targeted high-volume facilities for the pilot in order to have the greatest effect in helping industry achieve screening requirements. In response to stakeholder concerns about potential program costs, TSA is allowing independent cargo screening facilities to join the CCSP and screen cargo on behalf of freight forwarders or shippers. However, it is unclear how many of these facilities will join. Moreover, according to industry stakeholders, this arrangement could result in freight forwarders being required to deliver loose freight to screening facilities for screening. This could reduce the benefit to freight forwarders of consolidating freight before delivering it to air carriers, a central part of the freight forwarder business model. TSA has taken some steps to develop and test technologies for screening and securing air cargo, but has not yet completed assessments of the technologies it plans to allow air carriers and program participants to use in meeting the August 2010 screening mandate. To date, TSA has approved specific models of three screening technologies for use by air carriers and CCSFs until August 3, 2010—ETD, EDS, and X-ray. TSA chose these technologies based on its subject matter expertise and the performance of these technologies in the checkpoint and checked baggage environments. According to TSA officials, the agency has conducted preliminary assessments, but has not completed laboratory or operational testing of these technologies in the air cargo environment. After the technology pilot programs and other testing are complete, TSA will determine which technologies will be qualified for screening cargo and whether these technologies will be approved for use after August 3, 2010. However, TSA is proceeding with operational testing and evaluations to determine which of these technologies is effective at the same time that screening entities are using these technologies to meet air cargo screening requirements. For example, according to TSA, ETD technology, which most air carriers and CCSFs plan to use, has not yet begun the qualification process. However, it is currently being used to screen air cargo as part of the Air Cargo Screening Technology Pilot and by air carriers and other CCSFs. Although TSA’s acquisition guidance recommends testing the operational effectiveness and suitability of technologies prior to deploying them, and TSA agrees that simultaneous testing and deployment of technology is not ideal, TSA officials reported that this was necessary to meet the screening deadlines mandated by the 9/11 Commission Act. While we recognize TSA’s time constraints, the agency cannot be assured that the technologies it is currently using to screen cargo are effective in the cargo environment, because they are still being tested and evaluated. We will continue to assess TSA’s technology issues as part of our ongoing review of TSA’s efforts to meet the mandate to screen 100 percent of cargo transported on passenger aircraft. Although TSA is in the process of assessing screening technologies, according to TSA officials, there is no single technology capable of efficiently and effectively screening all types of air cargo for the full range of potential terrorist threats. Moreover, according to industry stakeholders, technology to screen cargo that has already been consolidated and loaded onto a pallet or ULD may be critical to meet the 100 percent screening mandate. Although TSA has not approved any technologies that are capable of screening consolidated pallets or ULDs containing various commodities, according to TSA, it is currently beginning to assess such technology. TSA officials reported that they do not expect to qualify such technology prior to the August 2010 deadline. Air cargo industry stakeholders we interviewed also expressed some concerns regarding the cost of purchasing and maintaining screening equipment for CCSP participants. Cost is a particular concern for the CCSP participants that do not participate in the Air Cargo Screening Technology Pilot and will receive no funding for technology or other related costs; this includes the majority of CCSFs. Because the technology qualification process could result in modifications to TSA’s approved technologies, industry stakeholders expressed concerns about purchasing technology that is not guaranteed to be acceptable for use after August 3, 2010. We will continue to assess this issue as part of our ongoing review of TSA’s efforts to meet the mandate to screen 100 percent of cargo transported on passenger aircraft. In addition to the importance of screening technology, TSA officials noted that an area of concern in the transportation of air cargo is the chain of custody between the various entities that handle and screen cargo shipments prior to its loading onto an aircraft. Officials stated that the agency has taken steps to analyze the chain of custody under the CCSP, and has issued cargo procedures to all entities involved in the CCSP to ensure that the chain of custody of the cargo is secure. This includes guidance on when and how to secure cargo with tamper-evident technology. TSA officials noted that they plan to test and evaluate such technology and issue recommendations to the industry, but have not set any time frames for doing so. Until TSA completes this testing, however, the agency lacks assurances that existing tamper-evident technology is of sufficient quality to deter tampering and that the air cargo supply chain is effectively secured. We will continue to assess this issue as part of our ongoing review of TSA’s efforts to meet the mandate to screen 100 percent of cargo transported on passenger aircraft. Although the actual number of cargo TSIs increased each fiscal year from 2005 to 2009, TSA still faces challenges overseeing compliance with the CCSP due to the size of its current TSI workforce. To ensure that existing air cargo security requirements are being implemented as required, TSIs perform compliance inspections of regulated entities, such as air carriers and freight forwarders. Under the CCSP, TSIs will also perform compliance inspections of new regulated entities, such as shippers and manufacturers, who voluntarily become CCSFs. These compliance inspections range from an annual review of the implementation of all air cargo security requirements to a more frequent review of at least one security requirement. According to TSA, the number of cargo TSIs grew from 160 in fiscal year 2005 to about 500 in fiscal year 2009. However, cargo TSI numbers remained below levels authorized by TSA in each fiscal year from 2005 through 2009, which, in part, led to the agency not meeting cargo inspection goals in fiscal year 2007. As highlighted in our February 2009 report, TSA officials stated that the agency is still actively recruiting to fill vacant positions but could not provide documentation explaining why vacant positions remained unfilled. Additionally, TSA officials have stated that there may not be enough TSIs to conduct compliance inspections of all the potential entities under the CCSP, which TSA officials told us could number in the thousands, once the program is fully implemented by August 2010. TSA officials also indicated plans to request additional cargo TSIs in the future, although the exact number has yet to be formulated. According to TSA officials, TSA does not have a human capital or other workforce plan for the TSI program, but the agency has plans to conduct a staffing study in fiscal year 2009 to identify the optimal workforce size to address its current and future program needs. Until TSA completes its staffing study, TSA may not be able to determine whether it has the necessary staffing resources to ensure that entities involved in the CCSP are meeting TSA requirements to screen and secure air cargo. We will continue to assess this issue as part of our ongoing review of TSA’s efforts to meet the mandate to screen 100 percent of cargo transported on passenger aircraft. To meet the 9/11 Commission Act screening mandate as it applies to inbound cargo, TSA revised its requirements for foreign and U.S.-based air carrier security programs and began harmonization of security standards with other nations. The security program revisions generally require carriers to screen 50 percent of nonexempt inbound cargo. TSA officials estimate that this requirement has been met, though the agency is not collecting screening data from air carriers to verify that the mandated screening levels are being achieved. TSA has taken several steps toward harmonization with other nations. For example, TSA is working with foreign governments to improve the level of screening of air cargo, including working bilaterally with the European Commission (EC) and Canada, and quadrilaterally with the EC, Canada, and Australia. As part of these efforts, TSA plans to recommend to the United Nations’ International Civil Aviation Organization (ICAO) that the next revision of Annex 17 to the Convention of International Civil Aviation (due for release in 2009) include an approach that would allow screening to take place at various points in the air cargo supply chain. TSA also plans to work with the International Air Transport Association (IATA), which is promoting an approach to screening cargo to its member airlines. Finally, TSA continues to work with U.S. Customs and Border Protection (CBP) to leverage an existing CBP system to identify and target high-risk air cargo. However, TSA does not expect to achieve 100 percent screening of inbound air cargo by the August 2010 screening deadline. This is due, in part, to TSA’s inbound screening exemptions, and to challenges TSA faces in harmonizing its air cargo security standards with those of other nations. TSA requirements continue to allow screening exemptions for certain types of inbound air cargo transported on passenger aircraft. TSA could not provide an estimate of what percentage of inbound cargo is exempt from screening. In April 2007, we reported that TSA’s screening exemptions on inbound cargo could pose a risk to the air cargo supply chain and recommended that TSA assess whether these exemptions pose an unacceptable vulnerability and, if necessary, address these vulnerabilities. TSA agreed with our recommendation, but has not yet reviewed, revised, or eliminated any screening exemptions for cargo transported on inbound passenger flights, and could not provide a time frame for doing so. Furthermore, similar to changes for domestic cargo requirements discussed earlier, TSA’s revisions to inbound requirements could result in variable percentages of screened cargo on passenger flights to the United States. We will continue to assess this issue as part of our ongoing review of TSA’s efforts to meet the mandate to screen 100 percent of cargo transported on passenger aircraft. Achieving harmonization with foreign governments may be challenging, because these efforts are voluntary and some foreign countries do not share the United States’ view regarding air cargo security threats and risks. Although TSA acknowledges it has broad authority to set standards for aviation security, including the authority to require that a given percentage of inbound cargo be screened before it departs for the United States, TSA officials caution that if TSA were to impose a strict cargo screening standard on all inbound cargo, many nations likely would be unable to meet such standards in the near term. This raises the prospect of substantially reducing the flow of cargo on passenger aircraft or possibly eliminating it altogether. According to TSA, the effect of imposing such screening standards in the near future would be, at minimum, increased costs for international passenger travel and for imported goods, and possible reduction in passenger traffic and foreign imports. According to TSA officials, this could also undermine TSA’s ongoing cooperative efforts to develop commensurate security systems with international partners. TSA agreed that assessing the risk associated with the inbound air cargo transportation system will facilitate its efforts to harmonize security standards with other nations. Accordingly, TSA has identified the primary threats associated with inbound air cargo, but has not yet assessed which areas of inbound air cargo are most vulnerable to attack and which inbound air cargo assets are deemed most critical to protect. Although TSA agreed with our previous recommendation to assess inbound air cargo vulnerabilities and critical assets, it has not yet established a methodology or time frame for how and when these assessments will be completed. We continue to believe that the completion of these assessments is important to the security of inbound air cargo. Finally, the amount of resources TSA devotes to inbound compliance is disproportionate to the resources for domestic compliance. In April 2007, we reported that TSA inspects air carriers at foreign airports to assess whether they are complying with air cargo security requirements, but does not inspect all air carriers transporting cargo into the United States. Furthermore, in fiscal year 2008, inbound cargo inspections were performed by a cadre of 9 international TSIs with limited resources, compared to the 475 TSIs that performed domestic cargo inspections. By mid-fiscal year 2008, international compliance inspections accounted for a small percentage of all compliance inspections performed by TSA, although inbound cargo made up more than 40 percent of all cargo on passenger aircraft in 2007. Regarding inbound cargo, we reported in May 2008 that TSA lacks an inspection plan with performance goals and measures for its international inspection efforts, and recommended that TSA develop such a plan. TSA officials stated in February 2009 that they are in the process of completing a plan to provide guidance for inspectors conducting compliance inspections at foreign airports, and intend to implement the plan during fiscal year 2009. Finally TSA officials stated that the number of international TSIs needs to be increased. Madam Chairwoman, this concludes my statement. I look forward to answering any questions that you or other members of the subcommittee may have at this time. For questions about this statement, please contact Stephen M. Lord at (202) 512- 4379 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Steve D. Morris, Assistant Director; Scott M. Behen; Glenn G. Davis; Elke Kolodinski; Stanley J. Kostyla; Thomas Lombardi; Linda S. Miller; Yanina Golburt Samuels; Daren K. Sweeney; and Rebecca Kuhlmann Taylor. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Implementing Recommendations of the 9/11 Commission Act of 2007 mandates the Department of Homeland Security (DHS) to establish a system to physically screen 50 percent of cargo transported on passenger aircraft by February 2009 and 100 percent of such cargo by August 2010. This testimony provides preliminary observations on the Transportation Security Administration's (TSA) progress in meeting the mandate to screen cargo on passenger aircraft and the challenges TSA and industry stakeholders may face in screening such cargo. GAO's testimony is based on products issued from October 2005 through August 2008, and its ongoing review of air cargo security. GAO reviewed TSA's air cargo security programs, interviewed program officials and industry representatives, and visited two large U.S. airports. TSA has made progress in meeting the air cargo screening mandate as it applies to domestic cargo. TSA has taken steps that will allow screening responsibilities to be shared across the air cargo supply chain--including TSA, air carriers, freight forwarders (which consolidate cargo from shippers and take it to air carriers for transport), and shippers--although air carriers have the ultimate responsibility for ensuring that they transport cargo screened at the requisite levels. TSA has taken several key steps to meet the mandate, including establishing a new requirement for 100 percent screening of cargo transported on narrow-body aircraft; revising or eliminating most screening exemptions for domestic cargo; creating the Certified Cargo Screening Program (CCSP) to allow screening to take place at various points in the air cargo supply chain; and establishing a screening technology pilot. Although TSA estimates that it achieved the mandated 50 percent screening level by February 2009 as it applies to domestic cargo, the agency cannot yet verify that the requisite levels of cargo are being screened. It is working to establish a system to do so by April 2009. Also, TSA's screening approach could result in variable percentages of screened cargo on passenger flights. TSA and industry stakeholders may face a number of challenges in meeting the screening mandate, including attracting participants to the CCSP, and technology, oversight, and inbound cargo challenges. TSA's approach relies on the voluntary participation of shippers and freight forwarders, but it is unclear whether the facilities needed to meet TSA's screening estimates will join the CCSP. In addition, TSA has taken some steps to develop and test technologies for screening air cargo, but the agency has not yet completed assessments of these technologies and cannot be assured that they are effective in the cargo environment. TSA's limited inspection resources may also hamper its ability to oversee the thousands of additional entities that it expects to participate in the CCSP. Finally, TSA does not expect to meet the mandated 100 percent screening deadline as it applies to inbound air cargo, in part due to existing inbound screening exemptions and challenges it faces in harmonizing security standards with other nations. |
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EAGLE II is a strategic sourcing suite of contracts designed to fulfill the majority of DHS’s needs for information technology services. For example, EAGLE II is intended to provide computer-based information systems and other forms of information technology to produce, manipulate, store, communicate, and/or disseminate information and enhance mission-critical functions. As one of DHS’s strategic sourcing initiatives, EAGLE II is intended to increase the efficiency of the department’s acquisition and mission support capabilities, as well as improve fulfillment of socioeconomic contracting goals. To promote the use of EAGLE II, DHS’s strategic sourcing policy requires that its components use this contract vehicle when procuring information technology services. In fact, all DHS strategic sourcing contract vehicles, including EAGLE II, are mandatory for use unless the procurement meets a specific exception. DHS’s efforts are in response to OMB’s strategic sourcing memorandum that requires agencies to identify commodities that could be purchased through strategic sourcing, which helps optimize performance, minimize price, increase achievement of socioeconomic goals, and improve vendor access to business opportunities. EAGLE II is the successor to EAGLE, which DHS used to procure information technology services from 2006 through 2013. The period of performance for EAGLE II includes a 5-year base period, from 2013 through 2018, and one 2-year option period, from 2018 through 2020. EAGLE II contracts are structured as multiple-award Indefinite Delivery Indefinite Quantity (IDIQ) contracts.used when the government needs flexibility in the timing of orders within a specified period of time. Indefinite-quantity contracts provide for an indefinite quantity, within stated limits of supplies or services during a fixed period. Multiple-award refers to the fact that more than one prime contractor is awarded a contract. After award of a base IDIQ contract, products and services are procured through individual task orders during the contract period. DHS’s CPO was responsible for awarding the EAGLE II IDIQ contracts, while DHS components, such as the United States Coast Guard or Transportation Security Administration, can issue task orders based on their needs. Indefinite delivery contracts can be A broad range of DHS IT service requirements are covered through EAGLE II’s three lines of business, which DHS refers to as functional categories, such as software design, program support, and verification services. Within each line of business, DHS established at least two business tracks, or pathways that will distribute business opportunities, including tracks reserved for small businesses. These categories include small disadvantaged businesses such as those in the Small Business Administration’s (SBA) 8(a) Business Development Program, Service- Disabled Veteran-Owned Small Business (SDVOSB) program and in the Historically Underutilized Business Zone (HUBZone) program.also has tracks in which both large and small businesses can compete (unrestricted track). See table 1. Congress has set an annual government-wide goal of awarding not less than 23 percent of prime contract dollars to small disadvantaged businesses and SBA negotiates specific goals with each agency to help ensure that the federal government collectively meets this statutory goal, including those for various socioeconomic categories of small businesses. DHS’s small business goal for fiscal year 2015, as negotiated with SBA, is that 32 percent of its prime contract dollars will be awarded to small businesses department wide with no less than 5 percent to small disadvantaged businesses, including Section 8(a) small businesses; 5 percent to women-owned small businesses; 3 percent to SDVOSB small businesses; and three percent to small businesses in HUBZones. Within DHS, the Office of Small and Disadvantaged Business Utilization (OSDBU) assists with negotiating DHS’s small business goals with SBA, participates in small business outreach events and hosts vendor outreach sessions. In addition, the OSDBU director makes recommendations to contracting officers as to whether particular contract requirements should be set aside for small businesses. DHS has not set a specific goal for the percent of EAGLE II contracts that should be awarded to small businesses. As explained by DHS CPO officials, however, the value of EAGLE II task orders issued to small businesses contributes to DHS’s department wide small business goals. Federal regulations require agencies to perform acquisition planning activities, including market research, for all acquisitions to ensure that the government meets its needs in the most effective, economical, and timely manner possible. Development of the EAGLE II contract award was overseen by the DHS CPO. Within the DHS CPO, the Strategic Sourcing Program Office is responsible for the DHS Strategic Sourcing Program, including development and implementation of EAGLE II. In 2009, DHS CPO staff began acquisition planning for EAGLE II which included publishing a request for information from small businesses to gain insight into how best to structure EAGLE to provide opportunities for small business participation and publishing an additional request to gain similar perspectives from larger businesses. In addition, DHS’s CPO sponsored a lessons-learned assessment of EAGLE by obtaining feedback from DHS contracting staff and EAGLE contractors on a range of topics including the procurement process for task orders, small business participation, as well as communications between prospective contractors and DHS staff. DHS made its initial EAGLE II source selection decisions in 2012 and 2013, but its final round of source selections was not finalized until 2014 because of a series of bid protests filed by businesses, large and small, objecting to the selection decisions.award or proposed award of a contract for procurement of goods and services or a challenge to the terms of a solicitation for a contract. Contractors filed a total of 56 protests with GAO regarding the EAGLE II procurement, which were ultimately dismissed, withdrawn, or denied. GAO dismissed most of the protests because DHS took corrective action by reevaluating its source selection decisions for the affected business A bid protest is a challenge to the tracks. As a result, DHS’s final source selections were delayed. See figure 1 for EAGLE II’s acquisition timeline and see appendix II for more information on the bid protests. In our past work, we have assessed how strategic sourcing initiatives affect small businesses, including small disadvantaged businesses. In January 2014, we found that OMB, the General Services Administration (GSA), and selected agencies, including DHS, had taken steps to consider small businesses, including small disadvantaged businesses, in their strategic sourcing efforts. However, data and performance measures that would provide a more precise understanding of the level of inclusion were limited. We recommended the agencies, including DHS, collect baseline data and establish performance measures on the inclusion of small businesses in strategic sourcing initiatives. DHS concurred with the recommendation and has implemented it. According to DHS CPO and OSDBU officials, three key steps enhanced EAGLE II small business opportunities. Specifically, DHS established (1) specific competition tracks for small businesses, including those with specific socioeconomic characteristics, (2) mechanisms to maintain a steady pool of eligible small businesses, and (3) opportunities for small businesses to participate as core team members. As of March 31, 2015, DHS had issued almost all EAGLE II task orders to small businesses, but it is too soon to determine the full extent to which DHS’s key steps have enhanced small business participation as only about 3 percent of anticipated EAGLE II spending has occurred. A key outcome of the acquisition planning process and lessons-learned was DHS’s decision to combine three of EAGLE’s five functional categories into a single functional category (termed functional category 1) that incorporates a larger range of information technology services, such as software design and development. Users of EAGLE had experienced difficulty in determining which functional area related to their requirements because of overlapping categories. DHS CPO officials estimated that about 80 percent of EAGLE II spending would go through this new category. DHS then established tracks to set aside competition for task orders for small businesses within each functional category, including those with specific socioeconomic characteristics. Specifically, DHS created three individual socioeconomic tracks within functional category 1 for qualifying 8(a), HUBZone, and SDVOSB small businesses and a general small business track. An OSDBU official told us that the creation of socioeconomic business tracks was the single most important step that DHS took to enhance small business participation. Small businesses can compete for task orders within the small business tracks or compete against larger businesses within the unrestricted business track. As part of its lessons-learned from EAGLE, CPO officials concluded that small businesses were able to successfully compete with large businesses. Table 2 depicts the number of EAGLE II IDIQ awards by functional category (line of business) and business track. Each of these contractors has the potential to compete for task orders placed by DHS contracting staff for specific requirements. To further enhance small business opportunities, DHS also established procedures in the EAGLE II ordering guide—used by component contracting staff to issue task orders under the contracts—to facilitate the use of small business set-aside opportunities. For example, after the contracting officer determines into which functional category a requirement falls, the contracting officer and the component’s small business specialist are required to determine if the competition should be set aside for small businesses. In the case of functional category 1, this determination expands to whether the procurement should be set aside for competition within one or all of the small business socioeconomic tracks. In addition, a DHS small business specialist told us that the DHS Office of Procurement Operations sponsored meetings between awardees within each of EAGLE II’s small business tracks and DHS program managers to promote use of the small business tracks. According to DHS CPO and OSDBU officials, a second key step in enhancing small business participation was creating an “on ramp/off ramp” mechanism as a means of maintaining an eligible pool of small businesses throughout EAGLE II’s performance period. DHS CPO officials explained that, during the course of EAGLE, 9 of 28 small business IDIQ awardees had been acquired by larger firms and consequently lost their small business status, effectively shrinking the pool of small businesses to compete over the contract period. EAGLE did not have a mechanism to replace these vendors with other small businesses. To avoid a similar situation on EAGLE II, DHS developed a mechanism referred to as an “off ramp,” which according to DHS requires businesses that have outgrown or otherwise lost their small business status to leave the EAGLE II program after completing any ongoing task orders. In contrast, according to DHS CPO officials, under EAGLE, these businesses were permitted to compete for orders in the unrestricted track. In addition, DHS created a new mechanism known as an “on ramp,” which according to DHS, permits DHS to replenish the pool of small businesses by reopening the EAGLE II solicitation to award additional IDIQ contracts to small businesses. DHS CPO officials reported they have not yet needed to use the on ramp/off ramp mechanisms to maintain an eligible pool of small businesses because there has been no reduction in the number of small businesses as of March 31, 2015. A third key step that DHS CPO and OSDBU officials considered significant to enhancing EAGLE II small business opportunities was specifically permitting all prime contractors to formally team with subcontractors, referred to as core team members, to compete for contract awards. As part of the EAGLE II solicitation process, DHS permitted prime contractors to designate up to four core team members in their proposals to more fully meet the broad array of information technology service requirements. DHS also instructed that businesses competing for IDIQs in the small business tracks may team only with other small businesses. CPO officials also noted that the use of teaming on EAGLE II allowed prime contractors to designate team members for the purpose of strengthening their offers. For example, the solicitation allowed prospective contractors to provide information on the core team members—such as past performance—that DHS would evaluate and consider as part of the award decisions. According to DHS OSDBU officials, teaming was a way to allow small businesses that did not receive an EAGLE II award to still participate at the task order level in meeting DHS information technology services requirements, as a team member. Further, DHS CPO officials said that the success of teaming arrangements in performing task orders was a lesson-learned from EAGLE, in which teaming arrangements with subcontractors were encouraged, but only after award of the IDIQ contracts. Our analysis of DHS CPO teaming data indicates that 127 of the 150 IDIQ contracts included teaming arrangements. Almost all of the small business prime contractors—60 of 64—used teaming, as did many of the 86 large businesses in the unrestricted business tracks. According to officials, DHS requires the original core team to remain together for the life of the contract including the base and option periods except for extraordinary circumstances and with the DHS contracting officer’s consent. As of March 31, 2015, DHS issued 74 EAGLE II task orders with a total estimated value of $591 million, almost all of which—about 94 percent— was issued to small businesses. Over half of the total amount went to HUBZone businesses. However, this amount represents only about three percent of EAGLE II’s potential value of $22 billion. Figure 2 depicts the total value of EAGLE II task orders issued by functional category and business track from fiscal year 2013 through March 31, 2015 and the percentage of task orders issued by business track. DHS CPO officials stated the high percentage of task orders issued within functional category 1 is an early indication that the steps they took to enhance small business utilization are working as intended. However they also noted that the trend of awards to small businesses was unlikely to continue at the same levels over the life of the contract. They explained that delays in awarding some of the contracts within the unrestricted portion of functional category 1 may have contributed in particular to the high level of HUBZone task orders. DHS did not make its final source selection decisions for IDIQ awards within functional category 1’s unrestricted business track until April 2014 due to a series of bid protests. In the meantime, according to DHS CPO officials, DHS contracting officers made greater use of functional category 1’s small business tracks, especially the HUBZone track which was available as early as July 2013. DHS CPO officials reported that they anticipate an uptick in EAGLE II task orders later in fiscal year 2015 and that with the availability of functional category 1’s unrestricted track, they expect large businesses to win a higher amount of task orders going forward. At the same time, however, the officials expect the overall percentage of task orders issued to small businesses to be higher for EAGLE II than for EAGLE. DHS officials reported that about 10 percent of EAGLE’s obligations were issued to small businesses over the 7 years of that contract vehicle. DHS set five goals and objectives for EAGLE II and set performance measures for most of the goals, as shown in Table 3. DHS has not fully set performance measures for two of DHS’s stated goals for EAGLE II: fulfillment of socioeconomic goals and enhancing DHS mission performance capabilities. According to DHS strategic sourcing guidance, staff are to collect and review performance data to ensure program objectives are met. Further, federal internal control standards state that the ability to compare actual performance to planned or expected results can help managers identify and analyze significant differences in expected outcomes. However, as reflected in table 3, DHS does not have performance measures or collect information that would allow them to assess the extent to which: (1) use of core team members may be furthering EAGLE II’s socioeconomic goals and (2) the activities of teaming coordinators may have furthered DHS’s goal of enhancing its mission capabilities by finding subcontractors with new and innovative services. DHS CPO officials explained that they considered inclusion of core team members and teaming coordinators in the EAGLE II solicitation to be sufficient to meet goals. At the same time, however, they recognized that tracking team member use at the task order level would be difficult. For example, the officials noted that almost five years have passed since the time of the original EAGLE II offers in 2011, and that the contractors may now not have the same relationships with their core team members. In terms of teaming coordinators, DHS CPO officials told us they have received informal feedback that teaming coordinators are helpful in locating subcontractors with innovative technologies. However, as indicated by the market research during acquisition planning for the unrestricted business track, vendors reported mixed views to DHS as to whether companies should be required to have teaming coordinators, for example, questioning the additional costs. Without establishing performance measures to gauge progress, and collecting needed information, DHS will not be able to fully assess if its goals for EAGLE II are being met. We also identified a potential barrier to DHS’s ability to measure the full extent of small business participation. DHS does not consistently record the use of set asides within FPDS-NG, which may limit DHS’s ability to accurately track results. Within FPDS-NG, the government’s procurement database, the “type of set-aside” field is a key data element that contracting staff are supposed to check to indicate a small business set- aside award. In our assessment of contract documentation, we found that contracting staff did not correctly record the use of set-asides for seven of the eight task orders awarded to small businesses in our sample. Without correct FPDS-NG data, DHS and others will not be able to correctly assess the extent to which DHS has used its small business tracks to set aside task orders for small business competition. Based on the results of our assessment, data in the FPDS-NG understates the extent to which DHS staff have set aside task orders to promote small business participation. During the course of our review, DHS CPO officials corrected the errors in the seven contracts we identified after we brought this issue to their attention. The officials agreed to take additional steps to correct this problem going forward by creating an automated process to check for coding errors. CPO officials are also planning to issue additional guidance. In addition, one DHS component reported that it was providing additional training to contracting officers, including step-by-step instructions on how to report set asides, to avoid future reporting errors. DHS took a number of actions aimed at enhancing small businesses participation in EAGLE II and a large proportion of the dollars obligated so far have gone to small businesses. However, only a fraction of the anticipated $22 billion in spending has occurred to date, so it is too soon to fully assess the effectiveness of steps taken. In this early stage, DHS has an opportunity to improve how it measures performance against its stated goals. Specifically, the department has established the use of core team members as a key element in enhancing opportunities for small businesses that did not receive prime contracts and teaming coordinators to improve DHS mission performance, but does not collect information on the extent of use of these entities. Without this information, it will be difficult for DHS to assess their contributions towards its EAGLE II goals such as promoting small business participation. Further, given the mixed reviews from vendors as to the benefits of teaming coordinators, DHS could better position itself to ensure that new and innovative contractors support DHS over the life of the EAGLE II contracts. Evaluating the usefulness of these activities could also be beneficial to future DHS strategic sourcing vehicles seeking to employ teaming approaches. To support effective implementation of EAGLE II goals for enhancing small business participation and access to innovative technology, we recommend that the Secretary of Homeland Security direct the Office of the Chief Procurement Officer to take the following two actions: Collect and review information on the use of small business core team members to determine whether their use is helping to increase small business participation. Collect and review information to assess how teaming coordinators have provided DHS with greater access to innovative technology. We provided a draft of this product to the Secretary of Homeland Security for comment. In its written comments, reproduced in appendix III, DHS acknowledged our recognition of the key steps it has taken to increase small business participation but did not concur with our two recommendations. Regarding our recommendation that DHS collect and review information on the use of small business core team members to determine whether their use is helping to increase small business participation, DHS stated that the actions it took during the solicitation phase as well as the ordering procedures and safeguards included in the awarded contracts have already achieved this goal and addressed this recommendation. While these actions are important, monitoring contractor use of their core team members post-award is also significant. As DHS notes in its letter, use of small business core team members was intended to maximize opportunities for companies that may not have individually been competitive. Our report shows that this approach was largely successful in the solicitation phase since almost all small businesses that were awarded EAGLE II contracts took advantage of this opportunity and had at least one small business core team member. However, being a small business core team member does not guarantee that the company will actually be used to conduct work. As a result, the impact of these efforts will be unknown if DHS does not gather information to monitor whether small business core team members are actually used to conduct work at the task order level. For example, as noted in the report, of ten task orders we reviewed, only 2 prime contractors used a core team member to conduct work. Further, such information would also prove helpful to DHS when planning for EAGLE II’s successor, just as EAGLE II benefited from the lessons-learned from EAGLE contractors. Given that the base period of performance for EAGLE II ends in 2018, DHS is likely to begin its acquisition planning for EAGLE II’s successor in just a few years. Regarding our recommendation that DHS collect and review information to assess how teaming coordinators have provided DHS with greater access to innovative technology, DHS explained that it did not concur because it has no valid means to evaluate a teaming coordinator’s individual efforts in bringing innovative products and services to EAGLE II task orders. Nevertheless, DHS reported its plans to survey the DHS Chief Information Officer community, as the principal user of the EAGLE II contracts, to indicate whether they are seeing new and innovative solutions and services in the proposals received. While this outcome may not link directly to contractor teaming coordinator activities, it could provide DHS with useful insights. To the extent that the survey obtains information on how contractor proposals have contributed to enhancing DHS’s access to new and innovative solutions and also seeks information on factors that may contribute to the results, it has the potential to satisfy our recommendation. Again, this information would prove useful as DHS plans for the EAGLE II successor contracts, especially since the contracting community reported mixed reviews about teaming coordinators. DHS also provided technical comments that we incorporated into the report as appropriate. We are sending copies to the Secretary of Homeland Security, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Enterprise Acquisition Gateway for Leading-Edge Solutions II (EAGLE II) is a suite of strategic sourcing contracts, which serves as the Department of Homeland Security’s (DHS) preferred source for procuring information technology services. Our objectives were to assess (1) the key steps DHS has taken to enhance small business participation and (2) EAGLE II’s goals and performance measures and progress made to date. To identify and describe the key steps DHS took to enhance small business participation on EAGLE II prior to awarding the Indefinite Delivery Indefinite Quantity (IDIQ) contracts, we reviewed DHS acquisition planning documentation. This documentation, including the EAGLE II acquisition plan, the market research report, and summary of lessons-learned, contains the bases for decisions made by DHS’s Office of the Chief Procurement Officer (CPO) before proceeding with the EAGLE II solicitation. These decisions included deciding whether to use EAGLE II rather than other contract vehicles to procure information technology services, how to structure EAGLE II to increase small business participation, and how to facilitate the use of teaming arrangements. We also reviewed the DHS EAGLE II solicitation and Ordering Guide to document the final decisions DHS made for implementing EAGLE II, including how to structure the business tracks and how ordering procedures should be used to facilitate setting aside task orders for competition within the small business tracks. To better understand DHS’s decision making during acquisition planning, we interviewed staff from the DHS CPO about the planning process and the steps they considered as key to enhancing small business participation. We also interviewed the Director of the DHS Office of Small and Disadvantaged Business Utilization Office (OSDBU), and a small business specialist from DHS’s Office of Procurement Operations, to obtain their perspectives on which steps were key to enhancing small business participation. To obtain an additional small business perspective, we reviewed correspondence submitted by a small business advocacy group and interviewed its representative. In addition, to understand how a series of bid protests delayed finalization of EAGLE II IDIQ awards, we analyzed DHS bid protest data to identify the dates on which the protests were filed and resolved. We also analyzed EAGLE II source selection decisions to identify the dates on which DHS finalized its selection decisions for each EAGLE II business track. To determine the number and estimated value of EAGLE II task order awards as well as the business size of the recipients, we analyzed Federal Procurement Data System-Next Generation (FPDS-NG) data for fiscal years 2013, 2014, and the first two quarters of fiscal year 2015. We assessed the reliability of the FPDS-NG data by (1) performing electronic testing of the required data fields, (2) reviewing data documentation and validation rules, and (3) comparing data for selected data fields, including the award date, total dollar value, and type of set-aside, to contract documentation for 10 EAGLE II task orders. We selected a non- probability sample of task orders, selecting contracts that provided us the opportunity to determine whether DHS staff from a variety of components had correctly recorded if a small business set aside had been used for the procurement. Our task order selection was made using November 2014 FPDS-NG data, at which time DHS had awarded 54 task orders. We concluded that while the FPDS-NG data was reliable for the purposes of assessing the number and estimated value of task orders as well as the business size of the recipient, it was not reliable for the purpose of determining whether DHS had set aside the task order award for small business competition due to the errors we identified and discussed in our report. As a result, our analysis reflects the estimated values of awards made to EAGLE II prime contractors based on the specific functional category business track for which they won their IDIQ award. DHS CPO officials corrected the errors in the 7 contracts we identified, and agreed to take additional steps to correct this problem, as discussed in this report. To determine the number of prime contractors that used core team members when making offers for the IDIQ awards, we analyzed information DHS had compiled for each IDIQ award. We assessed the accuracy of this information by identifying whether both DHS’s information and the listing of core team members on the Federal Business Opportunities website listed one or more team members for 12 of the 150 IDIQ awardees. We selected 4 contracts from Functional Category 1’s unrestricted business track, and 1 from each of the other eight business tracks, for a total of 12 contracts. We determined that the DHS information on core team members was reliable for the purposes of this report. In addition, to identify if prime contractors used one or more of their core team members on the 10 task orders, we then reviewed DHS information indicating whether the prime contractors had used one or more of their core team members in performing work under a task order. To identify EAGLE II’s goals and performance measures and progress made to date, we assessed the January 2011 EAGLE II Solutions Business Case to identify EAGLE II goals and performance measures that DHS specified during acquisition planning. We interviewed DHS CPO officials to obtain their perspectives on the goals, related activities, and performance measures and to refine our understanding of what they intended EAGLE II to accomplish. To assess the progress EAGLE II has made towards meeting each goal, we undertook a range of activities. First, to identify DHS progress in meeting its socioeconomic goals, we analyzed FPDS-NG data to assess the value of contracts awarded to small businesses as of March 31, 2015, the most recent quarter of FPDS- NG data. Second, to identify how DHS measures cost savings, including fees avoided by using EAGLE II rather than other strategic sourcing vehicles and enhancements to EAGLE II’s acquisition efficiencies, we obtained and reviewed the strategic sourcing saving methodology sponsored by the DHS Strategic Sourcing Program Office, and obtained saving estimates from this office. Third, to verify DHS’s assertion that it had increased the efficiency of the acquisition process by consolidating ordering information for its staff on the EAGLE II intranet, DHS provided us with access and we directly examined the contents of the EAGLE II intranet. We then reviewed federal internal control standards and assessed whether DHS had established performance measures for program goals consistent with these standards. We obtained information from DHS on its progress in meeting those goals as of March 2015. GAO is also conducting additional work about the benefits of strategic sourcing for information technology services, including opportunities that may exist to leverage the government’s buying power and barriers to the use of strategic sourcing. This review, expected to be completed in 2015, also involves EAGLE and EAGLE II in addition to other government agency contract vehicles. We conducted this performance audit from November 2014 to June 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Department of Homeland Security (DHS) made its initial EAGLE II source selection decisions in 2012 and 2013, but its final round of source selections was not finalized until 2014 because of a series of bid protests filed by businesses, for the unrestricted and small business tracks, objecting to the selection decisions. A bid protest is a challenge to the award or proposed award of a contract for procurement of goods and services or a challenge to the terms of a solicitation for a contract. A total of 46 large and small businesses filed a total of 56 bid protests with GAO. These protests took place from August 2012 through July 2014 and were all resolved by late 2014. The number of bid protests varied by functional category and by business track, with the highest number of protests (21) filed by large businesses in functional category 1’s unrestricted business track. Most of the bid protests (44 of the 56 bid protests filed) were dismissed. GAO sustained none of the cases. According to DHS officials, the agency took corrective action for the dismissed cases by reevaluating its source selection decisions. Table 4 depicts the number of bid protests businesses filed within each of EAGLE II’s business tracks and the outcomes of each. In addition to the contact named above, W. William Russell, Assistant Director; Peter Anderson, Sonja Bensen, Virginia Chanley, Wendell K. Hudson, Julia Kennon, and Roxanna Sun made key contributions to this report. | DHS's EAGLE II is a suite of strategic sourcing contracts, valued at $22 billion, which serves as DHS's mandatory source for information technology services. Strategic sourcing is a process that moves an organization away from numerous individual procurements toward a broader aggregate approach to achieve cost savings and other efficiencies. The small business community has raised questions about strategic sourcing reducing contracting opportunities. GAO was asked to examine the EAGLE II program. This report assesses (1) key steps DHS has taken to enhance small business participation and (2) EAGLE II goals, performance measures, and progress made to date. GAO reviewed EAGLE II acquisition planning documents and interviewed DHS procurement and small business staff. GAO analyzed federal procurement data from fiscal year 2013 through the second quarter of fiscal year 2015 and assessed reliability by comparing data to a nonprobability sample of 10 EAGLE II contracts selected from a variety of DHS components. Department of Homeland Security (DHS) procurement officials reported taking three key steps to enhance small business participation in the Enterprise Acquisition Gateway for Leading-Edge Solutions II (EAGLE II) contracts: Creating small business tracks within each of EAGLE II's three lines of business, including socioeconomic set-aside tracks, to exclusively target competitions to small businesses in the first line of business. See table. Establishing a process to maintain a steady pool of eligible small businesses by reopening the EAGLE II solicitation after requiring businesses that outgrow their small size status to leave the program. Requiring small business track prime contractors to team only with other small businesses. As of March 2015, DHS had issued 74 EAGLE II task orders worth an estimated $591 million, almost all of which—94 percent—went to small businesses. However, it is too soon to evaluate the full impact of these steps because only about 3 percent of the anticipated $22 billion in task orders have been issued. DHS established five goals for EAGLE II and developed performance measures to assess progress in meeting most of them. DHS established performance measures for the three EAGLE II goals related to cost savings and efficiencies through a methodology to assess cost savings, but has not fully set performance measures for the remaining two, relating to (1) the small business socioeconomic goal and (2) enhancing DHS mission capabilities. For its socioeconomic goal, DHS assesses progress via the percentage of the value of orders issued to small businesses. However, DHS does not assess whether use of team members (other small businesses) supports this goal, although DHS procurement officials told us teaming is key to enhancing small business participation. Further, DHS has not set a performance measure for assessing how the use of teaming coordinators contributes to the EAGLE II goal of enhancing DHS's mission capabilities. According to DHS, prime contractors are required to have teaming coordinators identify subcontractors with innovative services. Federal internal control standards highlight the importance of developing measures to compare expected outcomes to actual results. Without such measures, it will be difficult for DHS to have needed information to assess the extent to which the use of team members and teaming coordinators contribute toward their respective EAGLE II goals. GAO recommends the Secretary of Homeland Security support implementation of EAGLE II goals by assessing the use of team members and teaming coordinators. DHS did not concur with GAO recommendations, citing actions already taken in soliciting and awarding the contracts. GAO believes there is still value in assessing whether team members are used for task orders, and that DHS's plan to survey EAGLE II users has merit. |
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VBA’s compensation program pays monthly benefits to veterans with service-connected disabilities (injuries or diseases incurred or aggravated while on active military duty), according to the severity of the disability. VBA’s pension program pays monthly benefits to wartime veterans who have low incomes and are permanently and totally disabled for reasons not service-connected. In addition, VBA pays dependency and indemnity compensation to some deceased veterans’ spouses, children, and parents. In fiscal year 2001, VBA paid over $20 billion in disability compensation to about 2.3 million veterans and over 300,000 survivors. VBA also paid over $3 billion in pensions to over 600,000 veterans and survivors. Veterans may submit their disability claims to any of VBA’s 57 regional offices, which process these claims in accordance with VBA regulations, policies, procedures, and guidance. Regional offices assist veterans in obtaining evidence to support their claims. This assistance includes helping veterans obtain the following documents: records of service to identify when the veteran served, records of medical treatment provided while the veteran was in military service, records of treatment and examinations provided at VA health-care facilities, and records of treatment of the veteran by nonfederal providers. Also, if necessary for decision on a claim, the regional office arranges for the veteran to receive a medical examination or opinion. Once this evidence is collected, VBA makes a rating decision on the claim. Veterans with multiple disabilities receive a single composite rating. For pension claims, VBA determines whether the veteran meets certain criteria. The regional office then notifies the veteran of its decision. In May 2001, the Secretary created the VA Claims Processing Task Force to develop recommendations to improve the compensation and pension claims process and to help VBA improve claims processing timeliness and productivity. The task force observed that the work management system in many VBA regional offices contributed to inefficiency and an increased number of errors. The task force attributed these problems primarily to the broad scope of duties performed by regional office staff—in particular, veterans service representatives (VSR). For example, VSRs were responsible for both collecting evidence to support claims and answering claimants’ inquiries. In October 2001, the task force made short- and medium-term recommendations for improving the claims process and reorganizing regional office operations. In particular, the task force recommended that VBA change its claims processing system to one that utilizes specialized teams. VBA is in the process of implementing many of these recommendations and has established a new claims processing structure that is organized by specific steps in the claims process. For example, regional offices will have teams devoted specifically to claims development, that is, obtaining evidence needed to evaluate claims. VBA’s key timeliness measure does not clearly reflect its timeliness in completing claims because it fails to distinguish among its three disability programs—disability compensation, pension, and dependence and indemnity compensation. The programs’ processing times differ, in part because they have different purposes, beneficiaries, eligibility criteria, and evidence requirements to decide each type of claim. Despite these differences, VBA sets an annual performance goal that is an average of all three programs. For the purposes of reporting its performance to the Congress and other stakeholders, VBA adopted one key timeliness measure—the average time to complete decisions on rating-related cases. This measure includes original and reopened disability compensation, pension, and dependency and indemnity compensation claims—in other words, claims for three VBA compensation and pension programs. VBA sets an annual goal for average days to complete rating-related cases in VA’s annual performance plans and subsequently reports its actual timeliness—and whether it met its goal—in VA’s annual performance reports to the Congress. This one measure does not reflect the differences in the timeliness for the three programs. In general, the disability compensation program requires the most evidence and thus these claims generally take longer to complete, as shown in figure 1. While VBA’s average fiscal year 2002 timeliness was 223 days, disability compensation decisions (which represented about 83 percent of total decisions) took almost twice as long to complete as pension decisions. The aggregate measure understated the time required to decide disability compensation claims by 18 days and overstated the time to decide pension claims by 97 days and dependency and indemnity compensation claims by 51 days. Each program has a different claims processing time frame because each has different evidence requirements resulting from their different purposes and eligibility requirements. For example, a major reason why disability compensation claims take longer is that VBA must not only establish that each claimed disability exists, but that each was caused or aggravated by the veteran’s military service. This process requires substantial evidence gathering, with VBA actively assisting the claimant. To prove service- connection, VBA obtains the veteran’s service medical records and may request medical examinations and treatment records from VA medical facilities. In contrast, pension claims do not require evidence that the claimed disabilities were service-connected. Also, veterans aged 65 and older do not have to prove that they are disabled to receive pension benefits as long as they meet the income and military service requirements. VBA does not yet have adequate data to measure timeliness or set goals for its specialized regional office teams but is making progress in obtaining complete and accurate data. While VBA is in the process of developing performance measures and goals for these teams and has developed a system to report timeliness data, it acknowledges that the quality of its existing timeliness data needs to be improved. Implementation of the task force recommendations to reorganize claims processing requires that VBA measure its performance for its teams. Where teams were once responsible for processing claims from receipt to completion, teams are now responsible for specific phases of the process. With complete and accurate data, VBA will be able to measure the timeliness of the individual teams and, therefore, will be able to hold them accountable for their performance as well as identify processing delays and take corrective actions. VBA expects to be able to obtain more complete and accurate data to measure team performance once it deploys new software applications that should enable it to consistently capture data for all cases and will rely less on manual data entry. VBA expects these applications to be fully deployed by October 2003. The task force recommended that regional office Veterans Service Centers (VSC), which process compensation and pension claims, be reorganized into specialized teams. The task force identified six types of teams—triage, pre-determination, rating, post-determination, appeals, and public contact—based on different phases of the claims process. From February through April 2002, VBA piloted its CPI initiative, which included reorganizing regional offices’ VSCs into specialized teams at four regional offices. The CPI task team noted that processing teams needed clearly defined and reasonable performance expectations and recommended timeliness measures for each team, as shown in table 1. VBA began to implement the CPI model at its other regional offices in July 2002. VBA has implemented an inventory management system (IMS) that allows it to measure and report team timeliness, nationally and at the regional office level. This system should provide VBA with the necessary data to develop annual performance goals, which can be used to hold itself and its regional offices accountable for improving timeliness. IMS should also provide useful data to assist VBA management with identifying problems in specific regional offices and allowing regional office management to identify problems with specific teams for further analysis and corrective actions. However, VBA acknowledges that its IMS reports are not as useful as they can be, because IMS receives incomplete data from an existing VBA system—the Claims Automated Processing System (CAPS). Not all regional offices are fully using CAPS; thus, CAPS data that are sent to IMS are incomplete. CAPS was not being used to collect timeliness data for all cases; rather, it was used to provide regional office staff with information on the status of cases expected to take more than 30 days to process. In order to provide a short-term improvement in the completeness of IMS data, in May 2001 VBA instructed regional offices to ensure that certain data were consistently entered into CAPS; for example, dates when evidence was requested and received. In May 2002, VBA instructed regional offices to report on how fully they use CAPS and to provide estimated timeframes for complete compliance with CAPS data entry requirements. As of August 2002, VBA reported that about 81 percent of its pending cases had records in CAPS. According to VBA officials, as the regional offices implement new software applications, the ability of IMS to provide complete and accurate timeliness reports is expected to improve. For example, Share, the new claims establishment application, will automatically input data on a case into other applications, including CAPS. This will help ensure more complete and consistent data in the short term, because there will be a CAPS record for each case. Eventually, the Modern Award Processing– Development (MAP-D) application will replace CAPS as a source of timeliness data for IMS. MAP-D will, according to VBA officials, contain records for all cases and will reduce the amount of manual data entry required, thus reducing the potential for data input errors. VBA plans to have all regional offices using Share and MAP-D by October 2003. VBA has chosen to use one aggregate performance measure for timeliness for its disability compensation, pension, and dependency and indemnity compensation programs. Such a measure does not reflect VBA’s performance for programs with different purposes, beneficiaries, and claims processing requirements. In particular, VBA’s timeliness in deciding disability compensation claims is assessed under a measure that also covers pension and dependency and indemnity compensation claims, which take much less time. Consequently, the aggregate measure can make the processing time for VBA’s largest and most time-consuming workload look better than it really is. As long as VBA uses an aggregate timeliness measure, it will not be able to clearly demonstrate to the Congress, top VA management, and claimants how well it is meeting its objectives to serve disabled veterans and their families. VBA’s reorganization of its regional office compensation and pension claims processing operations into specialized teams underscores the need for complete and accurate data on the timeliness of the phases of the claims process. VBA does not yet have adequate data for timeliness measurement purposes but is making progress in ensuring that it does. Once VBA has deployed its new claims processing software applications at all of its regional offices, it expects to be able to better measure the timeliness of its specialized teams, provide baselines for future comparisons, quantify team performance goals, and identify problems needing corrective action. In this way, local and team-specific information can be used to hold regional offices and their specialized teams accountable for improving timeliness. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Benefits to establish separate claims processing timeliness goals for its three main disability programs, incorporate these goals into VA’s strategic plan and annual performance plans, and report its progress in meeting these goals in its annual performance reports. In its written comments on a draft of this report (see app. I), VA concurred in principle with our recommendation. VA noted that VBA plans to develop performance measures for each of its programs, as part of VA’s effort to restructure its budget. However, VA believes establishing new goals by program should be deferred until at least fiscal year 2005, because establishing new goals at this time risks obscuring its focus on achieving the Secretary’s 100-day goal by the end of fiscal year 2003. We believe developing timeliness measures for each program would not obscure VBA’s focus on performance improvement, but would provide a more accurate picture of claims processing timeliness, because the new measures would reflect the differences among the three programs. Because VBA already has the necessary data, we believe that it should report timeliness by program for fiscal year 2004 and set goals by program for fiscal year 2005, at the latest. VA also suggested that we based our calculations of average days to complete disability compensation, pension, and dependency and indemnity compensation decisions, as shown in figure 1, on original claims only. We based our calculations on all eight types of claims (known as end products) that VBA uses to calculate rating-related timeliness. These end products include both original and reopened claims. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 1 day after its issue date. At that time, we will send copies of this report to the Secretary of the Department of Veterans Affairs, appropriate congressional committees, and other interested parties. We will also make copies of this report available to others on request. The 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 regarding this report, please call me at (202) 512-7101 or Irene Chu, Assistant Director, at (202) 512-7102. In addition to those named, Susan Bernstein, Martin Scire, and Greg Whitney made key contributions to this report. | The Chairman and Ranking Minority Member, Senate Committee on Veterans' Affairs, asked GAO to assist the Committee in its oversight of the Veterans Benefits Administration's (VBA) efforts to improve compensation and pension claims processing. As part of this effort, GAO assessed (1) whether VBA's key timeliness measure clearly reflects its performance and (2) whether it has adequate data to measure the timeliness of its newly created specialized claims processing teams. VBA's key claims processing timeliness measure does not clearly reflect how quickly it decides claims by veterans and their families for disability compensation, pension, and dependency and indemnity compensation benefits. Although each program has its own purpose and eligibility requirements, VBA does not set a separate timeliness goal for each in its annual performance plan. This obscures the significant differences in the time required to complete decisions under each program. Fiscal year 2002 timeliness, using VBA's measure, was 223 days; however, disability compensation decisions took significantly longer than decisions under the other two programs. A disability compensation decision requires more evidence, in part because VBA must determine that each claimed disability is related to the veteran's military service. VBA does not yet have adequate data to measure the timeliness of its new specialized regional office claims processing teams but is working to improve its data. VBA's inventory management system, which allows it to report and analyze teams' timeliness, relies on an existing information system that does not provide timeliness data on all cases. VBA is acting to improve the completeness of the data in the existing system. Meanwhile, VBA is deploying new software that it expects should enable it to capture more complete and accurate data. VBA expects to deploy this new software at all regional offices by October 2003. |
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Under the Clean Air Act, EPA is responsible for setting National Ambient Air Quality Standards for certain pollutants considered harmful to public health and the environment. EPA has set these standards for six such pollutants, known as criteria air pollutants: carbon monoxide, nitrogen oxides, sulfur oxides, particulate matter, ozone, and lead. Diesel exhaust contains nitrogen oxides, particulate matter, and numerous other harmful chemicals. Exposure to nitrogen oxides can result in adverse respiratory effects, and nitrogen oxides contribute to the formation of ozone, which can cause respiratory illnesses, decreased lung function, and premature death. A large body of scientific evidence links exposure to particulate matter to serious health problems, including asthma, chronic bronchitis, heart attack, and premature death. Nondiesel mobile sources, industrial processes, and power plants, among other sources, generated the remaining nitrogen oxide emissions; fossil fuel combustion, dust, and agricultural activities, among other sources, generated the remaining particulate matter emissions. 43 percent and 42 percent of such emissions, respectively, from diesel engines. EPA has progressively implemented more stringent diesel emissions standards to lower the amount of key pollutants from mobile diesel sources since 1984. For example, EPA regulations for heavy-duty highway diesel engines required a 98 percent reduction from 1988 allowable levels of nitrogen oxide and particulate matter emissions for new engines built after 2009. The most recent emissions standards for construction and agricultural equipment began to take effect in 2008 and required a 95 percent reduction in nitrogen oxides and a 90 percent reduction in particulate matter from previous standards, which took effect in 2006 and 2007. In 2008, EPA issued its most recent regulations for new marine vessels and locomotives, which EPA expects will, by 2030, reduce nitrogen oxide emissions from the engines of these sources by about 80 percent and particulate matter emissions by about 90 percent compared to previous standards. Figures 1 and 2 show the effective dates of major reductions in allowable amounts of nitrogen oxide and particulate matter emissions from mobile diesel sources. Owners and operators of diesel engines can undertake a variety of activities to reduce diesel emissions, including retrofitting, rebuilding, or replacing existing diesel engines or vehicles; installing devices that reduce idling of diesel engines; and converting diesel engines and vehicles to use cleaner fuels. Retrofitting existing diesel engines generally involves the installation of emissions control devices, such as filters, on a vehicle’s tailpipe. Rebuilding components of existing diesel engines can return engines to their original emissions levels or involve the installation of new technology that produces lower levels of emissions. Replacing existing diesel engines and vehicles with newer, lower emitting engines or vehicles can lead to significant emissions reductions, but because it is a costly option, it may be most appropriate for the oldest, most polluting vehicles. Devices that reduce idling of diesel engines generally allow a vehicle’s heat, air conditioning, and other electrical equipment to run without operation of the vehicle’s main engine. Converting diesel vehicles and engines to use cleaner fuels can also provide significant emissions reductions. The Government Performance and Results Act, as amended, requires agencies to prepare annual performance plans that contain, among other things, a set of annual goals that establish the agencies’ intended performance and measures that can be used to assess progress toward achieving those goals. DOE, DOT, and EPA establish and organize these goals and performance measures at differing agency and administrative levels. Specifically, DOE and EPA establish strategic goals and performance measures for each goal as part of their agencywide performance plans. DOT establishes strategic goals as part of its agencywide strategic plan, but the agency’s administrations—the Federal Aviation Administration, Federal Highway Administration, and Federal Transit Administration, among others—generally establish their own performance measures for assessing their programs’ contributions to the department’s strategic goals. Federal grant and loan funding for activities that reduce mobile source diesel emissions is fragmented across 14 programs at DOE, DOT, and EPA. Many of these programs generally target air pollution, but of the 14 programs, one—EPA’s Diesel Emissions Reduction Act program—has a specific purpose of reducing mobile source diesel emissions. The remaining 13 programs focus on other goals or purposes, such as supporting energy efficiency projects or reducing petroleum use. Nevertheless, each of these programs allows or requires a portion of its funding to support activities that have the effect of reducing mobile source diesel emissions. For example, authorizing legislation for DOT’s Congestion Mitigation and Air Quality Improvement program directs grant recipients to give priority to certain activities, including retrofitting diesel engines and vehicles. The 14 programs provide funding through one or more mechanisms, including competitive grants, formula grants, and loans. Specifically, 13 of the programs provide funding through competitive and formula grants, and 1 program—DOT’s State Infrastructure Banks program—provides loans.gaps in the programs, such as mobile sources that are not eligible for funding. See appendix II for additional information about each program. We did not identify any From fiscal years 2007 through 2011, these 14 programs obligated at least $1.4 billion for activities that have the effect of reducing mobile source diesel emissions. According to data from DOE, DOT, and EPA, the American Recovery and Reinvestment Act of 2009 provided about $870 million of this funding. The $1.4 billion amount is a lower bound because DOT could not determine the amount of grant and loan funding some of its programs have provided for projects that reduce mobile source diesel emissions. According to DOT officials, the agency does not track this information because statutory program requirements do not call for the agency to do so. These activities that have the effect of reducing mobile source diesel emissions include replacing fleets of older diesel trucks or school buses with natural gas vehicles, installing particulate matter filters on construction equipment, and replacing diesel-powered airport luggage transporters with electric vehicles. As table 1 shows, some of the programs that support these activities have broad purposes, such as increasing energy efficiency in transportation, reducing petroleum consumption, or funding public transportation projects, and other programs have narrower purposes, such as reducing emissions at airports, constructing ferry boats and related facilities, or promoting alternative transportation systems in and around national parks. As table 2 shows, each of the 14 relevant programs overlaps with at least one other program in the specific types of activities they fund, the program goals, or the eligible recipients of funding. For example, 6 of the 14 programs share a broad goal of increasing energy efficiency, and local governments are eligible to receive grants under 10 of the programs. In addition, we found that 13 of the 14 programs fund activities that retrofit diesel engines or vehicles, and 11 programs fund activities that reduce diesel vehicle idling. We also identified the potential for overlap among these 11 programs and an excise tax exemption for certain vehicle idling reduction devices because the tax expenditure and the 11 programs all provide incentives to use idle reduction devices to reduce diesel emissions. Appendix III provides additional information on this and two other tax expenditures related to diesel emissions reductions. We also identified several instances of duplication where more than one program provided funding to the same recipient for the same type of activities. In one case, a state transportation agency received $5.4 million from DOT’s Transit Investments in Greenhouse Gas Emissions Reduction program to, among other things, upgrade 37 diesel buses to hybrid diesel-electric buses; $3.5 million from DOT’s Congestion Mitigation and Air Quality Improvement program to replace diesel buses with 4 hybrid diesel-electric buses; and $2.3 million from DOT’s Clean Fuels Grant program to replace 4 diesel buses with hybrid electric buses. In another case, a nonprofit organization received $1.1 million from EPA’s Diesel Emissions Reduction Act Program to install emission reduction and idle reduction technologies on 1,700 trucks as well as $5.6 million from a state infrastructure bank established under DOT’s program to equip trucks and truck fleets with emissions control and idle reduction devices. Even with duplication among the programs, several factors make it difficult to precisely determine whether unnecessary duplication exists. First, when different programs fund the same diesel emissions reduction activities, it is not necessarily wasteful. For example, a transit agency could use funds from two different programs to replace two separate fleets of aging diesel buses. Second, grant recipients may leverage funding from more than one program to support the full cost of diesel emissions reduction projects. In some cases, grant recipients have used funding from multiple agencies, in addition to local matching funds, to support the cost of large projects that include multiple diesel emissions reduction activities. Third, agencies were often unable to provide information necessary to determine whether and to what extent unnecessary duplication exists among the programs. For example, several agencies reported that they do not track costs for administrative functions at the program level. Without information on these costs, it is difficult to determine whether and to what extent programs perform duplicative administrative functions that could be consolidated to provide grants and loans more efficiently. The fragmentation, overlap, and duplication among these programs result, in part, from their legislative creation as separate programs with different purposes that fund a wide range of activities, some of which have the effect of reducing mobile source diesel emissions. We have previously reported that, as the federal government has responded over time to new needs and problems, many agencies have been given responsibilities for addressing the same or similar national issues. Some of this shared responsibility was intended to recognize that addressing some issues from a national perspective would necessarily involve more than one agency or approach. However, the resulting fragmentation, overlap, and duplication may waste administrative resources and create an environment in which participants are not served as efficiently and effectively as possible. In addition, we have previously reported that fragmentation, overlap, and duplication suggest the need for further examination of programs to identify potential areas for improvement, realignment, consolidation, or elimination. The effectiveness of federal funding for activities that reduce mobile source diesel emissions is unknown because agencies vary in the extent to which they have established performance measures. In addition, few programs collect performance information on their diesel emissions reduction activities because 13 of the 14 programs that fund these activities have purposes other than reducing diesel emissions. This incomplete performance information may limit the ability of agencies to assess the effectiveness of their programs and activities that reduce diesel emissions. Agencies that fund activities that reduce mobile source diesel emissions have established performance measures for their strategic goals to varying degrees. DOE and EPA have established performance measures for the strategic goals related to their programs that reduce mobile source diesel emissions. For example, EPA monitors progress toward its strategic goal of reducing greenhouse gas emissions and developing adaptation strategies to protect and improve air quality by measuring, among other things, the tons of mobile source emissions its programs reduce. DOT has established such performance measures for two of its administrations—the Federal Aviation Administration and Federal Highway Administration—but has not established such measures for the Federal Transit Administration for two of the four strategic goals that link to its programs that fund diesel emissions reduction activities. Appendix IV provides additional information on these agencies’ strategic goals and performance measures related to programs that reduce mobile source diesel emissions. The Government Performance and Results Act, as amended, generally requires agencies to provide a basis for comparing actual results with established goals, and as such, federal departments and agencies are to comply with Government Performance and Results Act requirements. As we have previously reported, Government Performance and Results Act requirements also can serve as leading practices at lower levels within federal agencies, such as individual divisions, programs, or initiatives. We have also reported that principles of good governance indicate that agencies should establish quantifiable performance measures to demonstrate how they intend to achieve their goals and measure the extent to which they have done so. The Federal Transit Administration has not established performance measures for its goals of (1) environmental sustainability—that is, advancing environmentally sustainable policies and investments that reduce carbon and other harmful emissions from transportation sources—and (2) economic competitiveness—that is, promoting transportation policies and investments that bring lasting and equitable economic benefits to the nation and its citizens. Agency officials said they generally collect information on the current condition of the nation’s transit fleet, the use of public transportation, and transit fleet compliance with the Americans with Disabilities Act to measure the performance of the agency’s transit programs. However, this information will not enable the agency to determine the extent to which it has met its goals related to environmental sustainability and economic competitiveness. At the program level, limited performance information is available about the results of activities that reduce mobile source diesel emissions. The 14 programs that fund activities that reduce diesel emissions currently collect performance information on their diesel emissions reduction activities to varying degrees. According to agency documents and officials, EPA’s Diesel Emissions Reduction Act Program collects performance information on the amount and type of diesel emissions reductions each project achieves; DOE’s three programs collect some emissions reduction information but do not quantitatively collect diesel emissions reduction information; three of DOT’s programs collect some performance information related to diesel emissions reductions; and the remaining seven DOT programs do not collect performance information related to diesel emissions. This variation in the amount of diesel-related performance information programs collect occurs partially because 13 of the 14 programs that fund these activities have purposes other than reducing diesel emissions, such as supporting energy efficiency projects or reducing petroleum use. However, without information on the results of the programs’ activities that reduce mobile source diesel emissions, the overall effectiveness of federal grant and loan funding for activities that reduce diesel emissions cannot be determined. EPA. EPA’s Diesel Emissions Reduction Act Program collects information on the number of diesel engines it replaces, retrofits, and rebuilds as well as information on the estimated tons of particulate matter, nitrogen oxide, carbon dioxide, carbon monoxide, and hydrocarbon emissions it reduces. According to agency documents, in fiscal year 2008—the most recent year for which data were reported—the program reduced approximately 46,000 tons of nitrogen oxide emissions and 2,200 tons of particulate matter emissions. EPA documents show that the cost for these emissions reductions ranged from $400 to $2,000 per ton of nitrogen oxide emissions reduced and from $9,000 to $27,700 per ton of particulate matter emissions reduced. DOE. DOE’s Clean Cities program collects information on reductions in gasoline and diesel fuel use that the program achieves to measure progress toward its program goal of reducing national petroleum use by 2.5 billion gallons by 2020. DOE’s Energy Efficiency and Conservation Block Grant and State Energy programs estimate emissions reductions that result from program activities, but neither of these programs separately tracks diesel emissions from other emissions reductions. DOT’s Federal Aviation Administration. The Federal Aviation Administration’s Voluntary Airport Low Emissions program collects information on the total amount of criteria pollutant emissions each project will reduce, but it does not currently track reductions in diesel emissions. DOT’s Federal Highway Administration. The Federal Highway Administration’s Congestion Mitigation and Air Quality Improvement program collects information from grant recipients on the type and quantity of emissions reduced through each project the program funds. However, the program does not review or compile this information at the national level. The Ferry Boat Discretionary and State Infrastructure Banks programs do not collect performance information related to diesel emissions reductions. DOT’s Federal Transit Administration. The Federal Transit Administration’s Transit Investments for Greenhouse Gas and Energy Reduction program obtains information from grant applicants on the amount of energy use and greenhouse gas emissions each project is to reduce, but the program does not separately track reductions in diesel energy use or diesel emissions. The remaining five Federal Transit Administration programs that fund diesel emissions reduction activities— Bus and Bus Facilities, Clean Fuels Grant, National Fuel Cell Bus Technology Development, Transit in Parks, and Urbanized Area Formula Grants—do not collect performance information related to diesel emissions reductions. Efforts to measure the effects of programs that decrease diesel emissions are also hindered by the absence of a baseline assessment of nationwide diesel emissions from which agencies could measure progress. EPA has assessed national levels of nitrogen oxide and particulate matter pollution from some mobile diesel sources, including highway vehicles and some nonroad equipment, and DOT maintains data on the number of diesel transit vehicles currently in use. However, no agency has comprehensively assessed existing diesel pollution to identify the most significant mobile sources of diesel emissions and the specific areas that face the greatest health risks from diesel pollution. Without a more comprehensive assessment, agencies cannot identify and target, within their discretion, funding toward specific sectors or geographic areas of greatest need.criteria that may derive from law, agency discretion, or a combination thereof. Under some programs, agencies allocate funding based on statutory formulas or criteria. For example, DOT’s Urbanized Area Formula Grants program uses a statutory formula to allocate funds on the basis of population and population density. EPA’s Diesel Emissions Reduction Act program awards funds competitively but, based on statutory criteria, must prioritize projects that maximize health benefits, are the most cost-effective, and serve areas with poor air quality, among other factors. Under other programs, agencies have some discretion in awarding funds. These agencies generally consider applicant eligibility and other relevant factors, but this does not include consideration of which areas face the greatest diesel-related health risks. The federal programs that fund activities that have the effect of reducing mobile source diesel emissions generally do not collaborate. According to DOE, DOT, and EPA officials, the three agencies consult on broad issues, such as to discuss available technologies or emissions standards, but these efforts do not involve collaboration on diesel-related issues. Moreover, officials from most of the 14 programs reported that any collaboration across the programs occurs on an informal, case-by-case basis. For example, officials from EPA’s Diesel Emissions Reduction Act Program said they may contact officials from the Federal Highway Administration’s Congestion Mitigation and Air Quality Improvement program to discuss a specific emissions reduction technology or project that appears in a grant application but that they do not collaborate with officials from this program on a regular basis. Also, some program officials reported that enhanced collaboration could improve the effectiveness of federal funding for activities that reduce diesel emissions. For example, officials from EPA’s Diesel Emissions Reduction Act Program said that diesel-related programs could share information to more efficiently award grants and to reduce duplication of agency efforts, such as researching various emissions reduction technologies. DOE, DOT, and EPA officials generally reported that they do not collaborate on diesel emissions reduction activities with other federal programs because they are unaware of the other programs that fund these activities, including, in some cases, programs within their own agencies. According to agency officials, this is due to the differing purposes and goals of each program, which often do not directly relate to reducing diesel emissions. However, we have previously reported that, although federal programs have been designed for different purposes or targeted for different population groups, coordination among programs with related responsibilities is essential to efficiently and effectively meet national concerns. We reported that uncoordinated program efforts can waste scarce funds, confuse and frustrate program customers, and limit the overall effectiveness of the federal effort. A focus on results as envisioned by the Government Performance and Results Act implies that federal programs contributing to the same or similar results should be closely coordinated to ensure that goals are consistent, and, as appropriate, program efforts are mutually reinforcing. This means that federal agencies are to look beyond their organizational boundaries and coordinate with other agencies to ensure that their efforts are aligned. Also, the Government Performance and Results Act Modernization Act of 2010 requires that agency strategic plans include a description of how the agency is working with other agencies to, among other things, achieve its goals and objectives. In addition, we have previously reported that agencies face a range of barriers in their efforts to collaborate. To overcome such barriers and to maximize the performance and results of federal programs that share common outcomes, we have previously identified practices that can help agencies enhance and sustain collaboration. These practices include agreeing on agency roles and responsibilities in the collaborative effort and identifying and addressing needs by leveraging collective resources. Further, we have reported that, to the extent that federal efforts are fragmented across agency lines, developing crosscutting performance measures through interagency coordination could ease implementation burdens while strengthening efforts to develop best practices. Over time, EPA has issued more stringent emissions regulations for new diesel engines and vehicles, but existing diesel trucks, buses, locomotives, ships, agriculture equipment, and construction equipment continue to emit harmful pollution. Because diesel engines are durable and energy efficient, it could take decades for these older diesel vehicles and equipment to fall out of use. As a result, federal agencies play an important role in accelerating the attrition of existing diesel engines and vehicles and the resulting reduction in diesel emissions. However, federal funding that reduces diesel emissions is fragmented across 14 programs that overlap in their activities, goals, and eligible recipients. Also, the effectiveness of this funding is unknown because agencies collect limited performance information related to these programs. Because DOT’s Federal Transit Administration has not developed performance measures for its goals related to environmental sustainability and economic competitiveness, the agency is unable to fully assess the performance of programs that contribute to these goals. In addition, agencies collect limited information on the results of the diesel emissions reduction activities they fund and do not have a baseline assessment of nationwide diesel emissions, which they could use to measure progress. Also, collaboration among the 14 programs that fund activities that reduce mobile source diesel emissions is essential to efficiently and effectively reduce diesel emissions. As the focus on results as envisioned by the Government Performance and Results Act implies, federal programs contributing to the same or similar results should be closely coordinated to ensure that goals are consistent, and, as appropriate, program efforts are mutually reinforcing. Agencies often face barriers in their efforts to collaborate, and some best practices for overcoming these barriers include identifying agency roles and responsibilities as well as identifying and leveraging collective resources. Further, when federal efforts are fragmented, this coordination can be achieved through collaboratively developing crosscutting performance measures. However, as we found, these 14 programs generally do not collaborate and collect limited information on the results of the activities they fund that reduce diesel emissions. Without collaboration and crosscutting performance measures, agencies do not have needed information to assess the effectiveness and efficiency of their programs or identify any unnecessary duplication. We are making two recommendations to help ensure effectiveness and accountability: 1. For transit grant programs, we recommend that the Secretary of Transportation require the Administrator of the Federal Transit Administration to develop quantifiable performance measures, a leading practice based in Government Performance and Results Act principles, for the agency’s environmental sustainability and economic competitiveness strategic goals. 2. For federal funding that reduces diesel emissions, we recommend that the Secretary of Energy, the Secretary of Transportation, and the Administrator of the EPA, consistent with statutory obligations, establish a strategy for collaboration among their grant and loan programs in their activities that reduce mobile source diesel emissions. This strategy should help the agencies identify agency roles and responsibilities for activities that reduce diesel emissions, including how a collaborative effort will be led; identify and address any unnecessary duplication, as appropriate; identify and leverage resources needed to support funding activities that reduce diesel emissions; assess baseline levels of diesel pollution and the contributors to mobile source diesel emissions to help agencies target, within their discretion, investments and, as appropriate, inform efforts to measure program effectiveness; and develop crosscutting performance measures, as appropriate, to monitor the collective results of federal funding for activities that reduce diesel emissions. We provided a draft of this report to the Secretary of Energy, the Secretary of Transportation, and the Administrator of EPA for their review and comment. In its written comments, EPA stated that it agreed with our findings and relevant recommendation. EPA’s comments can be found in appendix V. In its comments, DOE questioned several of our findings but agreed with our relevant recommendation. Specifically, DOE stated that our report mischaracterizes the agency as having a statutory responsibility for diesel emissions reductions. Our report does not contain such a statement. Rather, it identifies 14 programs, including 3 DOE programs, that fund activities with the effect of reducing diesel emissions and states that programs with related responsibilities should coordinate their efforts. Our report states that most of the programs we identified have other goals or purposes and do not focus on diesel emissions reduction; nonetheless, each of the programs does fund such activities. Our report also recognizes the varying statutory requirements for each program and recommends that the agencies establish a strategy for collaboration that is consistent with their existing statutory obligations. DOE also stated that our report mischaracterizes DOE as not collaborating with other government agencies. Our report states that DOE collaborates with other agencies on broad issues but does not collaborate on diesel-related issues. In addition, DOE stated that our report mischaracterized the agency as sharing redundant national goals with DOT and EPA. Our report does not discuss DOE’s national goals, their relationship to those of other agencies, or whether they are redundant. Rather, our report (1) focuses on DOE programs that fund activities that result in diesel emissions reductions and (2) demonstrates that these programs share similar goals with DOT and EPA programs that fund the same activities. Specifically, each of these programs shares some goals, such as reducing emissions, increasing energy efficiency, and reducing fuel use. DOE also provided technical comments, which we incorporated as appropriate. DOE’s comments and our response can be found in appendix VI. DOT questioned several of this report’s key findings and its recommendations. Specifically, DOT stated that we inaccurately described the Federal Transit Administration’s programs as funding diesel emissions reduction activities. Our report identifies activities that reduce diesel emissions, including replacing existing diesel vehicles and installing devices that reduce idling of diesel engines, and identifies six Federal Transit Administration programs that fund these same activities. In addition, DOT questioned the evidence underlying our finding of fragmentation among the federal programs within our review. DOT stated that we identified independent programs with varying objectives that, in some cases, include similar activities. As we reported, fragmentation occurs when more than one federal agency, or more than one organization within an agency, is involved in the same broad area of national need. Further, our report does not state that fragmentation implies small, incomplete, or broken parts strewn across government, as DOT’s comments state. Our report clearly identifies fragmentation, overlap, and duplication among the 14 federal programs that fund diesel emissions reduction activities. Consistent with our established definition of fragmentation and our evidence, we stand by our finding that federal grant and loan funding for activities that reduce diesel emissions is fragmented across 14 programs. DOT also questioned our finding that the effectiveness of federal funding for diesel emissions reduction activities is unknown. DOT stated that we could have used available air quality data from EPA to assess the effectiveness of the programs we reviewed. We reviewed air quality data from EPA and determined that it was not possible to establish a causal link between the EPA data and the programs we reviewed. Moreover, principles of good governance indicate that agencies that use scarce federal resources should establish quantifiable performance measures for use in administering their programs. This is particularly important when multiple agencies engage in the same or similar activities, even if the activities contribute to different goals. Related to this finding, DOT questioned why the report does not include information that the Federal Transit Administration provided on its contribution to air quality improvement through replacing transit buses. We reviewed this information and found that the numbers the Federal Transit Administration provided were based on unverified assumptions and estimates rather than actual data on the number of diesel buses replaced. As such, the numbers were not reliable for the purposes of our report. In several instances, DOT questioned our recommendation that the Federal Transit Administration should develop quantifiable performance measures for its environmental sustainability and economic competitiveness strategic goals. DOT’s comments on this recommendation reflect a misinterpretation of the recommendation. Specifically, DOT incorrectly stated that our report recommended that the Federal Transit Administration develop quantifiable performance measures relating to diesel emissions reductions. Neither of our recommendations called for DOT to establish such performance measures. Instead, we recommended that (1) the Federal Transit Administration develop performance measures for two of its agencywide strategic goals and (2) DOE, DOT, and EPA establish a strategy for collaboration on diesel emissions reduction activities that, among other things, helps the agencies develop crosscutting performance measures, as appropriate, to assess the collective results of federal funding for activities that reduce diesel emissions. DOT also stated that it operates in full compliance with the Government Performance and Results Act. Specifically, DOT said that it has established outcome-focused performance measures that are appropriate for its programs and mission focus. Our report does not assess DOT's compliance with the Government Performance and Results Act. Rather, it identifies the Federal Transit Administration's strategic goals that relate to the agency's relevant programs and states whether the Federal Transit Administration has developed performance measures for these goals. Our report states that principles of good governance indicate that agencies should establish quantifiable performance measures to demonstrate how they intend to achieve their goals and measure the extent to which they do so. Our report also states that Government Performance and Results Act requirements for agencies to set goals for program performance and to measure results can serve as leading practices for lower levels within federal agencies. We have clarified the report language and recommendation to state that, on the basis of these leading practices, we recommend the Federal Transit Administration establish performance measures for the two agency-wide strategic goals of environmental sustainability and economic competitiveness that relate to the programs involving diesel emissions reduction activities. The Federal Transit Administration provided no evidence that it has established performance measures for these strategic goals. Importantly, the agency’s fiscal year 2012 budget justification that it submitted to Congress—the document that Federal Transit Administration officials said contained the agency’s goals and performance measures—did not include performance measures for its environmental sustainability and economic competitiveness strategic goals. We continue to believe that the Federal Transit Administration should establish performance measures for these goals. Regarding our recommendation that DOE, DOT, and EPA establish a strategy for collaboration among their programs that reduce mobile source diesel emissions, DOT agreed that collaboration can be useful but questioned its usefulness in this context. Specifically, DOT stated that the report demonstrates no specific deficiency that has occurred due to the existing level of collaboration. As our report states, DOE, DOT, and EPA were generally unaware of other programs that fund activities that decrease diesel emissions. Additionally, we reported that representatives of several DOE and DOT programs were unaware of related programs within their own agencies that fund the same underlying activities. Our report also states that EPA officials said that enhanced collaboration could improve the effectiveness of federal funding for activities that reduce diesel emissions. In its comments, DOT stated that the report does not offer evidence to support why establishing a strategy for collaboration among entities that fund these activities should be a priority use of federal resources. While the programs we reviewed have been designed for different purposes, coordination among programs with related responsibilities and that fund the same activities is essential to the efficient and effective use of resources. Further, uncoordinated programs can waste scarce funds and limit the overall effectiveness of federal spending. We therefore continue to believe that our recommendation is warranted. DOT also stated that the report does not effectively demonstrate that our recommended actions will produce cost-effective investments appropriate for DOT that do not potentially duplicate efforts elsewhere in the government. We believe it is entirely appropriate for the Federal Transit Administration to establish performance measures for its goals and do not see how this would duplicate other efforts within the government. We also continue to believe that establishing a strategy for collaboration is an appropriate investment that would help ensure the effectiveness and accountability of federal funding for activities that reduce diesel emissions. As we noted, such a strategy should help agencies identify and address any unnecessary duplication. Finally, DOT's comments emphasized its view that its programs focus on their statutory mission of transit, whereas diesel emissions reduction is a corollary benefit. Our report states that most of the programs we identified have other goals or purposes and do not focus on diesel emissions reduction; nonetheless, each of the programs does fund such activities. Our report also recognizes the statutory requirements for each program and recommends that the agencies establish a strategy for collaboration that is consistent with existing statutory obligations. DOT’s comments can be found in appendix VII. We are sending copies of this report to the Secretaries of Energy and Transportation, the Administrator of the EPA, appropriate congressional committees, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VIII. This report examines the (1) extent to which duplication, overlap, fragmentation, or gaps, if any, exist among federal grant, rebate, and loan programs that address mobile source diesel emissions; (2) effectiveness of federal funding for activities that reduce mobile source diesel emissions; and (3) extent to which collaboration takes place among agencies that fund activities that reduce mobile source diesel emissions. To address the first objective, we identified federal grant, rebate, and loan programs that address mobile source diesel emissions, and reviewed information about each program to identify duplication, overlap, fragmentation, and gaps. To identify the programs that address diesel emissions, we (1) conducted a literature review of government reports, academic materials, legislation, transcripts, appropriations, trade and industry articles, and other relevant publications; (2) interviewed agency officials and relevant industry stakeholders; and (3) reviewed agency documents, including information about activities eligible for funding. For the literature review, we searched twenty databases and websites— Article First, Congressional Research Service, Congressional Budget Office, Inspectors General, Policyfile, ProQuest, Worldcat, National Technical Information Services, Wilson’s Applied Science and Technical Abstracts, and the Catalog of Federal Domestic Assistance, among others—for materials published in the last 10 years that may identify relevant federal grant, rebate, and loan programs. Next, we interviewed agency and relevant third-party officials and analyzed agency documents to determine if the programs our searches identified could provide funding for activities that reduce diesel emissions. For this review, we identified programs that fund activities that directly reduce diesel emissions and did not include programs that fund activities, such as research and development efforts, that have the potential to reduce diesel emissions in the future. We held these interviews and conducted these searches from June 2011 to September 2011. For each program we identified as reducing diesel emissions, we conducted structured interviews of agency officials and reviewed agency documents to determine the types of funding the program provides as well as its purpose, goals, eligible activities, and eligible applicants. We then compared each of these areas across the programs to identify areas of duplication, overlap, or fragmentation. We also compared eligible recipients under each program with available data on the sources of diesel emissions to identify any gaps among the programs, such as mobile sources of diesel emissions for which funding opportunities are not available. For the duplication, overlap, and fragmentation we found, we interviewed agency officials and relevant industry stakeholders to determine its causes and impact. In addition, we obtained and analyzed funding data from the Department of Energy (DOE), the Department of Transportation (DOT), and the Environmental Protection Agency (EPA) to determine the total amount of federal funding for diesel emissions reduction projects from fiscal years 2007 through 2011. We selected fiscal years 2007 through 2011 as our time period because, by 2007, EPA had issued emissions standards for key on-road sources, such as heavy-duty trucks and buses, as well as a rule requiring refiners to reduce the sulfur content—and therefore the emissions—of certain diesel fuels. We obtained these data from DOE for the Clean Cities, Energy Efficiency and Conservation Block Grant, and State Energy programs; from DOT’s Federal Aviation Administration for the Voluntary Airport Low Emissions program; from DOT’s Federal Highway Administration for the Ferry Boat and State Infrastructure Banks programs; from DOT’s Federal Transit Administration for the National Fuel Cell Bus Technology Development and Transit Investments in Greenhouse Gas Emissions Reduction programs; and from EPA for the Diesel Emissions Reduction Act Program. However, DOT’s Federal Transit Administration was unable to provide this data for the Bus and Bus Facilities, Clean Fuels Grant, Congestion Mitigation and Air Quality Improvement, Transit in Parks, and Urbanized Area Formula Grants programs. A Federal Transit Administration official said that because the agency did not track which awards under these programs reduced diesel emissions or diesel fuel use, it was unable to identify the amount of funding each of these programs provided for activities that reduced diesel emissions. The official said that the agency did not track these data because statutory requirements do not call for such tracking. Instead, the agency provided us access to its grants management database, from which we estimated the amount of funding provided for diesel emissions reduction projects for the Clean Fuels Grant, Congestion Mitigation and Air Quality Improvement, and Transit in Parks programs, but we were unable to estimate the amount of funding provided through the Bus and Bus Facilities or Urbanized Area Formula Grants programs due to the limited timeframes of our review. We reviewed documents about the underlying databases that DOE, DOT, and EPA use to collect grant information and interviewed knowledgeable agency officials to assess the reliability of the data for each program. We determined that the data obtained from these agencies were sufficiently reliable for the purposes of this report. In addition, the Federal Transit Administration provided estimates of the amount that its Bus and Bus Facilities, Clean Fuels Grant, Congestion Mitigation and Air Quality Improvement, Transit in Parks, and Urbanized Area Formula Grants programs awarded from fiscal years 2007 through 2011 for projects that reduced diesel emissions. The agency derived these estimates by identifying obligations made under each of these five programs from fiscal years 2007 through 2011 for purchasing replacement transit vehicles. However, the agency does not consistently collect information on the fuel-type of the vehicles it replaces; rather it collects information on the intended purchase, by fuel-type, for all obligations made in each grant by year and program. The Federal Transit Administration provided this information to GAO; however, this information does not accurately reflect the amount of funding provided for replacement vehicles that reduced diesel emissions, and we did not include the information in this report. To address the second objective, we reviewed and analyzed agency officials’ responses to structured interview questions on their program goals and performance information. We also analyzed agency strategic plans, budget documents, and other agency documentation containing performance information. We reviewed relevant provisions of the Government Performance and Results Act of 1993, as amended by the Government Performance and Results Act Modernization Act of 2010, as well as our prior work on performance measurement. To address the third objective, we reviewed and analyzed agency officials’ responses to structured interview questions on coordination with other programs and assessment of diesel pollution. We also reviewed our prior work on collaboration to compare these programs’ efforts with best practices for federal programs. In addition, to identify tax expenditures that provide incentives that address mobile source diesel emissions, we reviewed tax expenditure lists produced by the U.S. Department of the Treasury and the Joint Committee on Taxation; reports by the Congressional Research Service, including the 2010 tax expenditure compendium; and a DOE list of federal incentives related to alternative fuels, vehicles, and air quality.DOE, DOT, and EPA as well as industry stakeholders. We also interviewed agency officials at We conducted this performance audit from May 2011 to February 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. Clean Cities program. DOE’s Clean Cities program, administered by the Office of Energy Efficiency and Renewable Energy, is a government- industry partnership that works to reduce America’s petroleum consumption in the transportation sector. The program provides competitive grants for projects that implement a range of energy-efficient and advanced vehicle technologies, such as hybrids, electric vehicles, plug-in electric hybrids, hydraulic hybrids, and compressed natural gas vehicles, helping reduce petroleum consumption across the United States. The program also supports refueling infrastructure for various alternative fuel vehicles, as well as public education and training initiatives. Energy Efficiency and Conservation Block Grant program. The Energy Efficiency and Conservation Block Grant program, administered by DOE’s Office of Energy Efficiency and Renewable Energy, provides funds through competitive and formula grants to states, territories, federally-recognized Indian tribes, and local governments to develop and implement projects to improve energy efficiency and reduce energy use and fossil fuel emissions in their communities. State Energy Program. The State Energy Program, administered by DOE’s Office of Energy Efficiency and Renewable Energy, provides technical and financial assistance to states through formula and competitive grants. States may use such grants to develop, modify, and implement approved state energy conservation plans. Voluntary Airport Low Emissions program. The Voluntary Airport Low Emissions program provides funding to reduce airport ground emissions at commercial service airports in areas failing to meet or maintain National Ambient Air Quality Standards. Grant funding generally supports projects such as electrification of airport gate systems, the incremental cost of purchasing electric luggage carts, and purchasing airport shuttle buses that use alternative fuels. The Federal Aviation Administration considers applications for Voluntary Airport Low Emissions grants on a case-by-case basis based on the project’s importance relative to other eligible airport activities. The agency also considers each project’s cost effectiveness and reductions in air emissions. Congestion Mitigation and Air Quality Improvement program. Jointly administered by Federal Highway Administration and the Federal Transit Administration, the Congestion Mitigation and Air Quality Improvement program provides grants to state departments of transportation, metropolitan planning organizations, and transit agencies for a variety of transportation projects in areas that do not meet or have previously failed to meet federal air quality standards. The program distributes funding through a statutory formula primarily based on population in areas of certain air quality status. The Safe, Accountable, Flexible, and Efficient Transportation Equity Act: A Legacy for Users of 2005 expanded the focus of eligible projects under the program, placing more priority on diesel engine retrofits and cost-effective emission reduction and congestion mitigation projects that also provide air quality benefits. Ferry Boat Discretionary program. The Intermodal Surface Transportation Efficiency Act of 1991 amended a predecessor ferry program, resulting in this program to construct ferry boats and ferry terminal facilities. Eligible projects include both ferry boats carrying passengers only and those carrying cars and passengers. In general, ferry boats and facilities must be publicly owned or operated, and the ferry facilities must provide connections on a public road, which has not been designated part of the interstate system. The program provides administrative consideration of whether the project will result in a useable facility; what other benefits exist; whether other funds, either state or local, are committed to the project; and whether the project has received program funds in the past. State Infrastructure Bank program. The State Infrastructure Bank program provides the opportunity to all 50 states, Puerto Rico, the District of Columbia, American Samoa, Guam, the Virgin Islands, and the Commonwealth of the Northern Mariana Islands to establish transportation revolving loan funds. States may capitalize their revolving loan funds with federal highway funding, and states could offer a range of loans and credit options, such as low-interest loans, loan guarantees, or loans requiring repayment of interest-only in early years and delayed repayment of the loan’s principal. For example, through a revolving fund, states could lend money to public or private sponsors of transportation projects, project-based or general revenues (such as tolls or dedicated taxes) could be used to repay loans with interest, and the repayments would replenish the fund so that new loans could be supported. Bus and Bus Related Equipment and Facilities program. DOT’s Bus and Bus Facilities program provides capital assistance for new and replacement buses, related equipment, and related facilities for expansion and maintenance purposes. The projects funded by this program are generally determined by Congress. Funds can be provided only to state and local governmental authorities. The purpose of the program is to replace, rehabilitate, and purchase buses and bus-related facilities in support of FTA’s goal of developing a transportation system that (1) maximizes the safe, secure, and efficient mobility of individuals; (2) minimizes environmental impacts; and (3) minimizes transportation- related fuel consumption and reliance on foreign oil. Clean Fuels Grant program. This program provides competitive grants to assist areas in achieving or maintaining the National Ambient Air Quality Standards for ozone and carbon monoxide and to support emerging clean fuel and advanced propulsion technologies for transit buses and markets for those technologies. Eligible projects under the program include (1) purchasing or leasing clean fuel buses, including buses that employ a lightweight composite primary structure and vans for use in revenue service; (2) constructing or leasing clean fuel bus facilities or electrical recharging facilities and related equipment; and (3) purchasing clean fuel, biodiesel, hybrid electric, or zero emissions technology buses that exhibit equivalent or superior emissions reductions to existing clean fuel or hybrid electric technologies. National Fuel Cell Bus Technology Development program. This program is a research, development, and demonstration competitive grant program established to facilitate the development of fuel cell bus technology and related infrastructure. The Federal Transit Administration may award grants for this purpose to up to three geographically diverse nonprofit organizations. The goals of the program are to (1) facilitate the development of commercially viable fuel cell bus technologies, (2) significantly improve transit bus fuel efficiency and reduce petroleum consumption, (3) reduce transit bus emissions, (4) establish a globally competitive U.S. industry for fuel cell bus technologies, and (5) increase public acceptance of the fuel cell vehicles. Paul S. Sarbanes Transit in Parks program. The Transit in Parks program was established to address the challenge of increasing vehicle congestion in and around our national parks and other federal lands by providing competitive grants for capital and planning expenses for new or existing alternative transportation systems in the vicinity of federally owned or managed recreation areas. According to program documents, alternative transportation includes transportation by bus, rail, or any other publicly available means of transportation and includes sightseeing service. It also includes nonmotorized transportation systems such as pedestrian and bicycle trails. The program seeks to conserve natural, historical, and cultural resources; reduce congestion and pollution; improve visitor mobility and accessibility; enhance visitor experience; and ensure access to all, including persons with disabilities. Transit Investments in Greenhouse Gas and Energy Reduction program. The American Recovery and Reinvestment Act of 2009 authorized the Transit Investments in Greenhouse Gas and Energy Reduction program, and the program received funding through fiscal year 2011. The program did not receive funding for fiscal year 2012 in the relevant appropriations act.assist public transportation agencies in implementing strategies for reducing greenhouse gas emissions and energy use in transit operations. Eligible applicants under the program include public transportation agencies, federally recognized tribes, and state departments of transportation. Two types of projects are eligible for funding under the Transit Investments in Greenhouse Gas and Energy Reduction program: capital investments that assist in reducing the energy consumption of a transit agency and capital investments that reduce greenhouse gas emissions of a transit agency. For purposes of the Transit Investments in Greenhouse Gas and Energy Reduction program, energy consumption is defined as energy purchased directly by the public transportation agency. Examples of energy include diesel fuel, compressed natural gas, and electricity purchased from power plants. Emissions are defined as those emitted directly by the assets of the public transportation agency. An urbanized area is an area with a population of 50,000 or more that is designated as such in the 2000 Census by the U.S. Department of Commerce, Bureau of the Census. 200,000 or more. Funds are first apportioned based on a formula provided in law to designated recipients (typically metropolitan planning organizations or a state or regional authority responsible for capital projects and for financing and directly providing public transportation). Designated recipients allocate the apportionment among eligible transit service providers in the urbanized area. Eligible uses of program funds include planning, design, and evaluation of transit projects and capital investments in bus-related activities, such as replacement, overhaul, and rebuilding of buses. Diesel Emissions Reduction Act Program. This program provides grant funding to reduce emissions from existing diesel engines through engine retrofits, rebuilds, and replacements; switching to cleaner fuels; and other strategies. The program offers funding through four subprograms: the National Clean Diesel Funding Assistance Program awards competitive grants for projects implementing EPA verified and certified diesel emissions reduction technologies, the National Clean Diesel Emerging Technologies Program awards competitive grants for projects that develop and evaluate emerging diesel emissions reduction technologies, the SmartWay Clean Diesel Finance Program awards competitive grants to establish low-cost revolving loans or other innovative financing programs that help fleets reduce diesel emissions, and the State Clean Diesel Grant Program allocates funds to participating states to implement grant and loan programs for clean diesel projects. This tax expenditure excludes certain idling reduction devices from the federal excise tax. Under federal excise tax law, heavy truck, trailer, and tractor parts sold separately from the vehicle generally are subject to a 12 percent retail tax. The Energy Improvement and Extension Act of 2008 excludes qualified idling reduction devices from the federal retail tax on vehicle parts. EPA, in consultation with the Secretaries for the DOT and DOE, maintains a list of devices approved for the tax exemption. An idle reduction device is generally a device or system that provides services, such as heat, air conditioning, or electricity, to the vehicle or equipment without the use of the main drive engine while the vehicle or equipment is temporarily parked or remains stationary, hence reducing unnecessary idling of the vehicle or equipment. No estimate of forgone federal tax revenue for this excise tax provision is available because the Department of the Treasury reports estimates only for income tax expenditures and does not report estimates for tax provisions that result in forgone excise tax only. This tax expenditure provides an income tax credit as well as an excise tax credit for the production and use of biodiesel. The use of biodiesel instead of conventional diesel fuel significantly reduces particulate matter and hydrocarbon emissions. The biodiesel fuels income tax credit is the sum of three credits: (1) the biodiesel mixture credit, which provides $1 for each gallon of biodiesel and agri-biodiesel used by the taxpayer in the production of a qualified biodiesel mixture; (2) the biodiesel credit, which is $1 per gallon for each gallon of unblended biodiesel and agri-biodiesel when used as a fuel or sold at retail; and (3) the small agri-biodiesel producer credit, which is 10 cents per gallon for up to 15 million gallons of agri-biodiesel produced by small producers. The biodiesel excise tax credit provides a tax credit of $1 for each gallon of biodiesel or agri- biodiesel a taxpayer used to produce a biodiesel mixture for sale or use in a trade or business. Renewable diesel fuel is eligible for both the income tax credit and excise tax credit at a rate of $1 per gallon. According to Department of the Treasury estimates, in fiscal year 2010, the biodiesel income tax credits resulted in $20 million in forgone federal income tax revenue, and the biodiesel excise tax credit resulted in $490 million in forgone federal excise tax revenue. A claim for credit or refund may be made for the nontaxable use of a diesel-water fuel emulsion—a mixture of diesel, water, and additives— and for undyed diesel fuel used to produce a diesel-water fuel emulsion. The presence of water in the emulsion reduces both nitrogen oxide and particulate matter emissions from the diesel fuel. The claim rate for nontaxable use of a diesel-water fuel emulsion taxed at 19.8 cents per gallon is 19.7 cents (if exported, the claim rate is 19.8 cents). The following are the nontaxable uses for a diesel-water fuel emulsion for which a credit or refund may be allowable to an ultimate purchaser: on a farm for farming purposes; off-highway business use; export; in a qualified local bus; in a school bus; other than as fuel in the propulsion engine of a train or diesel-powered highway vehicle, but not off-highway use; exclusive use by a qualified blood collector organization; in a highway vehicle owned by the United States that is not used on a highway; exclusive use by a nonprofit educational organization; exclusive use by a state, political subdivision of a state, or the District of Columbia; and in an aircraft or vehicle owned by an aircraft museum. No estimate of forgone federal tax revenue for this excise tax provision is available because the Department of the Treasury reports estimates only for income tax expenditures and does not report estimates for tax provisions that result in forgone excise tax only. 1. We agree that the DOE programs identified in this report fund projects that have a secondary effect of reducing diesel emissions. As our report states, these programs fund activities, such as retrofitting, rebuilding, or replacing existing diesel engines or vehicles, which have the effect of reducing diesel emissions. Our report also states that these programs generally focus on goals or purposes that do not directly relate to reducing diesel emissions. We did not modify our report based on this comment. 2. Our report does not evaluate whether DOE programs have established performance measures specific to mobile source diesel emissions reductions. Rather, this report states that DOE has established performance measures for the agency’s strategic goals that relate to its programs that fund diesel emissions reduction activities. We did not modify our report based on this comment. 3. Our report recognizes that DOE, DOT, and EPA consult on broad issues and states that the programs at these agencies that fund diesel emissions reduction activities generally do not collaborate. We did not review any collaboration that occurs among programs other than the 14 identified in our report or is not specifically related to diesel emissions reductions because this was outside the scope of our review. We did not modify our report based on this comment. 4. We disagree with DOE’s statement that there is not fragmentation or overlap among the 14 programs identified in our report. As our report states, fragmentation occurs when more than one federal agency, or more than one organization within an agency, is involved in the same broad area of national need. We found that the 14 programs that fund activities that have the effect of reducing diesel emissions are involved in the same area of national need. Our report states that overlap occurs when multiple agencies and programs have similar goals, engage in similar activities or strategies to achieve them, or target similar beneficiaries. As our report shows, each of the 14 programs shares goals, activities, or beneficiaries with at least one other program. In addition, we agree with DOE’s statement that it does not have a quantifiable goal associated with reducing diesel emissions. As we reported, DOE’s 3 programs that fund diesel emissions reduction activities share one or more broad goals, such as reducing emissions, increasing energy efficiency, and reducing fuel use, with the other 11 programs that fund these activities. We did not modify our report based on this comment. 5. We revised our report to note that DOE does not quantitatively collect information on diesel emissions reductions. We also noted that the three DOE programs collect some information related to diesel emissions reductions. For example, our report states that DOE’s Clean Cities program collects information on reductions in gasoline and diesel fuel use, and the agency’s Energy Efficiency and Conservation Block Grant and State Energy programs estimate emissions reductions that result from program activities. Further, we continue to believe that without information on the results of programs’ activities that reduce mobile source emissions, the overall effectiveness of federal grant and loan funding for activities that reduce diesel emissions cannot be determined. 6. We do not state that the secondary effect of reducing diesel emissions is a DOE responsibility. As our report shows, each of the 3 DOE programs we identified as funding diesel emissions reduction activities has responsibilities related to those of the other 11 programs within our review because they fund similar activities and have similar goals, including increasing energy efficiency and reducing fuel use. We continue to believe, as we state in our report, that coordination among programs with related responsibilities is essential to efficiently and effectively meet national concerns. Further, our report states that the DOE programs within our review focus on purposes other than reducing diesel emissions and lists the specific purpose for each DOE program. We did not modify our report based on this comment. 7. We believe this report sufficiently acknowledges the impact of the American Recovery and Reinvestment Act of 2009 on funding for activities that reduce diesel emissions. Our report states that the American Recovery and Reinvestment Act provided $870 million of the $1.4 billion that DOE, DOT, and EPA programs provided for activities that reduced mobile source diesel emissions from fiscal years 2007 through 2011. We did not modify our report based on this comment. In addition to the individual named above, Michael Hix, Assistant Director; Jennifer Beveridge; Colleen Candrl; Elizabeth Curda; Cindy Gilbert; Kristin Hughes; Joah Iannotta; Terence Lam; Zina Merritt; Ray Sendejas; MaryLynn Sergent; Tina Sherman; Ben Shouse; Kiki Theodoropoulos; and Sam Wilson made key contributions to this report. | Exhaust from diesel engines is a harmful form of air pollution. EPA has issued emissions standards for new diesel engines and vehicles, but older mobile sources of diesel emissionssuch as trucks and busescontinue to emit harmful pollution. Programs at DOE, DOT, and EPA provide funding for activities that reduce diesel emissions, such as retrofitting existing diesel engines and vehicles. The existence of these programs at multiple agencies has raised questions about the potential for unnecessary duplication. In response to a mandate in the Diesel Emissions Reduction Act of 2010, GAO examined the (1) extent of duplication, overlap, fragmentation, or gaps, if any, among federal grant, rebate, and loan programs that address mobile source diesel emissions; (2) effectiveness of federal funding for activities that reduce mobile source diesel emissions; and (3) extent of collaboration among agencies that fund these activities. GAO analyzed program data, documents, and relevant laws and regulations and interviewed agency officials. GAO also reviewed three diesel-related tax expenditures. Federal grant and loan funding for activities that reduce mobile source diesel emissions is fragmented across 14 programs at the Department of Energy (DOE), the Department of Transportation (DOT), and the Environmental Protection Agency (EPA). From fiscal years 2007 through 2011, the programs obligated at least $1.4 billion for activities that have the effect of reducing mobile source diesel emissions. The programs have varying goals and purposes; nevertheless, each program allows or requires a portion of its funding to support activities that reduce mobile source diesel emissions, such as replacing fleets of older diesel trucks or school buses with natural gas vehicles. In addition, each of the 14 programs overlaps with at least one other program in the specific activities they fund, the program goals, or the eligible recipients of funding. GAO also identified several instances of duplication where more than one program provided grant funding to the same recipient for the same type of activities. However, GAO was unable to determine whether unnecessary duplication exists because of limited information on program administrative costs, among other things. GAO did not find any gaps among the programs, such as mobile sources that are not eligible for funding. The effectiveness of federal funding for activities that reduce mobile source diesel emissions is unknown because agencies vary in the extent to which they have established performance measures. DOE and EPA have established performance measures for the strategic goals related to their programs that reduce mobile source diesel emissions. DOT has established such measures for two of its administrationsthe Federal Aviation Administration and Federal Highway Administrationbut has not established such measures for the Federal Transit Administration for two of the four strategic goals that link to its programs that fund diesel emissions reduction activities. Instead, agency officials said they collect information on the current condition of the nations transit fleet, among other things, to measure the performance of its programs. As GAO has previously reported, principles of good governance indicate that agencies should establish quantifiable performance measures to demonstrate how they intend to achieve their goals and measure the extent to which they have done so. In addition, 13 of the 14 programs have purposes other than decreasing diesel emissions, and diesel reductions are a side benefit of efforts to achieve these other goals. As a result, few programs collect diesel-related performance information. Incomplete performance information may limit the ability of agencies to assess the effectiveness of their programs and activities that reduce diesel emissions. The programs that fund activities that reduce diesel emissions generally do not collaborate because of the differing purposes and goals of each program, according to senior DOE, DOT, and EPA officials. The officials also were sometimes unaware of other programs that fund similar activities and said that any existing collaboration was on a case-by-case basis. GAOs previous work has shown that although federal programs have been designed for different purposes, coordination among programs with related responsibilities is essential to efficiently and effectively meet national concerns. Further, without a coordinated approach, programs can waste scarce funds, confuse and frustrate program customers, and limit the overall effectiveness of the federal effort. GAO recommends that DOTs Federal Transit Administration develop performance measures for its two relevant strategic goals and that DOE, DOT, and EPA establish a strategy for collaboration among their programs that fund activities that reduce diesel emissions. DOE and EPA agreed with the relevant recommendation, and DOE questioned several findings. DOT questioned several findings and both recommendations and neither agreed nor disagreed with the recommendations. GAO continues to believe in the need for the performance measures and collaboration. |
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The Bureau of Land Management (BLM) and the Forest Service manage most of the nation's 655 million acres of federal land. BLM is responsible for about 264 million acres of public lands, managed by 12 state offices that are responsible for supervising the operations of 175 field offices nationwide. The Forest Service is responsible for about 192 million acres of public lands, managed by 9 regional offices that are responsible for supervising the operations of 155 national forests. BLM and the Forest Service manage about 93 percent of the 44 million acres of federally owned land in Oregon and Washington. BLM's Oregon State Office manages about 17 million acres of land in the two states, including over 28,000 miles of roads. The state office directs the operations of 10 district offices—9 in Oregon and 1 in Washington—-each responsible for managing BLM's public land resources within its geographic jurisdiction. Six of the Oregon districts contain Oregon and California Grant Lands, distributed in a checkerboard pattern within each district, and interspersed within and around the federal lands is state and private lands. The Forest Service's Region 6 manages about 25 million acres of land in the two states, including nearly 94,000 miles of roads. Region 6 directs the operations of 19 national forests—13 in Oregon and 6 in Washington. BLM's district offices and the Forest Service's national forest offices perform similar land management functions, including restoration of fish and wildlife habitat and designing, constructing, and maintaining roads. BLM and Forest Service land management activities regarding fish habitat in Oregon and Washington are governed by three regional agreements: the Northwest Forest Plan, signed in 1994 for activities on the west side of the Cascade mountain range, and PACFISH and INFISH, signed in 1995, for activities on the east side of the range. Both agencies are required to direct their land management activities toward achieving the objectives of the three agreements. The Northwest Forest Plan's Aquatic Conservation Strategy includes the objective of maintaining and restoring "connectivity within and between watersheds," which must provide "unobstructed routes to areas critical for fulfilling the life history requirements" of aquatic species. In addition, the Northwest Forest Plan's road management guidelines state that the agencies shall "provide and maintain fish passage at all road crossings of existing and potential fish-bearing streams." PACFISH includes the objective of achieving "a high level of habitat diversity and complexity…to meet the life-history requirements of the anadromous fish community inhabiting a watershed." The PACFISH road management guidelines duplicate the Northwest Forest Plan guidance. INFISH provides similar management objectives and guidance for resident native fish outside of anadromous fish habitat. Maintaining fish passage and habitat is particularly important for anadromous fish, which as juveniles migrate up and down stream channels seasonally, then travel from their freshwater spawning grounds to the ocean where they mature, and finally return to their spawning grounds to complete their life cycle. Under the authority of the Endangered Species Act, the National Marine Fisheries Service currently lists four species of salmon—including Coho, Chinook, Chum, and Sockeye—as well as steelhead and sea-run trout as either threatened or endangered anadromous fish in the northwest region. According to agency officials, BLM and Forest Service lands in Oregon and Washington include watersheds that represent some of the best remaining habitat for salmon and other aquatic life, often serving as refuge areas for the recovery of listed species. As such, unobstructed passage into and within these watersheds is critical. Culverts—-generally pipes or arches made of concrete or metal—-are commonly used by BLM and the Forest Service to permit water to flow beneath roads where they cross streams, thereby preventing road erosion and allowing the water to follow its natural course. Culverts come in a variety of shapes and sizes, designed to fit the circumstances at each stream crossing, such as the width of the stream or the slope of the terrain. Historically, agency engineers designed culverts for water drainage and passage of adult fish. However, as a culvert ages, the pipe itself and conditions at the inlet and outlet can degrade such that even strong swimming adult fish cannot pass through the culvert. The agencies remove, repair, or replace culverts to restore fish passage, as shown in figure 1. To meet the objectives of the Northwest Forest Plan and PACFISH, as well as Oregon and Washington state standards, current culvert repair or replacement efforts must result in a culvert that allows the passage of all life stages of fish, from juvenile to adult. As of August 1, 2001, the agencies' fish passage assessments identified almost 2,600 barrier culverts—over 400 on BLM lands and nearly 2,200 on Forest Service lands—-and agency officials estimate that, in total, up to 5,500 fish barrier culverts may exist. BLM's 10 district offices are collecting culvert information as part of their ongoing watershed analysis activities and have not established a date for completing all culvert assessments. The Forest Service, using a regionwide fish passage assessment protocol, plans to complete data collection for all of its 19 forests by the end of calendar year 2001. The culvert information the agencies are collecting will help them coordinate and prioritize culvert repair, replacement, and removal efforts. Based on their current knowledge of culvert conditions, the agencies project that to restore fish passage at all barrier culverts could cost over $375 million and take decades to finish. BLM's district offices are assessing fish passage through culverts as part of the ongoing land management activity of a watershed analysis. A watershed analysis—-a systematic procedure to characterize the aquatic (in-stream), riparian (near stream) and terrestrial (remaining land area) features within a watershed—- is a requirement of the Northwest Forest Plan and provides the foundation for implementing stream and river enhancement projects, timber sales, and road building and decommissioning projects. According to an agency official, the extent to which a watershed analysis has been completed varies by district. The five western Oregon districts entirely within the Northwest Forest Plan's jurisdiction, which contain 98 percent of BLM's culverts on fish-bearing streams, have completed watershed analyses for 87 to 100 percent of their lands. The range for the remaining five districts is 0 to 18 percent. Each BLM district office maintains its own records regarding barrier culverts on its lands. As of August 1, 2001, BLM's district offices had assessed 1,152 culverts for fish passage and identified 414 barrier culverts. BLM plans to continue its ongoing watershed analysis process, and estimates, based on assessments to date, that an additional 282 barrier culverts may be identified, for a total of 696 culverts blocking fish passage. The Forest Service initiated a regionwide assessment of culverts on fish-bearing streams in fiscal year 1999 to determine the scope of fish passage problems and to create a database of culvert information that will allow it to prioritize projects to address barrier culverts on a regionwide basis. The region first developed written guidance and provided implementation training to staff at each forest office. In fiscal year 2000, 13 of the 19 forests conducted the assessments and reported the results to the region's fish passage assessment database. In fiscal year 2001, the remaining six forest offices initiated their assessments and follow-up and verification of the first year's results is ongoing. As of August 2001, the forest offices had assessed 2,986 culverts for fish passage and identified 2,160—or about 72 percent—as barrier culverts. The region plans to complete its assessment by December 2001, and based on its findings thus far, estimates that an additional 2,645 barrier culverts may be identified, for a total of 4,805 culverts blocking fish passage. On the basis of information collected as of August 1, 2001, the two agencies estimate a total of 10,215 culverts on fish-bearing streams under their jurisdictions—2,822 culverts on BLM lands and 7,393 culverts on Forest Service lands—as shown in figure 2. Detailed information on district and forest office culvert assessment efforts is provided in appendix I. Additional ground work is necessary before both agencies have complete information on the extent of barrier culverts on their Oregon and Washington lands, and as such, neither agency has established a process for prioritizing passage restoration projects on a regionwide basis. However, the agencies are using the fish passage information they have collected to help them coordinate and prioritize culvert repair, replacement, and removal efforts on a more limited scale. For example, officials at BLM's Coos Bay district stated that through the ongoing culvert assessment process, they annually reprioritize culvert projects for each resource area within the district and for each watershed within each resource area, thus ensuring that the most critical barriers are addressed first. In addition, according to BLM state office officials, some culverts identified by district offices as fish passage barriers are included in their deferred maintenance and capital improvement project backlog and evaluated for funding among other road and facility projects. State office officials stated that while culvert passage restoration projects have not ranked high due to the critical nature of other backlog projects, they expect barrier culvert projects to move up the list for funding as the backlog is reduced. National forest offices use their culvert fish passage assessment information to assist them in prioritizing culvert maintenance activities and for broader road management planning purposes. For example, in fiscal year 2001, regional officials directed each forest office to identify its top five culvert passage restoration projects when submitting its final assessment report. The region considered these projects for funding; however, according to a regional office official, it is not known how many of these projects were actually completed. In addition, Olympic National Forest officials stated that they have developed a draft road management strategy that uses the fish passage assessment results as input to assist them in further prioritizing of road projects identified by the strategy. Although BLM and the Forest Service are currently addressing barrier culverts based on the assessment information they have collected, agency officials estimate, based on their results to date, that it may cost over $375 million and take decades to restore fish passage at all barrier culverts. BLM officials estimate a total cost of approximately $46 million to eliminate their backlog of about 700 barrier culverts, while Forest Service officials estimate a total cost of about $331 million to eliminate their backlog of approximately 4,800 barrier culverts. At the current rate of replacement, BLM officials estimate that it will take 25 years to restore fish passage through all barrier culverts, and Forest Service officials estimate that they will need more than 100 years to eliminate all barrier culverts. Furthermore, these estimates do not reflect any growth in the backlog due to future deterioration of culverts that currently function properly. According to BLM and Forest Service officials, several factors restrict their ability to quickly address the long list of problem culverts. Of most significance, the agencies assign a relatively low priority to such culvert projects when allocating road maintenance funds because ensuring road safety is the top priority for road maintenance, repair, and construction funds. Both agencies emphasize reducing the backlog of road maintenance rather than specifically correcting barrier culverts. Because neither agency requests funds specifically for barrier culvert projects, district and forest offices must fund these restoration projects within their existing budgets, and these projects must compete with other road maintenance projects for the limited funds. Therefore, to restore fish passage, the agencies largely rely on other internal or external funding sources not dedicated to barrier removal nor guaranteed to be available from year-to-year. Other factors affecting the agencies' efforts to restore fish passage include the complex and lengthy federal and state project approval process to obtain environmental clearances and the limited number of agency engineers experienced in designing culverts that meet current fish passage requirements. Furthermore, to minimize disturbance to fish and wildlife habitat, states impose a short seasonal "window of opportunity" within which restoration work on barrier culverts can occur. As a result, each barrier removal project generally takes 1 to 2 years from start to finish. Both BLM and the Forest Service regard culverts as a component of their road system—similar to bridges, railings, signs, and gates—each requiring maintenance, including repair, replacement, and removal to ensure safe operation. As such, each agency requests funding for road maintenance as a total program of work rather than requesting funding specifically for culvert maintenance, or more specifically, to restore fish passage at barrier culverts. Furthermore, according to agency guidance, ensuring road safety is the top priority for road maintenance activities rather than removing barrier culverts. Individual forest and district offices must fund culvert projects within their road maintenance allocations, compete with other units for deferred maintenance funds, or use other funding sources. BLM's state office and the Forest Service's regional office each allocate annual road maintenance funds to districts and forests primarily based on the miles of roads each contains and distribute additional funds to those units for maintenance projects on a competitive basis. BLM's fiscal year 2001 annual road maintenance funding totaled about $6 million, while according to officials, about $32 million is required to meet annual maintenance needs, including culverts. The Forest Service's fiscal year 2001 annual road maintenance funding totaled about $32 million, while according to officials, about $129 million is required to meet their annual maintenance needs, including culverts. Due to their large backlogs of deferred maintenance, officials of both agencies stated that deferred maintenance funds have not been distributed to district or forest offices for fish passage restoration projects. In the absence of sufficient road maintenance funding, the district and forest offices largely rely on other internal or external funding sources not specifically dedicated to barrier removal nor guaranteed to be available from year-to-year to restore anadromous fish passage at barrier culverts. As shown in figure 3, BLM's district offices reported that since fiscal year 1998, they relied almost entirely on Jobs-In-The-Woods program funding, which seeks to support displaced timber industry workers within BLM's Oregon and California Grant Lands. BLM distributes this funding to the western districts in Oregon containing the Oregon and California Grant Lands to fund contracts with local workers to do stream restoration projects, including barrier culvert repair and replacement. While BLM officials view the Jobs-In-The-Woods program as an ongoing source of funding for culvert projects, this funding source is not dedicated to barrier removal and BLM may use these funds for a variety of other resource programs or projects. Other BLM barrier culvert project funding sources include timber sales and the Federal Highway Administration's Emergency Relief for Federally-owned Roads to replace storm-damaged culverts. As shown in figure 4, national forest offices reported that since fiscal year 1998 they have primarily relied on the Federal Highway Administration's funding and the National Forest Roads and Trails funds for projects to restore anadromous fish passage at barrier culverts. Due to severe flooding in recent years and widespread damage to culverts, forest offices obtained Federal Highway Administration funds to replace damaged culverts and concurrently ensure these culverts meet current fish passage standards. While such funds enabled the forest offices to address barrier culverts, the forest offices cannot rely on future flood events to ensure a steady stream of funding for such projects. National Forest Roads and Trails funds consist of 10 percent of the receipts of the national forests made available to supplement annual appropriations for road and trail construction and projects that improve forest health conditions. Forest offices used these funds to restore fish passage at barrier culverts and to fund their ongoing culvert fish passage assessment effort. These funds, however, are not dedicated to fish passage projects, but rather culvert projects compete with other road projects for these funds on a regionwide basis. Other funding sources for Forest Service fish passage projects include Jobs-In-The-Woods and timber sales. In addition to limitations on the amount of funding available for barrier culvert projects and uncertainty regarding the continuity of such funding, three other factors affect the agencies' efforts to restore fish passage. These factors are (1) the complex and lengthy federal and state project approval process, (2) the limited number of agency engineers with experience designing culverts that meet current fish passage standards, and (3) the short seasonal "window of opportunity" during which work on barrier culverts can occur. Each of these factors affects the time frame needed to complete each of the major phases of a barrier culvert project— specifically, obtaining necessary permits and clearances, designing the culvert, and constructing the culvert—and consequently impacts the number of projects that can be completed annually. Due to these factors, culvert projects to restore culvert fish passage take 1 to 2 years to complete, according to BLM and Forest Service officials. First, BLM and Forest Service officials stated that the number of fish passage projects the agencies can undertake and the speed with which they can be completed depend largely on how long it takes to obtain the various federal and state clearances necessary to implement a culvert project. Under the National Environmental Policy Act, an assessment of each project's impact on the environment must be completed before construction can commence. If the assessment indicates that an endangered species may be adversely affected by the project, Section 7 of the Endangered Species Act of 1973 requires the agency to consult with the appropriate authority—generally the National Marine Fisheries Service for anadromous fish and the Fish and Wildlife Service for other species— to reach agreement on how to mitigate the disturbance. BLM and the Forest Service have entered into an agreement with the consulting agencies to expedite the process through streamlined procedures. However, according to agency representatives, factors such as staffing shortages and turnover, as well as differing interpretations of the streamlining guidance, have prevented the revised consultation process from producing the efficiencies desired by the agencies, and it is currently under review. In addition to consultation: the U.S. Army Corps of Engineers requires a permit for fill or excavation in waterways and wetlands; Oregon requires a "removal and fill" permit for in-stream construction; and Washington requires a hydraulic project permit to engage in construction activities within streams. According to information provided by district and forest offices for 56 completed culvert projects, the clearance and permit process is the most time-consuming phase of a culvert project, ranging from a low of 4 weeks to a high of 113 weeks, for an average of about 31 weeks. Second, BLM's and the Forest Service's efforts to eliminate barrier culverts are restricted, according to agency officials, by the limited number of engineers available to design them, and more specifically, the few with experience in designing culverts that meet current fish passage requirements. As a result, district and forest officials speculate that additional hiring or contracting with engineering firms for culvert design work may be necessary if greater emphasis is placed on reducing the barrier culvert backlog. Agency officials also emphasized the need for more fish biologists, hydrologists, and other professionals with fish passage design skills. According to time frame information provided by district and forest offices for 56 completed culvert projects, the design process is the second most time-consuming phase of a project, ranging from a low of 4 weeks to a high of 78 weeks to complete, for an average of about 19 weeks. Finally, BLM and Forest Service officials stated that their efforts to eliminate barrier culverts are limited by a short seasonal "window of opportunity" of about 3 months during which fish passage restoration work—that is, construction work within streams— can occur. Oregon and Washington have established these time frames to minimize the impacts to important fish, wildlife, and habitat resources. The summer to fall in- stream work time frames, when construction is most feasible due to low water flow, most commonly run from July to September, but could be as narrow as July 15 to August 15, or just 1 month. According to time frame information provided by district and forest offices for 56 completed culvert projects, construction is the least time-consuming phase of a project, ranging from a low of 4 weeks to a high of 61 weeks to complete, for an average of about 10 weeks. According to BLM and Forest Service officials, the minimum time necessary to complete a barrier culvert project, if all phases of the project are completed in the shortest possible time frame, is about 1 year. However, due to the factors discussed above, projects are more likely to take over a year to complete. The consequences of a delay caused by any one of the factors have a cascading effect on the project completion date. For example, according to agency officials, they generally begin a project by initiating the clearance and permit process and collecting some preliminary engineering information. However, if project clearances are not obtained or imminent by March when project funding decisions are made, construction may be put off to the next year, rather than committing funds to a project that may not be ready for implementation within the seasonal time frames. Similarly, project clearances may be completed timely, but the project may be delayed if an engineer with fish passage design experience is not available. And, if all phases of a project, including construction contracts, are not in place in time to complete construction within the state-mandated stream construction time frames, the project must be put off until the next season. According to the information provided by district and forest offices for 56 projects, the total time to complete a project ranged from a low of 16 weeks to a high of 186 weeks, for an average of 60 weeks. BLM and the Forest Service completed 141 projects to restore fish passage for anadromous fish at barrier culverts from fiscal year 1998 through July 2001 and opened access to an estimated 171 miles of fish habitat. However, because neither agency requires systematic monitoring of these completed projects, the actual extent of improved fish passage is largely unverified. According to agency officials, current culvert fish passage design standards are based on scientific research that considers such factors as the swimming ability of fish at various life stages and the velocity of water. Therefore, the officials assume that fish can migrate into the newly accessible habitat through culverts built to these standards. Furthermore, agency officials cite a lack of funds and available staff as reasons for not requiring systematic post-project monitoring. While district and forest offices may monitor projects on a limited or ad hoc basis, whether both juvenile and adult fish can actually pass through the restored culvert or actually inhabit the upstream areas is not systematically determined. However, the Oregon and Washington state fish passage restoration programs, as well as other local efforts, require systematic post-project monitoring to determine the most effective methods for improving fish passage under various conditions. Without such monitoring, neither the Forest Service nor BLM can ensure that the federal moneys expended for improving fish passage are actually achieving the intended purpose. As shown in figure 5, BLM reported 68 projects completed to restore fish passage for anadromous fish at barrier culverts from fiscal year 1998 through August 1, 2001, opening access to an estimated 95 miles of fish habitat. During the same time frame, the Forest Service reported 73 projects completed to restore fish passage for anadromous fish at barrier culverts and opened access to an estimated 76 miles of fish habitat. The actual extent of improved fish passage is largely unknown, however, because neither agency requires systematic post-project monitoring of completed projects. Forest and district offices undertake a wide range of activities in and around streams to restore aquatic habitat. These activities include eliminating fish passage barrier culverts, as well as other activities such as stabilizing eroding stream banks, planting vegetation, and placing desirable woody debris and boulders into the streams. While each forest and district office is required to conduct monitoring of selected restoration activities, neither agency specifically requires barrier culvert projects be monitored. Therefore, restoration projects selected by district and forest offices for monitoring may or may not include barrier culvert passage projects. Consequently, the agencies do not systematically determine whether fish can actually pass through repaired or replaced culverts. Furthermore, while the miles of habitat theoretically made accessible to fish is estimated, the extent to which fish actually inhabit that stream area is not routinely determined. BLM and Forest Service officials stated that monitoring all culvert fish passage projects would be a costly and time-consuming effort for their already limited staff. Therefore, district and forest staff stated that culvert project follow-up is generally ad hoc in nature. For example, subsequent to project completion, the designing engineer will likely look to see if water appears to be flowing through the culvert as designed, or the fish biologist that helped plan a project may walk up the stream side looking for egg beds to ascertain the presence of fish. However, according to agency officials, a formalized, comprehensive measurement of results, for example, requiring engineers to measure water flows through all completed culverts or biologists to count egg beds in every area of a newly opened habitat is not feasible at current funding and staffing levels. One forest official stated that ideally, every project should have monitoring funds included with the project funds to verify effectiveness, but funding realities have not made this possible. According to BLM and Forest Service officials, in the absence of systematic monitoring, they assume that culverts built to current standards will allow fish migration into the newly accessible habitat. Current culvert design standards are based on scientific research that considers important factors such as the swimming capabilities of fish at various life stages and the velocity of water to guide engineers in building culverts that will allow passage of juvenile to adult fish. BLM primarily follows the standards published by the Oregon State Department of Fish and Wildlife, and the Forest Service follows those same Oregon standards or the Washington Department of Fish and Wildlife's standards, depending on the project's location. Where appropriate, the current standards endorse the use of open bottom culverts that simulate natural stream bottoms and slopes and culvert widths that adhere to the stream's natural width, mimicking the stream's natural features to the greatest extent possible. However, even culvert projects built to current standards may not necessarily result in improved fish passage. District and forest officials characterized culvert fish passage design as an evolving area of study. For example, according to federal and state officials, retrofitting culverts by adding staggered or perforated panels inside to slow down water velocities is a complex design process only applicable in limited circumstances. Another area of concern, according to Forest Service officials, is the length of culverts because questions remain as to how far fish will swim inside a dark culvert. Furthermore, during our field visits to completed culvert project sites, we observed culverts that, according to agency officials, continued to be barriers to fish passage, including a retrofitted culvert that did not sufficiently slow water flow, a replaced pipe that did not allow juvenile fish passage, and a culvert that allowed water to flow under it rather than through it. Systematic post-project monitoring is a requirement of the Oregon and Washington state fish passage restoration efforts on state lands, as well as cooperative local programs on other lands within the states and has helped these programs to identify ways to enhance the effectiveness of fish passage projects. According to an Oregon Department of Fish and Wildlife official, in fiscal year 1999 the state implemented a protocol for systematically monitoring and documenting the results of culvert retrofit projects to improve fish passage. The protocol, jointly developed by Oregon's Department of Fish and Wildlife and Department of Transportation, requires monitoring the movement of water in and around retrofitted culverts to determine if fish passage is improved. In the first year of implementation, the agencies systematically monitored selected culverts retrofitted in 1998 within certain state regions, including visual inspections and water velocity measurements taken at different times to assess how well the retrofit designs slowed water velocity. The monitoring results indicated the retrofit designs, while needing some adjustments, improved fish passage by slowing water and reducing culvert entry jump heights for fish. According to the state official, the agencies are currently developing fish passage monitoring protocols for culverts that have been replaced rather than retrofitted. The Washington Department of Fish and Wildlife, in partnership with the state Department of Transportation, developed and implemented a three- level culvert and fish use evaluation procedure for all culvert retrofit or replacement projects funded by the state's Fish Passage Barrier Removal Program. Agreeing that the best management practice is to avoid "walking away" from a fish passage project once construction is complete, the agencies are systematically assessing culvert projects for design, durability and efficiency; determining if fish use the newly available habitat; and troubleshooting problems identified. The three-level evaluation involves the following steps: First, fish use before and after project completion is determined, and each completed project is evaluated for durability, efficiency, and design flaws, which are corrected during the year following project completion. The culvert is removed from the monitoring list if fish passage is verified and no additional monitoring is required. Second, for culverts where fish passage is not occurring, additional monitoring for fish presence is implemented, and if necessary, other methods to support fish recovery, including supplementation such as planting of hatchery fish, fishing restrictions, or stream habitat improvement projects, are implemented. Third, selected culverts are studied to determine the overall impact on fish populations. Evaluation results as of April 2001 indicated most habitats reclaimed through culvert projects were immediately populated by fish; however, varied responses on some streams require additional monitoring and possibly further enhancement efforts to promote fish recovery. In addition to the state monitoring efforts, local fish passage restoration plans may also require systematic monitoring of project results to ensure they are successful. For example, Oregon's Rogue River Basin Fish Access Team, composed of local stakeholders, watershed councils, and state and federal agencies (including BLM and the Forest Service), has established a basinwide strategic plan to cooperatively prioritize fish passage barriers, secure funding for projects, implement passage enhancement projects, and monitor the success of projects. Specifically, to participate in the program, a monitoring plan must be completed for each project before the project begins. The monitoring plan must determine whether the project was implemented as planned, was effective in solving fish passage problems, and contributed to the expanding fish distribution across the Rogue River basin. Potential techniques suggested to determine effectiveness include spawning and snorkeling (underwater observation) surveys. As their actions demonstrate, Oregon, Washington, and other entities consider systematic monitoring to be an important tool to determine the most effective methods for improving fish passage under various conditions. The systematic monitoring allows the entities to incorporate this knowledge into future restoration planning and implementation. Their varied approaches reflect the range of methods available for monitoring— that is, monitoring improvements to water flow at selected culverts of a specific design type, verifying the actual presence of fish in a newly opened habitat, or developing monitoring plans for specific projects. While each monitoring approach requires a commitment of agency staff and funding to implement, they all provide valuable information for targeting future expenditures on culvert passage restoration methods that most benefit fish. Oregon and Washington's monitoring efforts have helped them to assess the success of various culvert passage restoration methods and identified methods that require adjustments or further study to determine their effectiveness. Without such systematic monitoring programs, neither the Forest Service nor BLM can ensure that the federal moneys expended for improving fish passage are actually achieving the intended purpose. BLM and the Forest Service are faced with the daunting task of addressing a large backlog of fish passage barrier culverts. Given the limited funding available for fish passage projects and the various factors that affect the agencies' ability to complete projects quickly, eliminating barrier culverts will be a long, costly effort. While both agencies are already using culvert assessment information to help them prioritize projects, that is just the beginning of the barrier elimination process. Ultimately, the culvert projects selected for implementation—whether retrofitting existing culverts, replacing culverts, or removing culverts—must achieve the objective of restoring fish passage. Systematic monitoring of completed projects would provide the agencies with information to help them identify which methods actually work best under various circumstances and evidence that their expenditures have actually improved fish passage. Although monitoring would divert funding and staff from the implementation of culvert passage improvement projects, state monitoring programs have demonstrated the value of monitoring to assess the effectiveness of barrier culvert projects and to allow these entities to incorporate this knowledge into future planning and implementation efforts. To determine whether fish passage restoration projects are achieving their intended purpose, we recommend that the Director of BLM and the Chief of the Forest Service each develop guidance for systematically monitoring completed barrier removal projects. This guidance should establish procedures that will allow the agencies to cost-effectively measure and document improvements to fish passage. We provided the Department of the Interior and the Forest Service with a draft of this report for comment prior to issuance. The agencies generally agreed with the content of the report and concurred with our recommendation for systematic monitoring so long as agency officials have the discretion to determine the monitoring approaches and methodologies that will most benefit them in planning and implementing future fish passage projects. We recognize that the agencies will have to exercise discretion in developing this guidance, but they need to ensure that they implement a monitoring program that cost-effectively measures and documents improvements to fish passage. The agencies also provided certain technical clarifications, which we incorporated, as appropriate, in the report. Copies of the agencies' comments are included as appendixes II and III. We conducted our review from March 2001 through October 2001 in accordance with generally accepted government auditing standards. Details of our scope and methodology are discussed in appendix IV. We are sending copies of this report to the Director of the Bureau of Land Management and the Chief of the Forest Service. We will also provide copies to others on request. If you or your staff have any question about this report, please call me at (202) 512-3841. Key contributors to this report are listed in appendix V. The Bureau of Land Management (BLM) and the Forest Service are assessing culverts on their lands in Oregon and Washington to identify barriers to fish passage. Neither agency has completed this effort, but each of the 10 district and 19 forest offices provided their assessment results as of August 1, 2001. In addition, each district and forest office provided the estimated total number of culverts on fish-bearing streams, an estimated number of culverts not yet assessed that may be barriers, and an estimated cost to restore fish passage through barrier culverts. BLM districts reported that they have assessed 1,152 culverts for fish passage and identified 414 barriers. In addition, the districts estimate that 282 additional barrier culverts may exist. BLM estimates that the cost to restore fish passage at all 696 of these barrier culverts could be about $46 million, as shown in table 1. Forest Service national forest offices reported that they have assessed 2,986 culverts for fish passage and identified 2,160 barriers. In addition, they estimate that an almost equal number, about 2,645, of additional barrier culverts may exist. The Forest Service estimates that the cost to restore fish passage at all 4,805 barrier culverts could be about $331 million, as shown in table 2. To determine the number of culverts that may impede fish passage on BLM and Forest Service lands in Oregon and Washington, we interviewed officials and gathered documentation from BLM's Oregon State Office and the Forest Service's Region 6 office, both located in Portland, Oregon. Specifically, we gathered and analyzed information on the number and maintenance status of culverts located in the 10 BLM districts under Oregon State Office jurisdiction and the 19 national forests under Region 6 jurisdiction and the costs and time frames associated with the repair of barrier culverts. We conducted site visits at four BLM district offices in Oregon—Coos Bay, Eugene, Medford, and Prineville—and at nine national forest offices—Deschutes, Ochoco, Rogue River, Siskiyou, Siuslaw, Umatilla, and Williamette in Oregon; and Gifford Pinchot and Olympic in Washington. We met with district and forest office staff and collected information on their culvert inventories and assessment and prioritization efforts and observed completed and potential culvert restoration projects. To identify the factors affecting the agencies' ability to restore passage through culverts acting as barriers to fish, we interviewed BLM and Forest Service headquarters officials, Oregon State Office and Region 6 officials, and district and forest office staff and reviewed policies, procedures, and practices for repairing, replacing, or removing barrier culverts. We gathered and analyzed funding information for 141 anadromous fish passage culvert projects completed in Oregon and Washington from fiscal year 1998 through July 2001, including the amount and source of funds expended for each project. We analyzed detailed time line information for 56 of the 141 projects that included complete start and finish dates for the three main phases of each project—federal and state clearances, design and engineering, and construction. We interviewed agency officials and gathered documentation to identify the factors that affect project time frames and to determine how these factors limit the number of culvert projects that can be completed annually. To determine the results of the agencies' efforts to restore fish passage, we gathered and analyzed information on the number of (1) culverts repaired, replaced, or removed to improve anadromous fish passage and (2) miles of habitat restored from fiscal year 1998 through August 1, 2001, by district and forest offices under Oregon State Office and Region 6 jurisdiction. We interviewed BLM and Forest Service headquarters, state and regional office, and district and forest office officials and reviewed documentation to determine whether regulations, policies, and procedures required systematic monitoring of the effectiveness of the culvert restoration projects. To identify state efforts to monitor the outcome of fish passage projects, we interviewed Oregon and Washington state officials and reviewed regulations, policies, and procedures and monitoring reports provided by the state agencies with fish passage restoration responsibilities. We conducted our work from March 2001 through October 2001 in accordance with generally accepted government auditing standards. In addition to the above, Leo Acosta, Kathy Colgrove-Stone, and Brad Dobbins made key contributions to this report. | The Bureau of Land Management and the Forest Service manage more than 41 million acres of federal lands in Oregon and Washington, including 122,000 miles of roads that use culverts--pipes or arches that allow water to flow from one side of the road to the other. Many of the streams that pass through these culverts are essential habitat for fish and other aquatic species. More than 10,000 culverts exist on fish-bearing streams in Oregon and Washington, but the number that impede fish passage is unknown. Ongoing agency inventory and assessment efforts have identified nearly 2,600 barrier culverts, but agency officials estimate that more than twice that number may exist. Although the agencies recognize the importance of restoring fish passage, several factors inhibit their efforts. Most significantly, the agencies have not made enough money available to do all the necessary culvert work. In addition, the often lengthy process of obtaining federal and state environmental clearances and permits, as well as the short seasonal "window of opportunity" to do the work, affects the agencies' ability to restore fish passages quickly. Furthermore, the shortage of experienced engineering staff limits the number of projects that can be designed and completed. BLM and the Forest Service have completed 141 culvert projects to remove barriers and to open an estimated 171 miles of fish habitat from fiscal year 1998 through 2000. Neither agency, however, knows the extent to which culvert projects ultimately improve fish passage because they don't require systematic post-project monitoring to measure the outcomes of their efforts. |
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Transplants are performed for organs such as kidney, liver, heart, intestine, pancreas, heart-lung, and kidney-pancreas. However, the kidney, liver, and heart are the most commonly transplanted organs. In 2000, doctors performed 13,333 kidney, 4,950 liver, and 2,197 heart transplants. Of these, children made up 617 of the kidney recipients, 569 of the liver recipients, and 274 of the heart recipients. Organ transplants were performed at 261 centers, which had one or more specific organ transplant programs, in 1998. Some of these centers accept both adults and children, and others are for children only. In 1998, pediatric kidney transplants were performed at 129 of the 241 centers that performed kidney transplants; pediatric liver transplants were performed at 77 of the 116 centers that transplanted livers; and pediatric heart transplants were performed at 54 of the 134 centers that transplanted hearts. In 1984, Congress enacted the National Organ Transplant Act (P.L. 98-507), which requires HHS to establish the OPTN. In 1986, HHS awarded the OPTN contract to UNOS, which operates the network under HRSA’s oversight. The OPTN develops national transplantation policy, maintains the list of patients waiting for transplants, and fosters efforts to increase the nation’s organ supply. OPTN members include all transplant centers, organ procurement organizations, and tissue-typing laboratories. Only a small fraction of those who die are considered for organ donation. Most cadaveric organs derive from donors who have been pronounced brain-dead as a result of a motor vehicle collision, stroke, violence, suicide, or severe head injury. When an organ becomes available, staff from the local organ procurement organization typically identify potential recipients from the OPTN computerized waiting list. Patients are ranked on the OPTN waiting list according to points assigned on the basis of time waiting, medical urgency, organ size, and the quality of the tissue-type match between the donor and the potential recipient, as determined by antigen matching. The criteria that determine the order of candidates on the list are applied or defined differently for each type of organ and for pediatric versus adult patients. With certain limitations, organs from pediatric donors can be transplanted into adults, and vice versa. The UNOS computer matches each patient in the OPTN database against a donor’s characteristics and then generates a different ranked list of potential recipients for each transplantable organ from the donor. Organs are generally allocated first to patients waiting in the local organ procurement organization’s service area, with priority based on a patient’s severity of illness. If a matching recipient is not found locally, the organ is offered regionally and then nationally. Organ allocation policies are revised from time to time to reflect advancements in medical science and technology. Title XXI of the Children’s Health Act of 2000 (P.L. 106-310, October 17, 2000) requires the OPTN to recognize the differences in organ transplantation needs between children and adults and adopt criteria, policies, and procedures that address the unique health care needs of children. In addition, the OPTN is to carry out studies and demonstration projects for improving procedures for organ procurement and allocation, including projects to examine and to increase transplantation among populations with special needs, such as children and racial or ethnic minority groups. Finally, the act requires the Secretary of HHS to conduct a study and make recommendations regarding the (1) special growth and developmental issues that children have before and after transplant; (2) extent of denials by medical examiners and coroners to allow donation of organs; (3) other special health and transplantation needs of children; and (4) costs of the immunosuppressive drugs that children must take after receiving a transplant and the extent of their coverage by health plans and insurers. (For a discussion of children’s access to these necessary medications, see app. I.) The Secretary must report to the Congress by December 31, 2001. Pediatric patients in need of an organ transplant continue to face a shortage of donated organs. From 1991 through 2000, the number of pediatric organ donors each year has remained relatively constant, even though the number of potential pediatric donors decreased. The number of adult donors has increased significantly during the same period, in large part because donor eligibility criteria have been expanded to include older donors and donors with certain diseases that were not accepted in the past. Simultaneously, the demand for organs for pediatric patients has grown substantially, with the number of children on waiting lists for organ transplants more than doubling. However, compared to adults, children account for a small number of transplant candidates. Several factors can prevent the recovery of organs from a potential donor. Refusal by the family to give consent for donation is the primary reason for nonrecovery of an organ, but failure by health professionals to identify potential donors or approach families and refusal by medical examiners and coroners to release the body also account for significant losses of transplantable organs. Nonetheless, organs are recovered from a higher proportion of potential pediatric donors than potential adult donors. The number of pediatric donors has held relatively steady despite a drop in the number of potential donors. Our analysis of 1989 through 1997 mortality data for children showed a 20-percent decline in deaths of the kinds that are most likely to result in organ donation, such as those resulting from head trauma, motor vehicle collisions, and violence. (See app. II for a complete list of these causes of death.) Mortality for potential donors up to age 19 years declined from 24,069 deaths in 1989 to 19,327 in 1997, the latest data available at the time of our analysis (see table 1). OPTN data show that from 1991 through 2000, while the number of pediatric donors remained relatively constant, the number of adult donors increased 45 percent (see fig. 1). The large increase in the number of adult donors is primarily due to changes in the criteria for accepting organs from a donor. At one time, organs were accepted only from someone who had been declared brain-dead and was relatively young and free from diseases that could affect organ quality. However, because of the continuing shortage of transplantable organs, transplant professionals have gradually expanded the criteria for acceptable organs. Older individuals and persons with certain medical conditions who previously would have been excluded from donating organs can now be donors.From 1991 through 2000, the number of cadaveric donors aged 50 to 64 increased 108 percent, and the number of cadaveric donors aged 65 or older increased 272 percent. The number of children waiting for a transplant has increased over time, but not as much as for adults (see fig. 2). OPTN data show that the number of pediatric patients awaiting transplants increased from 1,010 in 1991 to 2,299 in 2000, a 128-percent increase. The number of adults on the waiting list has increased even faster, from 23,709 in 1991 to 77,047 in 2000, a 225- percent increase. These increases have been spurred by advances in medical science and technology, which have made transplantation a more acceptable medical procedure; improvements in immunosuppressive medications, which have increased survival rates; and an increase in the incidence of certain diseases that lead to end stage organ failure. Despite these increases, the proportion of patients awaiting transplant who are children has remained fairly constant from 1991 through 2000, at between 3 and 4 percent overall. Several factors can prevent the recovery of organs from potential pediatric and adult donors and thus contribute to the continuing shortage of transplantable organs for both children and adults. For example, for many potential donors, families refuse to give consent for organ donation. For others, health care professionals may fail to offer the families the opportunity to donate. Further, some medical examiners and coroners believe that the need to preserve forensic evidence in certain types of cases, such as suspected child abuse and sudden infant death syndrome, makes it impossible for them to allow organ donation to proceed. The Association of Organ Procurement Organizations (AOPO) recently conducted a study at 31 organ procurement organizations on the reasons why potential adult and pediatric donors do not become organ donors. The study found that consent was not given for 39 percent of potential donors and only 41 percent of suitable individuals actually become organ donors. AOPO provided us with the survey data from the referral, request, and organ recovery processes for the pediatric patients. As our analysis shows in table 2, of the 2,420 potential pediatric donors, organs were recovered in 1,230 cases, or about 51 percent of pediatric cases, a rate higher than the overall donation rate. Family refusal (25 percent) was the most common obstacle to organ recovery, but this occurred less frequently for potential pediatric donors than for the entire group of potential donors. Most pediatric organs are transplanted into adults because adults make up the vast majority of patients waiting for an organ transplant and therefore are more likely to be at a higher status on local organ waiting lists than children. However, the degree to which pediatric organs are transplanted into adults varies by organ. In particular, adult patients receive more pediatric kidneys than pediatric patients do, partly because of the importance of tissue-type matching criteria in the allocation of kidneys.While most pediatric kidneys are transplanted into adults, adult kidneys are sometimes transplanted into children. The situation is different for livers and hearts, where organ size is an important determinant of suitability. Livers and hearts from children under 10 are usually transplanted into pediatric patients, whereas those from children aged 11 to 17 are usually transplanted into adults. Figure 3 shows the distribution of pediatric kidneys, livers, and hearts to pediatric and adult recipients. (See app. III for a detailed listing of the distribution of kidneys, livers, and hearts by age of donor and recipient.) Pediatric livers and hearts that are given to adults have sometimes been refused beforehand for a pediatric patient by the patient’s physician for various medical or logistical reasons. Adult organs are also transplanted into children, but in much smaller numbers. Although the majority of pediatric kidneys are transplanted into adults, some adult kidneys are transplanted into children. From 1994 through 1999, adult donors provided 81 percent of the kidneys procured and pediatric donors provided 19 percent (see table 4 in app. III). Of the adult kidneys, 4 percent were transplanted into children. Of the pediatric kidneys, 93 percent were transplanted into adults. Figure 4 shows the distribution of pediatric kidneys by age of donor and recipient. During that period, 32 percent of the kidneys given to pediatric recipients came from children, and 68 percent came from adults. Kidneys from pediatric donors are most often transplanted into adults because children make up only a small portion of the kidney waiting listand because of the importance of antigen matching as a ranking factor for this organ. Also, the matching criteria for kidneys generally do not include the size (weight and height) of the donor and recipient. When kidneys from small children are given to adults, they are typically transplanted en bloc, meaning that both kidneys are transplanted into the recipient. Transplant center representatives told us that adult kidneys are often preferred for children because of the larger kidney mass. If complications occur, the larger kidney is more apt to continue functioning than a small, pediatric kidney. For liver transplants, the sizes of the donor and the recipient are factors that are considered to obtain an organ of compatible size. From 1994 through 1999, adult donors provided 78 percent of the livers procured and pediatric donors provided 22 percent (see table 5 in app. III). Of the adult livers, 4 percent were transplanted into children. Of the pediatric livers, 63 percent were transplanted into adults, but this varied greatly by age of the donor. Most livers (81 percent) from donors aged 5 years or younger went to recipients in the same age group, and 4 percent went to adults. For the 6- to 10-year-old donors, 47 percent of the livers went to adult recipients, and for the 11- to 17-year-old donors, 89 percent of the livers went to adult recipients. Figure 5 shows the distribution of pediatric livers by age of donor and recipient from 1994 through 1999. During that period, 72 percent of the livers given to pediatric recipients came from children, and 28 percent came from adults. Unlike kidneys and hearts, livers can be reduced in size or split to accommodate the size of the recipient. A reduced-size liver from an adult donor can be transplanted into a pediatric patient. A split liver can yield a portion for an adult and a portion for a child. However, the number of livers that are either reduced or split is small. From 1994 through 1999, fewer than 2 percent of donor livers were reduced for transplantation, and about 1 percent were split for transplantation. Although using reduced or split livers can provide a needed transplant for children, initial studies found that survival rates were lower for pediatric recipients of these types of liver transplants. However, a recent OPTN analysis of 1997-99 transplants has shown similar 1-year survival rates for whole and split-liver transplants. Sometimes an organ from a pediatric donor is transplanted into an adult even though there is a higher-ranking pediatric patient waiting. This only occurs if the transplant center refuses the organ for the higher-ranked patient. According to OPTN data, 1,122 liver transplants occurred during 1997 and 1998 in which an adult recipient received a pediatric organ. Of these, 222 livers were each refused for at least one potential pediatric recipient who was ranked higher on the waiting list than the adult recipient. The most common reasons for refusing the pediatric liver for a pediatric patient involved administrative reasons (e.g., medical judgment, transportation, logistics, and distance concerns) (33 percent), donor size and/or weight (26 percent), and poor donor quality (18 percent). From 1994 through 1999, adult donors provided 75 percent of the hearts procured and pediatric donors provided 25 percent (see table 6 in app. III). Of the adult hearts, 3 percent were transplanted into children. Of the pediatric hearts, 39 percent were transplanted into adults, but this varied greatly by age of donor. For heart transplants, organ size is critically important both to proper functioning and to proper fit into the chest cavity. Hearts from small children, aged 5 years or younger, are therefore likely to be transplanted into children of the same age group. Of the hearts recovered from donors aged 5 years and younger, 93 percent were transplanted into recipients in the same age group, and 1 percent went to adults. During the same period, adults received about 24 percent of the hearts from donors aged 6 through 10 years, and 89 percent from donors aged 11 through 17 years. Figure 6 shows the distribution of pediatric hearts by age of donor and recipient. During that period, 83 percent of the hearts given to pediatric recipients came from children, and 17 percent came from adults. OPTN data indicate that 664 heart transplants occurred during 1997 and 1998 in which a pediatric organ was transplanted into an adult. Of these, 75 hearts were each refused for at least one pediatric patient who was ranked higher on the waiting list than the adult recipient. In these instances, the most common refusal reasons were donor quality (17 percent), donor size and/or weight (17 percent), administrative reasons (14 percent), and abnormal echocardiogram (14 percent). Although the patterns vary by organ and present a complex picture, pediatric patients appear to be faring as well as or better than adult patients, both while on the waiting list and after transplantation. Data from the OPTN and HHS on four key measures—time on the waiting list, deaths while waiting for a transplant, and 1- and 5-year post-transplant survival— show that children appear to fare as well as or better than adults, with some exceptions for very young patients and heart transplant patients. Other measures of importance for pediatric patients, such as growth and development, are not routinely part of the current OPTN data collection. Pediatric patients wait fewer days on average than adults for transplants. With the exception of infants under 1 year of age and heart transplant patients, death rates for pediatric patients on the waiting list are lower than those for adults. Again with the exception of infants under 1 year old, post-transplant survival rates for children generally appear to be equivalent to or better than those for adult patients at the 1- and 5-year post-transplant points. However, because the number of pediatric patients is small, variation across time by even a few pediatric patients on any of these measures could result in relatively large changes in the percentages. We report on the most current data available. In general, pediatric patients wait fewer days than adults for transplants (see fig. 7). Adults are likely to wait about twice as long as children for a kidney transplant. For patients added to the waiting list for a transplant in 1997, the median waiting time for pediatric kidney recipients ranged from 389 days for 6- to 10-year-olds to 548 days for 11- to 17-year-olds, while for adults the range was from 1,044 days for 18- to 34-year-olds to 1,150 days for 50- to 64-year-olds. For livers and hearts, the median waiting time for adult candidates was two to three times as long as it was for children. For livers, median waiting times for patients added to the waiting list in 1999 ranged across age subgroups from 182 to 318 days for children through age 10. For children aged 11 to 17 years, however, the waiting time was similar to waiting times for adults. Candidates aged 11 through 17 years waited 746 days, whereas adult waiting times ranged across age subgroups from 636 to 795 days. Across all age groups, waiting times for hearts were much shorter than they were for kidneys and livers because survival is lower without a transplant. Among heart transplant candidates added to the waiting list in 2000, median waiting times for children ranged from 52 to 86 days and for adults from 137 to 242 days across the different age subgroups. The death rates for pediatric patients on the waiting list vary considerably by organ, with pediatric patients having slightly lower rates than adults for kidneys and livers, but higher rates than adults for hearts (see fig. 8). In 2000, death rates for children waiting for a kidney transplant ranged from 0 to 92 per 1,000 patient risk years (i.e., years on the waiting list), whereas for adults they ranged from 36 to 104. Infants under 1 year old who were awaiting liver or heart transplants had considerably higher death rates than other pediatric or adult age groups; however, pediatric patients aged 1 year or older waiting for a liver transplant had lower death rates than adults. For patients waiting for a heart transplant, pediatric patients of all age groups had higher death rates than did adults. With the exception of infants under 1 year old, post-transplant survival rates (i.e., the percentage of patients alive at 1 and 5 years after transplant) for children generally appear to be as good as or better than those for adults (see figs. 9 and 10). In general, 1-year survival rates vary more by type of organ than they do by age group, with kidney transplant recipients having the highest survival rates and heart transplant patients having the lowest survival rates. Overall, survival rates for children at 5 years after transplant are better than adult survival for kidneys and livers. Children 5 years old and younger have lower 5-year survival rates for heart transplants. Organ allocation policies provide a number of protections for children awaiting transplants. The organ transplant community has recognized the distinctive needs of children waiting for a transplant, and the OPTN has revised organ allocation policies over time to consider the pediatric patient. The priority a child receives takes into account differences between children and adults in the progression and treatment of end stage organ disease. Prolonged waiting times can be more harmful for children than for adults because disease progression in children can be faster and their growth and development can be compromised without timely transplantation. The policies differ for each organ. For example, waiting time requirements for kidney transplants are less stringent for pediatric patients than for adult patients because of the unique problems children experience with end stage renal disease, including difficulties with dialysis. For livers, research showing better survival for pediatric patients who received a pediatric liver led to a policy change giving priority for pediatric livers to pediatric patients. For hearts, medical urgency status is determined differently for pediatric patients because pretransplant treatments appropriate for adults, such as heart assist devices, cannot always be used for children who are waiting for transplants. Current kidney allocation policy provides several protections for pediatric kidney patients because of the unique problems they experience in association with end stage renal disease. These problems include dialysis difficulties and disruption of growth and development due to renal failure. Early transplantation can avoid or ameliorate many of the effects of end stage renal disease experienced by pediatric patients. One advantage the allocation policy gives to pediatric patients concerns waiting time, one factor in determining priority for obtaining a transplant. Waiting time for children is measured from when they are placed on the waiting list, whereas, since changes to the adult kidney allocation policy in January 1998, waiting time for adults begins when they reach a certain stage of disease. Therefore pediatric patients can begin moving up in priority on the waiting list at an earlier point in their disease progression than can adult patients. In addition, pediatric patients receive higher priority for kidney allocation at the time of listing and until they reach 18 years of age, based on their age at listing. The criteria for granting this priority were first implemented by the OPTN in 1990 and have been altered several times, most recently in November 1998. Kidney transplant candidates less than 11 years of age at listing are assigned four additional points, and candidates aged 11 through 17 years are assigned three additional points. Another advantage was introduced by the OPTN in November 1998. It provides that patients who are less than 18 years old at listing, and have not received a transplant within a specified amount of time, must be the first in line to receive available kidneys, except for those that must be allocated to a patient with a perfect antigen match, to a patient needing a kidney plus a nonrenal organ, or to a patient whose immune system makes it difficult to receive organs. These specified times are within 6 months of listing for candidates up to and including 5 years of age, 12 months for those from 6 to 10 years, and 18 months for those from 11 to 17 years. The liver allocation policy for pediatric patients has been revised several times since 1994 to address conditions and challenges unique to pediatric patients. Children with chronic liver disease may deteriorate rapidly and unpredictably. Their growth and development may also be affected. The policy revisions redefine medical urgency criteria, focus on disease progression in children, and recognize factors distinctive to pediatric liver candidates. In June 2000, the OPTN approved a policy to give pediatric liver transplant patients preference over adult patients for livers from pediatric donors. Prior to the implementation of this change, the age of the donor was not a factor. Now, a pediatric liver is offered to a pediatric patient before an adult patient with the same medical urgency within the same organ distribution area. If no local matches occur in a given medical urgency category, the pediatric liver will be offered to a pediatric patient before an adult patient with the same medical urgency at the regional level. This change was made in response to the finding that pediatric liver transplant recipients have higher survival rates and better graft survival if they are transplanted with a pediatric liver rather than an adult liver. A study showed that pediatric patients receiving livers from pediatric donors during 1992 through 1997 had a 3-year graft survival rate of 81 percent, compared to 63 percent for children receiving an adult liver. Adults, however, had similar 3-year graft survival rates regardless of donor age. The OPTN policy also provides an advantage for pediatric patients with chronic liver failure. The policy places these patients at the highest medical urgency level when their condition worsens, a provision that is not in place for adult patients with chronic liver failure. Moving pediatric patients to the highest category provides the advantage of access to donated organs locally and regionally before all patients in lower categories. The heart allocation criteria have also been revised recently to reflect differences in treatment and progression of heart disease between children and adults. Before these revisions, the use of certain mechanical assist devices or other monitoring and treatment therapies was required for any patient to be included in the highest medical urgency categories. However, because some of these devices and therapies are generally not used with pediatric patients, the OPTN removed this requirement for pediatric patients in January 1999. The OPTN implemented two further revisions in May 2000. One change allows pediatric patients on the waiting list for a heart to retain their medical urgency status when they turn 18 rather than being subject to adult criteria. Another revision gives priority to pediatric heart transplant candidates, within each medical urgency category, for hearts recovered from 11- to 17-year-old donors. Children constitute a small proportion of patients in need of an organ transplant, but organ allocation policies have been designed to provide this vulnerable population with some special protections. Our examination of transplantation patterns across age groups and recent data on waiting times and death and survival rates indicates that pediatric patients do not appear to be at a disadvantage in the competition for scarce organs. These data show comparable or better outcomes for pediatric patients even before the most recent policy changes, such as the change to prioritize pediatric livers for pediatric recipients. We provided HHS with the opportunity to comment on a draft of this report. HHS provided technical comments, which we have incorporated where appropriate. We also provided a draft of the report to UNOS, and it provided technical comments, which we have incorporated where appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to others who are interested and make copies available to others who request them. If you or your staffs have any questions about this report, please call me at (202) 512-7119. Another contact and key contributors to this report are listed in appendix IV. Coverage for immunosuppressive medications may be extended to children under Medicare, Medicaid, and private insurance. Pediatric patients may also gain access to prescription drug coverage through special state insurance programs for children. However, both adults and children may have difficulty in obtaining and retaining insurance coverage for the expensive immunosuppressive medications necessary for survival following transplantation. Further, gaps in coverage may occur during a transition from one type of insurance to another. For example, if a parent loses Medicaid eligibility, a child’s eligibility status could also be affected. In addition, coverage problems can arise for both Medicaid- and private- insurance-covered pediatric patients when they reach adulthood. Transplant recipients covered by Medicaid as children may become ineligible for continued coverage if they are able to obtain employment as they reach adulthood. Children covered by private insurance under a parent’s policy may be unable to afford coverage, given their expensive preexisting medical condition, when they grow too old to be covered by a parent’s policy. Data on the costs of immunosuppressive medications, actual payments, and patient cost-sharing by the various insurers are not readily available, so the level of the coverage cannot be specified with certainty. The proportion of transplant patients covered by different insurance programs can be used to derive an indication of coverage for immunosuppressive medications. Data from the Organ Procurement and Transplantation Network (OPTN) on the expected sources of payment for the pediatric transplants performed from 1997 through 1999 may serve as a general estimate of the share of immunosuppressive medications for children paid for by Medicare, Medicaid, and private insurance. OPTN data show that 4,835 transplants were performed on children up to age 17 from 1997 to 1999. Of these, 2,775 transplants were for livers and hearts, and 2,060 were for kidneys. As figure 11 shows, private insurance paid for almost half of the pediatric transplants for these three organs performed from 1997 through 1999, while Medicaid paid for 25 percent and Medicare paid for 14 percent of these transplants. For the same period, Medicare paid for an estimated 30 percent of pediatric kidney transplants because of its special coverage for kidney patients under the End-Stage Renal Disease (ESRD) program. Medicare coverage for transplants and the associated medications is provided to children either under a special entitlement to the Medicare program created by the Congress for those diagnosed with ESRD or by virtue of a parent’s enrollment as an eligible Medicare beneficiary. The Medicare program has special entitlement rules for patients with ESRD, the stage of kidney impairment that is considered irreversible and requires either regular dialysis or a kidney transplant to maintain life. To be eligible for Medicare entitlement as an ESRD patient, the patient generally must have been on dialysis for 3 months and must be (1) entitled to a monthly insurance benefit under title II of the Social Security Act (or an annuity under the Railroad Retirement Act), (2) fully or currently insured under Social Security, or (3) the spouse or dependent child of a person who meets at least the first 2 requirements. Currently, ESRD patients’ entitlement to Medicare—and thus coverage for immunosuppressive medications—ends 36 months after a transplant is performed. In contrast, individuals who are eligible for Medicare under other entitlement rules—that is, age 65 or disabled, and eligible for Social Security or Railroad Retirement benefits—currently receive unlimited coverage for immunosuppressive drug medications for the life of the transplant under Part B. Originally, Medicare limited immunosuppressive drug coverage to 1 year. However, the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) expanded this coverage with a series of annual 6- month increases beginning in 1995. As a result, by 1998, Medicare patients received immunosuppressive medication coverage for 36 months after a transplant operation. In 1999, the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (P.L. 106-113) extended this immunosuppressive drug coverage benefit for an additional 8 months. Most recently, the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (P.L. 106-554) eliminated all time limits for immunosuppressive drug coverage under Part B of Medicare. Medicaid is a joint federal/state entitlement that annually finances health care coverage for more than 40 million low-income individuals, over half of whom are children. Medicaid coverage for children is comprehensive, offering a wide range of medical services and mandating coverage based upon family income in relation to the federal poverty level (FPL). Federal law requires states to cover children up to age 6 from families with incomes up to 133 percent of the FPL, and children ages 6 to 15 for incomes up to 100 percent of the FPL. Medicaid benefits are particularly important for children because of Medicaid’s Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) Program. EPSDT, which is mandatory for categorically needy children, provides comprehensive, periodic evaluations of health and developmental history, as well as vision, hearing, and dental screening services to most Medicaid-eligible children.Under EPSDT, states are required to cover any service or item that is medically necessary to correct or ameliorate a condition detected through an EPSDT screening, regardless of whether the service is otherwise covered under a state Medicaid program. This would include immunosuppressive drugs. Private insurance, such as employer-sponsored health plans, generally covers all aspects of organ transplants, including follow-up care and necessary medications. Information is not readily available on private insurance coverage specifically for immunosuppressive medications. However, according to a 1998 national survey of employer-sponsored health plans, nearly all employers that offer health benefits include benefits for outpatient prescription drugs. In addition, a Kaiser Family Foundation survey of employer health benefits found that 96 percent of all firms with conventional fee-for-service plans and 99 percent of those with managed care plans cover prescription drugs. Privately insured organ transplant patients most likely will incur additional expenses for medications, however, such as out-of-pocket expenses for deductibles and copayments, because of limits on coverage. A recent survey of employers with 1,000 or more employees on strategies to control prescription drug expenditures found that 6 percent of employers cap annual benefits and 10 percent are considering doing so. The study also found that 41 percent of employers limit the quantities of prescription drugs and 7 percent are considering it. Moreover, 40 percent of employers now require higher copayments than previously, and 39 percent are considering it. The causes and circumstances of death that could reasonably result in a declaration of brain death and from which organ donation might be possible are listed in table 3. We used the International Classification of Diseases, 9th Revision, Clinical Modification (ICD-9-CM) codes to classify deaths by causes and circumstances. The following tables show the distribution of kidneys, livers, and hearts procured from all donors from 1994 to 1999, by age of donor and recipient. In addition to the above, Donna Bulvin, Charles Davenport, Roy Hogberg, Behn Miller, and Roseanne Price made key contributions to this report. | Pediatric patients in need of an organ transplant face a shortage of donated organs. The number of pediatric organ donors has remained relatively constant from 1991 to 2000, despite a drop in potential donors. The number of adult donors rose 45 percent during the same period, in large part because donor eligibility criteria have been expanded to include older donors and donors with diseases that have been prohibited in the past. Organ waiting lists for pediatric patients have more than doubled. Compared to adults, however, children account for a small number of transplant candidates. The degree to which pediatric organs are transplanted into adults varies by organ. Pediatric patients appear to be faring as well as or better than adult patients, both while on the waiting list and after transplantation. Allocation policies for kidneys, livers, and hearts provide several protections for children awaiting transplants. The priority a child receives takes into account differences between children and adults in the progression and treatment of end stage organ disease, with the policies differing for each organ. |
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The Army has 10 active duty divisions, as listed in appendix II. Six of these divisions are called heavy divisions because they are equipped with large numbers of tanks, called armor. Two other divisions are called light divisions because they have no armor. The remaining two divisions are an airborne division and an air assault division. Heavy divisions accounted for the majority of the Army’s division training funds, about 70 percent ($808 million) in fiscal year 2000, and these divisions are the focus of this report. The Army uses a building block approach to train its armor forces— beginning with individual training and building up to brigade-sized unit training, as shown in figure 1. This training approach is documented in the Army’s Combined Arms Training Strategy (CATS). The strategy identifies the critical tasks, called mission essential tasks, that units need to be capable of performing in time of war and the type of events or exercises and the frequency with which the units train to the task to produce a combat ready force. The strategy, in turn, guides the development of unit training plans. The Army uses CATS as the basis for determining its training budget. To do this, it uses models to convert training events into budgetary resources, as shown in figure 2. For armor units, the Battalion Level Training Model translates the type of training events identified in CATS and the frequency with which they should be conducted into the number of tank miles to be driven in conducting those training events. The Army then uses another model, the Training Resource Model, to compute the estimated training cost for units based on the previous 3 years’ cost experience. The output from these models is the basis for the Army’s training budget. CATS, in combination with the Battalion Level Training Model, has established that the tanks in armor units will be driven, on average, about 800 miles each year for home station training. This is the level of training the Army has identified as needed to have a combat ready force, and its budget request states that it includes funds necessary to support that training. While the Army uses the 800-tank mile goal as a tool to develop its divisions’ home station budgets, it does not identify the number of tank miles to be driven in its training guidance and training field manuals as a training requirement nor does it mention the miles in unit training plans. To measure the readiness of its units, the Army uses the Global Status of Resources and Training System. Unit commanders use this readiness system to report their units’ overall readiness level. Under this readiness system, each reporting unit provides information monthly on the current level of personnel, equipment on hand, equipment serviceability, and training, and the commander’s overall assessment of the unit’s readiness to undertake its wartime mission. Units can be rated on a scale of C-1 to C-5. A C-1 unit can undertake the full wartime mission for which it is organized and designed; a C-2 unit can undertake most of its wartime mission; a C-3 unit can undertake many but not all elements of its wartime mission; a C-4 unit requires additional resources or training to undertake its wartime mission; and a C-5 unit is not prepared to undertake its wartime mission. Currently, the training readiness portion of the readiness report reflects the commander’s assessment of the number of training days that are needed for the unit to be fully combat ready. In addition to the Army setting a training goal of 800 miles for tanks located at unit home stations, in its performance report for fiscal year 1999, DOD began to use 800 tank training miles, including miles driven at units’ home station and the National Training Center, as a performance benchmark for measuring near-term readiness in responding to the Government Performance and Results Act. This act is a key component of a statutory framework that Congress put in place during the 1990s to promote a new focus on results. The Army is continuing to move training funds planned for its tank divisions to other purposes. Budget requests should reflect the funds needed to conduct an organization’s activities and its spending priorities. The Army’s budget request for tank division training includes funding needed to conduct 800 miles of unit home station tank training. However, each year since at least the mid-1990s, the Army has obligated millions of dollars less than it budgets to conduct training, and tanks have not trained to the 800-mile level. For the 4-year period fiscal years 1997 through 2000, the Army obligated a total of almost $1 billion less than Congress provided for training all its divisions. At the same time, the Army trained on its tanks an annual average of 591 miles at home station. Beginning with fiscal year 2001, the Army is taking action to restrict moving tank training funds. Each fiscal year the Army develops a budget request to fund, among other activities and programs, the operation of its land forces. The largest component of the land forces budget is for training the Army’s 10 active- duty divisions. The Army, through the President’s budget submission, requests more than $1 billion annually in O&M funds to conduct home station division training. The majority of this budget request is for the Army’s six heavy divisions to use for unit training purposes. Over the last 4 years, Congress has provided the Army with the training funds it has requested. For much of the past decade, the Army has moved some of these funds from its division training to other purposes, such as base operations and real property maintenance. We previously reported that this occurred in fiscal years 1993 and 1994 and our current work shows that the Army continues to move training funds to other purposes. Although the Army has moved funds from all of its land forces subactivities, as shown in table 1, for the 4-year period fiscal years 1997 through 2000, it moved the most funds from its subactivity planned for division training. Although the Army has moved the most funds out of its division training subactivity, the amount moved has decreased over the past 2 years, as shown in figure 3. Despite the recent decrease in training funds moved from the divisions, the Army moved almost $190 million in fiscal year 2000. Most of the training funds moved occurred within the Army’s six heavy divisions. As shown in table 2, $117.7 million of the $189.7 million in division funds that were moved in fiscal year 2000 occurred in the heavy divisions. Although O&M funds cannot generally be traced dollar for dollar to their ultimate disposition, an analysis of funds obligated compared to the funds conferees’ initially designated shows which subactivities within the Army’s O&M account had their funding increased or decreased during the budget year. Generally, the Army obligated funds planned for training its divisions for other purposes such as base operations, real property maintenance, and operational readiness (such as maintaining its training ranges). Although the Army budgets to achieve 800 tank miles for home station training, it has consistently achieved less than the 800 training miles for the last 4 years (see fig. 4). During this period, armor units missed the 800-tank mile goal annually by about an average of 26 percent. Recently, however, the number of home station tank miles achieved increased, from 568 miles in fiscal year 1999 to 655 miles in fiscal year 2000. There are some valid reasons for not achieving the 800-tank mile goal at home station, which are described below. The Army, however, does not adjust its tank mile goal to reflect these reasons. The Army develops its data on tank mile achievement from each unit’s tank odometer readings. Some home station training, however, does not involve driving tanks. Specifically, the 800-tank mile goal for home station training includes a 60 tank mile increment that some units can conduct through the use of training simulators. These 60 miles are included in the funding for the 800-tank miles, but they are not reflected in tank mile reporting because they are not driven on real tanks. In addition, deployment to contingency operations, such as the ones in the Balkans (Bosnia and Kosovo), affects both the available funding and the amount of training that can be conducted at home station. For example, when armor units are deployed to the Balkans they are not able to conduct their normal home station training. During fiscal year 1999, for example, the 1st Cavalry Division deployed to the Balkans for 11 months. Consequently, the division did very little home station training, which affected the Army-wide average home station tank training miles achieved for that year—specifically, an average of 568 tank training miles. However, if the Army had excluded the 1st Cavalry Division because it was deployed to the Balkans for most of that fiscal year, the Army-wide average home station tank mile training would have increased to 655 miles, nearly 90 miles more. In addition, the Army moved and used the funds associated with this missed training to offset the cost of Balkan operations. Although the magnitude of funding shifted to support contingency operations varies annually, the Army does not adjust its methodology and reporting to reflect the tank training miles associated with these cost offsets. Even though the Army is not conducting 800 tank miles of home station training, its armor units are still able to execute their unit training events. During our work at five of the Army’s six heavy divisions, we found no evidence to demonstrate that scheduled training events had been delayed or canceled in recent years because training funds were moved out of the division subactivity to other purposes. Training events included those at a unit’s home station and at the Army’s National Training Center and its Combat Maneuver Training Center. Unit trainers told us that if scheduled training had to be canceled or delayed, it likely would be for reasons such as deployments or bad weather. In addition, when unit trainers establish their training plans for certain training events, they focus on achieving the unit’s mission essential tasks and not on how many miles will be driven on the tanks. According to the Army, units can execute their training plans despite funds being moved for several reasons. The major reasons were because most of the movement in funds occurs before the divisions receive the funds, division trainers, using past experience, anticipate the amount of training funds they will likely receive from higher commands and adjust their training plans accordingly and the intensity of the training event can be modified to fit within available funding by taking steps such as driving fewer miles and transporting— rather than driving—tanks to training ranges. In fiscal year 2001, the Army implemented an initiative to protect training funds from being moved that should result in the Army’s using these training dollars for the purposes originally planned. Senior Army leadership directed that for fiscal year 2001, Army land forces would be exempt from any budget adjustments within the discretion of Army headquarters. The senior leadership also required that Army commands obtain prior approval from Army headquarters before reducing training funds. However, subactivities within the Army’s O&M account that have received these funds in the past—such as real property maintenance, base operations, and operational readiness—may be affected by less funding unless the Army requests more funds for these subactivities in the future. At the time of our work, this initiative had been in effect for only a few months; thus, we believe it is too early to assess its success in restricting the movement of training funds. Army readiness assessments reported in the Global Status of Resources and Training System show that for the last 4 fiscal years, armor units have consistently reported high levels of readiness, despite reduced training funding and not achieving its tank mile goals. This readiness assessment system does not require considering tank miles driven as an explicit factor when a unit commander determines the unit’s training or overall readiness posture. In fact, the number of tank miles driven is not mentioned in readiness reporting regulations. We analyzed monthly Global Status of Resources and Training System data to see how often active-duty Army armor units were reporting readiness at high levels and lower levels. Our analysis showed that most armor units reported high overall readiness for fiscal years 1997 through 2000. In our analysis of monthly readiness reports for fiscal years 1997 through 2000, we found that when armor units reported lower overall readiness the reason was usually personnel readiness. In reviewing comments of commanders who reported degraded readiness for the same period, we found that insufficient funding was rarely cited as a cause of degraded readiness. Only a handful of unit reports filed in the 4-year period covering fiscal years 1997 through 2000, identified instances in which a shortage of funds was cited as a factor in reporting lower readiness levels. During the same period, when commanders cited training as the reason for reporting lower overall readiness, they never cited insufficient funding as a cause. Not only do unit commanders report on their overall readiness levels, but they also are required to report on the four subareas that comprise overall readiness. These subareas are current readiness levels of personnel, equipment on hand, equipment serviceability, and training. For the training readiness component, a unit’s training status rating is based upon a commander’s estimate of the number of training days required for the unit to become proficient in its wartime mission. Our analysis of these readiness reports showed that most armor units reported that their training status was high throughout fiscal years 1997 through 2000. There seems to be no direct relationship between average tank miles achieved and reported training readiness. There were times when tank miles achieved (1) increased while the proportion of time units reporting high readiness levels declined and (2) declined while the proportion of units reporting high readiness levels increased. For example, tank miles achieved rose more than 25 percent between the second and third quarter of fiscal year 2000 while the proportion of time units were reporting high readiness levels declined. Conversely, tank miles achieved fell by more than 20 percent between the third and fourth quarter of fiscal year 1999 while the proportion of time units were reporting high readiness levels increased. Both the Army and DOD provide Congress with information on tank miles achieved, but reporting is incomplete and inconsistent. The Army reports tank miles achieved to Congress as part of DOD’s annual budget documentation. DOD reports tank miles achieved as part of its reporting under the Government Performance and Results Act. Army units train on their tanks at their home stations, at major training centers, and in Kuwait in concert with Kuwait’s military forces. All armor training contributes to the Army’s goal of having a trained and ready combat force. However, we found that the categories of tank training the Army includes in its annual budget documentation vary from year to year and the categories of training the Army includes in its budget documents and DOD includes in its Results Act reporting vary. In addition to home station training, Army units conduct training away from home station. This additional training is paid from different budget subactivities within the Army’s O&M account and thus is not included in the Army’s budget request for funds to conduct 800 miles of home station training. One such subactivity funds training at the National Training Center. Armor units based in the United States train at the National Training Center on average once every 18 months. Based on congressional guidance, the Army includes funds for this training in a separate budget subactivity. This subactivity, in essence, pays for tank training miles in addition to the 800 miles for home station training that is funded in the divisions’ training subactivity. During the period fiscal years 1997 through 2000, the National Training Center training added an annual average of 87 miles to overall Army tank training in addition to the average of 591 miles of home station training. Because, through fiscal year 2000, these miles have been conducted on prepositioned equipment rather than on a unit’s own tanks, they appropriately have not been included in home station training activity. Beginning in fiscal year 2001, the Army plans to have an as yet undetermined number of units transport their own tanks for use at the National Training Center. As this occurs, these units will report National Training Center tank miles achieved as part of their home station training. The Army is examining how to adjust division and the National Training Center budget subactivities to reflect this shift. Similarly, some armor units conduct training in Kuwait in conjunction with Kuwait’s military forces in a training exercise called Desert Spring (formerly called Intrinsic Action). Kuwait pays part of the cost of this training and the balance is paid from funds appropriated for contingency operations. The tanks used for this training are prepositioned in Kuwait. Over the last 4 fiscal years, this training added an annual average of about 40 miles to overall Army tank training and was also appropriately not included in the home station training activity. However, this training also contributed to the Army’s goal of having a trained and ready combat force. As shown in figure 5, when the miles associated with additional training are included, for the period fiscal years 1997 through 2000, an average of about 127 miles were added to the annual overall tank-miles achieved. The Army has not been consistent about reporting these miles. We found that in some years the Army included these miles in its reporting on tank miles achieved and in some years it did not. For example, for fiscal year 1999, the latest year for which such data were available, the Army reported only home station tank miles in its budget submission, while for fiscal year 1998 it reported both home station and National Training Center miles. Further, the Army did not include tank miles driven in Kuwait in either year. In fiscal year 1999, DOD began to report on the Army’s achievement of 800 tank miles of training as one of its performance goals under the Government Performance and Results Act. The Results Act seeks to strengthen federal decision-making and accountability by focusing on the results of federal activities and spending. A key expectation is that Congress will gain a clearer understanding of what is being achieved in relation to what is being spent. To accomplish this, the act requires that agencies prepare annual performance plans containing annual performance goals covering the program activities in agencies’ budget requests. The act aims for a closer and clearer link between the process of allocating resources and the expected results to be achieved with those resources. Agency plans that meet these expectations can provide Congress with useful information on the performance consequences of budget decisions. In its Results Act reporting, DOD is using a different training goal than the Army and, depending on the year, is including different categories of training. In response to the Results Act, DOD stated in its fiscal year 1999 performance plan that it planned to use 800 tank miles of training as one of its performance goals for measuring short-term readiness. In DOD’s performance report for 1999, DOD reported, among other performance measures, how well it achieved its training mile goal for tanks. In its reporting on progress toward the goal, DOD included mileage associated with training at the National Training Center in its tank mile reporting. As discussed previously, for the Army, the 800-tank mile goal relates exclusively to home station training, and tank miles achieved at the National Training Center are funded through a separate subactivity within the Army’s O&M account and tank miles achieved in Kuwait are paid for in part by Kuwait and in part by funds appropriated for contingency operations. In addition, because the Army has varied the categories of training (home station and National Training Center) it includes in its budget submission reporting, depending on the year, the Army and DOD are sometimes using different bases for their tank mile achievement reporting. As a result, Congress is being provided confusing information about what the 800-tank mile goal represents. Because the Army has consistently (1) not obligated all its O&M unit training funds for the purposes it told Congress that it needed them; (2) continues to conduct its required training events; and (3) reports that its heavy divisions remain trained and in a high state of readiness, questions are raised as to the Army’s proposed use of funds within its O&M account. In addition, the different ways in which the Army and DOD report tank mile training, results in Congress receiving conflicting information. By not providing Congress with clear and consistent information on Army tank training, the usefulness of the information is diminished. To better reflect Army funding needs and more fully portray all its tank training, we recommend that the Secretary of the Army reexamine the Army’s proposed use of funds in its annual O&M budget submission, particularly with regard to the funds identified for division training and for other activities such as base operations and real property maintenance and improve the information contained in the Army’s budget documentation by identifying more clearly the elements discussed in this report, such as (1) all funds associated with tank mile training; (2) the type of training conducted (home station, simulator, and National Training Center); (3) the training that could not be undertaken due to Balkan and any future deployments; (4) the budget subactivities within its O&M account that fund the training; and (5) the training conducted in and paid for in part by Kuwait. To provide Congress with a clearer understanding of tank training, we also recommend that the Secretary of Defense, in concert with the Secretary of the Army, develop consistent tank training performance goals and tank mile reporting for use in Army budget submissions and under the Results Act. DOD provided written comments on a draft of this report, which are reprinted in appendix III. DOD fully agreed with our two recommendations concerning improving the information provided to Congress and in part with our recommendation concerning reexamining its O&M funding request. DOD agreed that the Army should reexamine its funding request in all areas of its O&M budget submission. However, DOD objected to the implication that the Army was requesting too much funding for division training and noted that since we had not assessed the level of division training necessary to meet approved Army standards, any conclusion as to the adequacy of training funds is inappropriate. We did not directly examine whether the Army was training to its approved standards. We did examine whether the Army had delayed or canceled training due to the movement of funds. We found no evidence to demonstrate that scheduled training events had been delayed or canceled in recent years because training funds were moved. We also found that Army unit trainers plan their training events to focus on their mission essential tasks. These tasks form the basis of the Army’s training strategy. While we believe that our findings, including the Army’s movement of almost $1 billion—about 21 percent—of its division training funds to other O&M budget subactivities over the 4-year period fiscal years 1997 through 2000 suggest a need to reexamine the Army’s proposed use of funds within that subactivity, we did not conclude that the Army was requesting too much funding in some areas and not enough in others. As noted above, DOD concurs that the Army should make such a reexamination. We have, however, clarified our recommendation to focus on the need to reexamine the Army’s planned use of funds. We are sending copies of this report to the Secretary of Defense; the Under Secretary of Defense (Comptroller and Chief Financial Officer); the Secretary of the Army; and the Director, Office of Management and Budget. We will make copies available to others on request. If you or your staff have any questions concerning this report please call me on (757) 552-8100. This report was prepared under the direction of Steve Sternlieb, Assistant Director. Major contributors to this report were Howard Deshong, Brenda Farrell, Madelon Savaides, Frank Smith, Leo Sullivan, and Laura Talbott. To identify whether the Army is continuing to move training funds planned for its divisions, we examined Army budget submissions, the Secretary of Defense’s high priority readiness reports to Congress, appropriations acts for the Department of Defense (DOD), and the conference reports on those acts. We focused our analysis on fiscal years 1997 through 2000. We began with fiscal year 1997 because the Army had revised its operation and maintenance (O&M) budget structure for operating forces beginning in that year. We extracted data from these documents to compare the amounts congressional conferees initially designated for the Army’s operation of its land forces, including its divisions, to those the Army reported as obligated. We also obtained Army data on tank miles achieved for the Army overall and by armor battalion. To understand how the Army trains its armor forces to be combat ready as well as to ascertain how Army units adjust to reduced funding and if the Army had canceled or delayed any scheduled training due to the movement of training funds, we obtained briefings, reviewed training documents, and interviewed Army personnel at a variety of locations, including Army headquarters, the Army’s Forces Command and U.S. Army Europe, five of the six heavy divisions both within the United States and Europe, and the Army’s school for armor doctrine and training. We also analyzed tank mile data from the Army’s Cost and Economic Analysis Center. To assess the reported readiness of Army tank units, we examined monthly readiness reporting data from DOD’s Global Status of Resources and Training System for fiscal years 1997 through 2000. We examined both the reported overall readiness and the training component of the readiness reports. We reviewed this system’s readiness status ratings to determine (1) what level of readiness units were reporting, (2) whether unit readiness had declined, (3) whether training readiness was determined to be the primary cause for any decline in readiness, and (4) whether unit commanders had attributed training funding shortfalls as the cause for any decline in readiness levels. To assess whether DOD and the Army are providing Congress with complete and consistent information regarding armor training, we compared Army budget submissions with Army tank training data and DOD’s report on its performance required by the Government Performance and Results Act. We also discussed overall training versus home station training and the differences between Army and Results Act reports with Army officials. Our review was conducted from March 2000 through January 2001 in accordance with generally accepted government auditing standards. | Congress has expressed concern about the extent to which the Department of Defense has moved funds that directly affect military readiness, such as those that finance training, to pay for other subactivities within its operation and maintenance (O&M) account, such as real property maintenance and base operations. This report reviews the (1) Army's obligation of O&M division training funds and (2) readiness of the Army's divisions. GAO found that the Army continued to use division training funds for purposes other than training during fiscal year 2000. However, the reduced funding did not interfere with the Army's planned training events or exercises. The Army's tank units also reported that, despite the reduced funding and their failure to meet their tank mileage performance goal, their readiness remained high. Specifically, many tank units reported that they could be fully trained for their wartime mission within a short time period. Units that reported that they would need more time to become fully trained generally cited personnel issues rather than the lack of training funds as the reason. Even so, starting in fiscal year 2001, the Army has taken action to restrict moving training funds by exempting unit training funds from any Army headquarters' adjustments and requiring prior approval before Army commands move any training funds. |
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Risk assessments are conducted to estimate whether and/or how much damage or injury can be expected from exposures to a given risk agent and to assist in determining whether these effects are significant enough to require action, such as regulation. The effects of concern can be diseases such as cancer, reproductive and genetic abnormalities, workplace injuries, or various types of ecosystem damage. The risk agent analyzed in an assessment can be any number of things, including chemicals, radiation, transportation systems, or a manufacturing process. The product of a risk assessment is a quantitative and/or qualitative statement regarding the probability that an exposed population will be harmed and to what degree. Risk assessment, particularly quantitative risk assessment, is a relatively new discipline, developed in the first half of the 20th century to establish various health and safety codes and standards. The role of risk assessment in the regulatory process was accelerated by the enactment of various health, safety, and environmental statutes in the early 1970s. The development of chemical risk assessment procedures has traditionally followed two different tracks—one for assessments of cancer risks and another for assessments of noncancer risks. The procedures associated with cancer risks have historically assumed that there is no “threshold” below which an agent would not cause adverse effects. In contrast, procedures for assessments of noncancer risks were largely developed under the assumption that there is such a threshold—that exposures up to a certain level would not be expected to cause harm. In 1983, NAS identified four steps in the risk assessment process: (1) hazard identification (determining whether a substance or situation could cause adverse effects), (2) dose-response assessment (determining the relationship between the magnitude of exposure to a hazard and the probability and severity of adverse effects), (3) exposure assessment (identifying the extent to which exposure actually occurs), and (4) risk characterization (combining the information from the preceding analyses into a conclusion about the nature and magnitude of risk). This paradigm, originally intended to address assessments of long-term health risks, such as cancer, has become a standard model for conducting risk assessments, but is not the only model (e.g., different models are used for ecological risk assessments). According to NAS, the results of the risk assessment process should be conceptually distinguished from how those results are used in the risk management process (e.g., the decision on where to establish a particular standard). As illustrated by figure 1, the risk management decision considers other information in addition to the risk characterization. More recent reports have updated and expanded on these original concepts. In 1996, NAS urged risk assessors to update the original concept of risk characterization as a summary added at the end of a risk assessment. Instead, the report suggested that risk characterization should be a “decision-driven” activity directed toward informing choices and solving problems and one that involves decision makers and other stakeholders from the very inception of a risk assessment. In this updated view, the nature and goals of risk characterization are dictated by the goals of the risk management decisions to be made. Similarly, the Presidential/Congressional Commission on Risk Assessment and Risk Management (hereinafter referred to as the Presidential/Congressional Commission) recommended in 1997 that the performance of risk assessments be guided by an understanding of the issues that will be important to risk management decisions and to the public’s understanding of what is needed to protect public health and the environment. Substantial numbers and amounts of chemical substances and mixtures are produced, imported, and used in the United States. For example, there are over 70,000 commercial chemicals in EPA’s Toxic Substances Control Act (TSCA) Chemical Substances Inventory, and the agency receives about 1,500 petitions each year requesting the approval of new chemicals or new uses of existing chemicals. However, there is relatively little empirical data available on the toxicity of most chemicals and the extent to which people or the environment might be exposed to the chemicals. For example, we previously reported that EPA’s Integrated Risk Information System (IRIS), which is a database of the agency’s consensus on the potential health effects of chronic exposure to various substances found in the environment, lacks basic data on the toxicity of about two-thirds of known hazardous air pollutants. Furthermore, to the extent that data on health effects are available, the data are more often from toxicological studies involving animal exposures than from epidemiological studies involving human exposures. As a consequence, chemical risk assessments must rely often on extrapolation from animal studies and are quite different from risk assessments that use epidemiological studies or actuarial data (such as accident statistics). The limited nature of information on chemical toxicity was illustrated in a 1998 EPA report on the data that were publicly available on approximately 3,000 high-production-volume (HPV) chemicals. For each of these chemicals, EPA examined the available data corresponding to six basic tests that have been internationally agreed to as necessary for a minimum understanding of a chemical’s toxicity. As shown in figure 2, the agency concluded that the full set of basic toxicity data was available for only about 200 (7 percent) of the chemicals, and that 43 percent of the chemicals did not have publicly available data for any of the six tests. There are also significant gaps in the available data on the extent to which people are exposed to chemicals. For example, last year we reviewed federal and state efforts to collect human exposure data on more than 1,400 naturally occurring and manmade chemicals considered by HHS, EPA, and other entities to pose a threat to human health. We reported that, taken together, HHS and EPA surveys measured the degree of exposure in the general population for only 6 percent of those chemicals. Even for those chemicals that were measured, information was often insufficient to identify smaller population groups at high risk (e.g., women, children, and the elderly). There is an ongoing debate about the appropriate application of risk assessment in federal regulation. In 1990, Congress mandated that a commission be formed to “make a full investigation of the policy implications and appropriate uses of risk assessment and risk management in regulatory programs under various Federal laws to prevent cancer and other chronic human health effects which may result from exposure to hazardous substances.” The Presidential/Congressional Commission published its final report in 1997, and noted that often “the controversy arises from what we don’t know and from what risk assessments can’t tell us.” NAS has also emphasized that science cannot always provide definitive answers to questions raised during the course of conducting a risk assessment, so risk assessors must use assumptions throughout the process that reflect professional judgments and policy choices. One focus of the risk assessment debate has been agencies’ use of precautionary assumptions and analytical methods. The term “precautionary” refers to the use of methods and assumptions that are intended to produce estimates that should not underestimate actual risks. Some critics of federal risk assessment practices believe agencies use assumptions that are unjustifiably precautionary in the face of new scientific data and methods, thereby producing estimates that overstate actual risks. The critics contend that this effect is compounded when multiple precautionary assumptions are used. Others, however, criticize agency practices for not being precautionary enough in the face of scientific uncertainties, failing, for example, to adequately account for the synergism of exposures to multiple chemicals or the risks to persons most exposed or most sensitive to a particular toxic agent. Other observers, including NAS, have expressed concerns about whether the agencies’ procedures and assumptions are sufficiently transparent, thereby providing decision makers and the public with adequate information about the scientific and policy bases for agencies’ risk estimates as well as the limitations and uncertainties associated with those estimates. We have discussed these issues in several previous reports. For example, in 1993, we noted that EPA used precautionary assumptions throughout the process that it used to assess risk at Superfund hazardous waste sites, and that the agency had been criticized for overstating risk by combining precautionary estimates. In September 2000, we reported on EPA’s use of precautionary “safety factors” pursuant to the Food Quality Protection Act of 1996. In October 2000, we said that three factors influenced EPA’s use of precautionary assumptions in assessing health risks: (1) the agency’s mission to protect human health and safeguard the natural environment, (2) the nature and extent of relevant data (e.g., animal versus human studies), and (3) the nature of the health risk being evaluated (e.g., cancer versus noncancer risks). The context in which chemical risk assessments are conducted plays an important role in determining what type of assessments federal regulatory agencies perform and why certain approaches are used. Two dimensions seem particularly important to understanding the context for an agency’s chemical risk assessment activities: (1) the general statutory and legal framework underlying the agency’s regulation of chemicals and (2) how the agency plans to use the risk assessment information. The statutory and legal framework determines the general focus and goals of an agency’s chemical risk assessment activities and also can shape how risk assessments for those activities are supposed to be conducted. The specific tasks and purposes for which an agency will use the results of a particular risk assessment determine the questions that the assessment needs to address and the scope and level of detail of the assessment. A diverse set of statutes addresses potential health, safety, and environmental risks associated with chemical agents. These statutory mandates generally focus on different types and sources of exposure to chemicals, such as consumption of pesticide residues in foods, occupational exposures to chemicals, or inhalation of toxic air pollutants. Therefore, different agencies (and different offices within those agencies) have distinctive concerns regarding chemical risks. For example, each major program office within EPA (e.g., the Office of Air and Radiation or the Office of Water) is responsible for addressing the risk-related mandates of one or more statutes (e.g., the Clean Air Act, the Clean Water Act, or the Safe Drinking Water Act). Also, international agreements provide important legal context for transportation risk assessment activities. For example, criteria for classifying dangerous chemicals in transportation have been internationally harmonized through the United Nations’ Recommendations on the Transport of Dangerous Goods. The legal framework underlying chemical regulation influences both the extent to which risk assessment is needed for regulatory decision making and how risk assessments are supposed to be conducted. Some statutes require regulatory decisions to be based solely on risk (considering only health and environmental effects), some require technology-based standards (such as requiring use of the best available control technology), and still others require risk balancing (requiring consideration of risks, costs, and benefits). For example, section 112 of the Clean Air Act (CAA), as amended, has a technology-based mandate requiring the use of the maximum achievable control technology to control emissions of hazardous air pollutants. A risk assessment is not needed to determine such technology, but would be used to evaluate residual risks that remain after that technology is in use. Some statutes also place the primary responsibility for conducting risk assessments and compiling risk-related data for a particular chemical or source of exposure to chemical agents with industry, states, or local entities, rather than with the federal regulatory agencies. For example, industry petitioners have the primary responsibility to provide the data needed to support registration and tolerances from EPA for their pesticides, including information on the toxicological effects of the pesticides. Statutes can also affect risk assessment by specifically defining what will be considered a hazard, directing the agency to take certain methodological steps, or specifying the exposure scenario of regulatory concern. For example, in response to the “Delaney Clause” amendments to the Federal Food, Drug, and Cosmetic Act, FDA identifies any food additive for which an adequately conducted animal cancer study indicates that the additive produces cancer in animals as a carcinogen under the conditions of the study. No further corroboration or weight-of-evidence analysis is required. The Food Quality Protection Act of 1996 requires EPA to add an additional 10-fold safety factor to protect infants and children when deriving standards for allowable pesticide residues in foods, unless reliable data show that a different factor will be safe. Provisions in the Occupational Safety and Health Act focus OSHA’s risk assessments on estimating the risks to workers exposed to an agent for a working lifetime. However, in most cases the statutes simply provide a general framework within which the agencies make specific risk assessment assumptions and methodological choices. For example, section 109 of the CAA requires EPA to set national ambient air quality standards that in the judgment of the EPA Administrator—and allowing for an “ample margin of safety”—are requisite to protect the public health. EPA risk assessors translate that general requirement into specific risk assessment assumptions and methods (e.g., whether to assume a threshold or no-threshold relationship between dose and response at low doses). The specific purpose or task of an assessment determines the kinds of risk information needed for the agency to make its risk management decisions, and can significantly influence the scope and level of detail required of a risk assessment. For example, If the agency’s task is to set a specific health-based standard (e.g., a national air quality standard), a rigorous and detailed estimate of risks at particular exposure levels might be required. If the agency’s task is to decide whether to approve the production and use of commercial chemicals or pesticides, risk assessors may initially focus on potential upper-bound exposures (e.g., assuming that a chemical agent will be used at the maximum level permitted by law or focusing on individuals who consume the greatest amounts of a food containing residues of the agent at issue). If such upper-bound estimates exhibit no cause for concern, the agency may have no need to complete a more comprehensive and refined risk assessment. A decision on whether to add or remove a chemical from the list of potential hazards might focus the risk assessors on determining whether the potential risk is above or below a specific threshold level, such as the risk of 1 extra cancer case over the lifetime of 1 million people. The influence of the specific regulatory task at hand is illustrated by a method commonly used by agencies for risk assessments of noncancer health effects. Agencies such as EPA and FDA have historically attempted to identify a dose level of a chemical associated with no observed adverse effect level (NOAEL) in animal experiments—or the lowest observed adverse effect level (LOAEL) in the study, if every tested dose exhibited some effect. They then divided that NOAEL or LOAEL dose by multiple “safety” or “uncertainty” factors to account for the possibility that humans may be more sensitive to the chemical than animals and other uncertainties. This procedure is designed to identify a dose not likely to result in harm to humans, not to provide an explicit quantitative estimate of the risks associated with a given chemical. In other words, sometimes the focus of federal agencies’ “risk” assessments could more accurately be described as a safety assessment (i.e., estimating a “safe” level of exposure to chemical agents or a dose below which no significant risk is expected to occur) rather than a risk assessment (i.e., estimating the actual risks associated with exposures to chemical agents). Because of contextual differences, the risk assessment procedures used, the resulting risk estimates (and regulatory actions based upon those estimates), and even whether a substance would be subject to risk assessment, can vary among different agencies and programs within the same agency. The following examples illustrate how contextual differences affect the conduct of risk assessments. Because regulation of certain wastes may be impractical or otherwise undesirable, regardless of the hazards that the waste might pose, Congress and EPA exempted certain materials (e.g., agricultural or mining and mineral processing wastes) from the definitions of hazardous wastes. If a material meets one of the categories of exemptions, it cannot be identified as a hazardous waste even if it otherwise meets the criteria for listing as a hazardous waste. For example, according to EPA’s RCRA Orientation Manual, wastes generated in raw material, product storage, or process (e.g., manufacturing) units are exempt from EPA’s hazardous waste regulation while the waste remains in such units. However, OSHA might assess and regulate risks associated with such materials as part of its mission to protect the health of employees in the workplace. FDA and EPA both assess potential human health risks associated with ingestion of chemical substances. If a substance is being assessed by FDA as a food additive and results from any adequate study indicate that the substance produces cancer in animals, FDA labels that additive as a carcinogen without considering other scientific evidence (per the Delaney clause of the Federal Food, Drug, and Cosmetic Act, as amended). However, when assessing the risks associated with consumption of residues from animal drugs (FDA) and pesticides (EPA) the agencies may need to consider many scientific studies in determining whether and under what conditions an agent might cause cancer or other adverse health effects in humans. EPA’s risk assessments of commercial chemicals under TSCA vary depending on whether the chemical at issue is “existing” or “new.” For EPA to control the use of an existing chemical, the agency must make a legal finding that the chemical will present an unreasonable risk to human health or the environment. EPA said this standard requires the agency to have conclusive data on risks associated with that particular chemical. By comparison, newly introduced chemicals can be regulated based on whether they may pose an unreasonable risk, and this finding of risk can be based on data for structurally similar chemicals, not just data on that particular chemical. Because industrial chemicals in commerce were “grandfathered” under TSCA into the inventory of existing chemicals more than 20 years ago, without considering whether they were hazardous, there are situations in which existing chemicals might not be controlled while, at the same time, EPA would act to control a new chemical of similar or less toxicity. Within EPA’s Office of Water, risk assessments vary depending on whether the assessment is done to establish drinking water standards or standards for ambient water (e.g., bodies of water such as lakes and rivers). Risk assessments for drinking water standards focus solely on human health effects, but assessments used to establish ambient water quality criteria consider both human health and ecological effects. Even when considering just the human health risks, an important difference between the ambient and drinking water risk assessments is an additional focus for ambient water on exposures to contaminated water through consumption of contaminated fish or shellfish. This additional factor is a primary reason for potential differences in drinking water and ambient water risk estimates and standards for the same chemical. Appendices II through V describe the relevant contextual factors for each of the four selected agencies in greater detail. All four of the agencies included in our review have standard procedures for conducting risk assessments, although the agencies vary in the extent to which their procedures are documented in written guidance. In general, there are more similarities than differences across EPA, FDA, and OSHA procedures, because each of these agencies generally follows the four-step NAS risk assessment process. The procedures address the same basic questions regarding hazard identification, dose-response assessment, and exposure assessment. The specific analytical methods and approaches in those procedures are also very similar (e.g., extrapolating from animal study data to model dose-response relationships in humans, and generally using different procedures for assessing cancer and noncancer risks). The most substantive differences across and within these agencies are related to exposure assessment, reflecting the diversity in the agencies’ regulatory authorities regarding chemical agents across different kinds or sources of exposure. For example, both OSHA and EPA consider methylene chloride (also known as dichloromethane) to be a probable human carcinogen. However, this same chemical can be identified as a significant hazard by one agency in one exposure setting (OSHA for purposes of assessing health risks associated with occupational exposures) but as a low hazard by another agency in a different setting (EPA for purposes of Superfund hazard ranking screening). RSPA, although sharing a concern over identifying risks and analyzing their consequences and probabilities of occurrence, has a different structure to its risk assessments than the other three agencies because of its focus on risks associated with unintentional releases of hazardous materials during transportation. In general, all four agencies are incorporating more complex analytical models and methods into their risk assessment procedures. However, some of the advanced models require much more detailed information than may be currently available for many chemicals. EPA has extensive written internal risk assessment procedures. For example, EPA has agencywide guidelines, policy memoranda, and handbooks covering the following aspects of risk assessment: carcinogen risk assessment, neurotoxicity risk assessment, reproductive toxicity risk assessment, developmental toxicity risk assessment, mutagenicity risk assessment, health risk assessment of chemical mixtures, exposure assessment, ecological risk assessment, evaluating risk to children, use of probabilistic analysis in risk assessment, use of the benchmark dose approach in health risk assessment, and use of reference dose and reference concentration in health risk assessment. EPA also has numerous program-specific guidelines and policy documents, such as the Risk Assessment Guidance for Superfund series and a set of more than 20 science policy papers and guidelines from the Office of Pesticide Programs in response to the Food Quality Protection Act of 1996. Many of the agency’s guidance documents are draft revisions to earlier documents or procedures or draft guidance on new issues that have not previously been addressed by EPA. Although such drafts are not yet final, official statements of agency policies or procedures, they may better represent the current practice of risk assessment in EPA than earlier “final” documents. EPA generally follows the NAS four-step risk assessment process. (The major exception is the agency’s Chemical Emergency Preparedness and Prevention Office, which follows a different set of procedures because of its focus on risks associated with accidental chemical releases from fixed facilities. See app. II for a discussion of this office’s risk assessment procedures.) EPA’s risk assessment activities generally involve both the program offices (e.g., the Office of Air and Radiation or the Office of Solid Waste) and the Office of Research and Development (ORD), which is the principal scientific and research arm of the agency. ORD often does risk assessment work for EPA program offices that focuses on the first two steps in the four-step NAS process—hazard identification and dose- response assessment—in particular, the development of “risk per unit exposed” numbers. Preparation of the final two steps in the process— exposure assessment and risk characterization—tends to be the responsibility of the relevant program offices. Several programs, for example, frequently use a single hazard assessment, but for different exposure scenarios. There are, however, exceptions to this generalization. For example, ORD carries out all steps for highly complex, precedent- setting risk assessments, such as those for dioxin and mercury. There are also instances when EPA program offices carry out all four steps of the process. In some situations, EPA agencywide procedures also depart slightly from the NAS paradigm. For example, when assessing noncancer health effects, EPA’s normal practice is to do hazard identification in conjunction with the analysis of dose-response relationships, rather than as distinct steps. According to EPA’s guidelines, this is because the determination of a hazard is often dependent on whether a dose-response relationship is present. In the case of ecological risk assessments, EPA’s guidelines suggest a three-step process consisting of (1) problem formulation, (2) analysis, and (3) risk characterization, rather than the four- step process used for health risk assessments. EPA has identified several new directions in its approach to exposure assessment. First is an increased emphasis on total (aggregate) exposure to a particular agent via all pathways. EPA policy directs all regulatory programs to consider in their risk assessments exposures to an agent from all sources, direct and indirect, and not just from the source that is subject to regulation by the office doing the analysis. Another area of growing attention is the consideration of cumulative risks, when individuals are exposed to many chemicals at the same time. The agency is also increasing its use of probabilistic modeling methods to analyze variability and uncertainty in risk assessments and provide better estimates of the range of exposure, dose, and risk to individuals in a population than are provided by single point estimates. EPA’s guidance on probabilistic methods outlines standards that exposure data prepared by industry or other external analysts must meet to be accepted by EPA. FDA and OSHA also generally follow the NAS risk assessment paradigm, but neither FDA nor OSHA had written internal guidance specifically on conducting risk assessments at the time of our review. However, both agencies’ standard procedures are well documented in the records of actual risk assessments and in summary descriptions that have appeared in scientific and professional literature. In addition, FDA has published volumes of guidance on risk assessments for use by external parties affected by the agency’s regulations (e.g., animal drug manufacturers seeking FDA approval for their products). According to FDA officials, the documents are meant to represent the agency’s current thinking on the scientific data and studies considered appropriate for assessing the safety of a product, and sometimes include detailed descriptions of the risk assessment methods deemed appropriate to satisfy FDA’s requirements under various statutory provisions. However, these guidelines do not preclude the use of alternative procedures by either FDA or external parties. The responsibility for conducting risk assessments in FDA is divided among the agency’s program offices. For example, FDA’s Center for Food Safety and Applied Nutrition (CFSAN) is responsible for assessing risks posed by food additives and contaminants, while the Center for Veterinary Medicine (CVM) is responsible for assessing risks posed by animal drug residues in food. In addition, FDA’s National Center for Toxicological Research conducts scientific research to support the agency’s regulatory needs, including research aimed at understanding the mechanisms of toxicity and carcinogenicity and at developing and improving risk assessment methods. FDA officials said that there are variations in the risk assessment approaches used among the agency’s different product centers and, in some cases, within those centers. In general, those variations are traceable to differences in factors such as the substances being regulated, the nature of the health risks involved (particularly carcinogens versus noncarcinogens), and whether the risk assessment is part of the process to review and approve a product before it can be marketed and used (premarket) or part of the process of monitoring risks that arise after a product is being used (postmarket). For example, risk assessments by CFSAN’s Office of Food Additive Safety and Office of Nutritional Products, Labeling and Dietary Supplements are mandatory for new dietary ingredients (and are used for premarket review of such ingredients) but discretionary for other food (and are associated with postmarket review). A unique characteristic of the hazard identification phase of risk assessment in FDA is that, by statute, if there is an adequate study that indicates a food additive can cause cancer in animals, that additive is labeled as a carcinogen under the conditions of the study. No additional corroboration or weight-of-evidence analysis is required in such cases, and there is no need to complete the other three risk assessment steps before proceeding to a regulatory decision. FDA’s CVM is permitted to allow the use of carcinogenic drugs in food-producing animals under the DES proviso of the Federal Food, Drug, and Cosmetic Act, as amended, provided that “no residue of such drug will be found.” OSHA’s Directorate of Health Standards Programs is primarily responsible for conducting the agency’s chemical risk assessments. Such assessments focus specifically on the potential risks to workers associated with exposures to chemicals in an occupational setting. In contrast to agencies regulating environmental exposures to toxic substances, OSHA frequently has relevant human data available on occupational exposures. Even when the agency assesses risks based on animal data, OSHA said that the workplace exposures of concern are often not far removed from levels tested in the animal studies. Therefore, OSHA’s risk assessments do not extrapolate as far beyond the range of observed toxicity as might be necessary to characterize environmental exposure risks. OSHA’s risk assessment procedures have also evolved to consider data from advanced physiologically based pharmacokinetic (PBPK) models on the relationship between administered doses and effective doses (i.e., the amounts that actually reach a target organ or tissue). However, PBPK models are complicated and require substantial data, which may not be available for most chemicals. OSHA therefore developed a set of 11 criteria to judge whether available data are adequate to permit the agency to rely on PBPK analysis in place of administered exposure levels when estimating human equivalent doses. The applicable risk assessment guidance for RSPA is generally documented within broader DOT-wide guidance on conducting regulatory analyses and also in materials describing the agency’s Hazardous Materials Safety Program. Because of the particular regulatory context in which it operates, RSPA does not apply the NAS four-step paradigm for risk assessment used by EPA, FDA, and OSHA. RSPA is primarily concerned with potential risks associated with the transportation of hazardous materials. In particular, it is concerned with short-term or acute health risks due to relatively high exposures from unintentional release of hazardous materials. For its purposes, RSPA identifies chemicals as hazardous materials according to a regulatory classification system that is harmonized with internationally recognized criteria and EPA-defined hazardous substances. This classification system defines the type of hazard associated with a given material according to chemical, physical, or nuclear properties (e.g., whether it is an explosive, a flammable liquid, or a poisonous substance) that can make it dangerous in or near transporting conveyances. Therefore, a chemical’s toxicity is only one of its characteristics of concern to RSPA, rather than being the primary focus of analysis as in assessments of the other three agencies. The risk analyses by RSPA focus on identifying the potential circumstances under which unintentional releases of hazardous materials could occur during transit (e.g., due to transportation accidents) and assessing their consequences and probability of occurrence. Analysis of different modes (e.g., via truck, rail, or aircraft) and routes of transportation is an important component of RSPA’s consequence and probability analyses. Through DOT databases, directly relevant data on the incidence and severity of hazardous materials transportation accidents are available to assist RSPA in identifying and analyzing hazard scenarios. Appendices II through V provide more detailed descriptions of the standard procedures for chemical risk assessments in each of the four selected agencies. Assumptions and methodological choices are an integral and inescapable part of risk assessment. They are often intended to address uncertainty in the absence of adequate scientific data. However, those assumptions and methods may also reflect policy choices, such as how to address variability in exposures and effects among different individuals and populations, or particular contextual requirements. To the extent that the four agencies identified the specific reasons for selecting their major assumptions or methods, they most often attributed their choices to an evaluation of available scientific data, the precedents established in prior risk assessments, or policy decisions related to their regulatory missions. Agencies’ statements regarding the likely effects of their preferred assumptions and methods most often addressed the extent to which the default options would be considered precautionary. Some of the major assumptions and methodological choices of EPA, FDA, and OSHA address similar issues and circumstances during the risk assessment process, especially regarding assessment of a chemical’s toxicity. Agency procedural guidelines and officials we contacted during our review identified a large number and wide variety of major assumptions and methodological choices that they might use when conducting chemical risk assessments, in the absence of information that would indicate the particular assumption or method is not valid in a given case. Some of these assumptions and methodological choices were very broad (e.g., the common assumption that, in the absence of evidence to the contrary, substances that produce adverse health effects in experimental animals pose a potential threat to humans). Other assumptions and choices were more specific, covering particular details in the analytical process (e.g., identifying the preferred options for extrapolating high dose-response relationships to low doses). EPA and OSHA identified some of their choices as the default assumptions and methods of their agencies. FDA officials said that their agency does not require the use of specific default assumptions or risk assessment methods, but there are assumptions and methods that typically have been used as standard choices in FDA risk assessments. Although assumptions are also needed in RSPA’s risk assessments, RSPA officials said that they do not have any default assumptions. Instead, they said that their assumptions are specific to, and must be developed as part of, each risk assessment. Appendices II through V present detailed information on some of what the agencies identified as their major assumptions and methodological choices in chemical risk assessments. The tables illustrate both the number and variety of assumptions that agencies may use when conducting those assessments. The following sections summarize information that was available from the four agencies’ procedures and related documents on (a) when the agencies employ major assumptions and methods, (b) their reasons for selecting these options, (c) the likely effects on risk assessment results of these options, and (d) how they compare to the assumptions and choices used by other agencies or programs in similar circumstances. In some cases the agencies’ documents did not contain this information, but there is no requirement that the agencies do so. Also, the reason for using a particular assumption and its effect on risk assessment results can vary on a case-by- case basis, and therefore might not be addressed in general risk assessment guidance. Nevertheless, both NAS and the Presidential/Congressional Commission recommended greater transparency regarding the procedures, assumptions, and results of agencies’ risk assessments. Also, as will be discussed more fully later in this report, the agencies’ own risk characterization policies and practices emphasize the value of such transparency in communicating information about risk assessment procedures and results. Recent regulatory reform proposals considered by Congress have had provisions requiring transparency in the use of assumptions. As previously mentioned, NAS and the Presidential/Congressional Commission have both emphasized that science cannot always provide definitive answers to questions raised during a risk assessment. For example, in 1983, NAS identified at least 50 points during the course of a cancer risk assessment when choices had to be made on the basis of professional judgment, not science. EPA’s guidelines similarly point out that, because there is no instance in which a set of data on an agent or exposure is complete, all risk assessments must use general knowledge and policy guidance to bridge data gaps. Except in the case of RSPA, default or standard assumptions and methods may be used by agencies to address these gaps in knowledge, and to encourage consistency in the efforts of agencies’ risk assessors to address such basic issues as: uncertainty in the underlying data, model parameters, or state of scientific understanding of how exposure to a particular chemical could lead to adverse effects; variability in the potential extent of exposure and probability of adverse effects for various subgroups or individuals within the general population; and statutory requirements (and the related general agency missions) to be protective of public health and the environment (e.g., to set standards with “an adequate margin of safety”). However, agency risk assessors have considerable flexibility regarding whether to use particular assumptions and methods, even when the agency has default or standard options. For example, EPA stated that its revised guidelines for carcinogen risk assessment were intended to be both explicit and more flexible than in the past concerning the basis for making departures from defaults, recognizing that expert judgment and peer review are essential elements of the process. The Executive Director of ORD’s Risk Assessment Forum pointed out that, although EPA’s guidelines always permitted such flexibility, without detailed guidance on departing from default assumptions there had been a tendency for analysts to not do so. He also stated that when determining whether to use a default, the decision maker must consider available information on an underlying scientific process and agent-specific data, and that scientific peer review, peer consultation workshops, and similar processes are the principal ways of determining the strength of thinking and the general acceptance of these views within the scientific community. FDA officials emphasized that their agency does not presume that there is a “best way” of doing a risk assessment and does not require the use of a specific risk assessment protocol or of specific default assumptions, but they are continually updating procedures and techniques with the goal of using the “best available science.” Agencies identified assumptions and methodological choices throughout the risk assessment process, and each of the first three steps in the process can have its own set of issues and choices that risk assessors need to address. During hazard identification, agencies must make choices about which types of data to use and what types of adverse effects and evidence will be considered in their analyses. For example, risk assessors need to decide whether data on benign tumors should be used along with data on malignant tumors as the basis for quantitative estimates of cancer risks, or whether only data on malignant tumors should be used. During dose- response assessment, agencies may need to make assumptions when extrapolating effects from animals to humans (e.g., how to determine equivalent doses across different species). In particular, choices among assumptions and methods are needed when estimating dose-response relationships at doses that are much lower than those used in the scientific studies that provided the data for quantitative analysis. During exposure assessments, assumptions might be needed to address issues such as when exposures occur (e.g., in infancy or childhood versus as an adult), how long exposures last (e.g., short versus long term and continuous versus episodic), differences in exposures and effects for the population as a whole versus those affecting subpopulations and individuals, and questions about the concentration and absorption of chemical agents. Assumptions about human behavior also affect the relative likelihood of different exposure scenarios. For example, in assessing children’s residential exposures to a pesticide, risk assessors might need to make assumptions about how long children play in a treated area, the extent to which they are wearing clothing, and potential hand-to-mouth exposure to treated soil, among other factors. Agencies generally indicated that they use their major assumptions and methodological choices in risk assessments when professional judgments or policy choices must substitute for scientific information that is not available or is inconclusive. We examined risk assessment guidance documents and procedures in the four agencies to determine whether the agencies stated a specific scientific or policy basis for their choices, as recommended by NAS and the Presidential/Congressional Commission. In approximately three-quarters of the choices that we reviewed, the agencies provided at least some rationale for the use of particular assumptions or methods. The reasons most commonly cited were (1) an evaluation of available scientific data, (2) the precedents established in prior risk assessments, and (3) policy decisions related to their regulatory mandates. In some instances, the agencies cited more than one reason in support of their choices. For example, officials from FDA’s Center for Veterinary Medicine said they assume that an adult weighs 60 kilograms when converting an acceptable daily intake (ADI) to an intake level of residues in food because of historical precedent and because this assumption should protect women, growing adolescents, and the elderly. Of the three reasons, the agencies most often cited their evaluation of available scientific evidence as a reason for selecting particular assumptions or analytical methods. For example, one of the default assumptions in EPA’s carcinogen risk assessment guidance is that positive effects in animal cancer studies indicate that the agent under study can have carcinogenic potential in humans. EPA cited scientific research supporting this assumption, such as the evidence that nearly all agents known to cause cancer in humans are carcinogenic in animals in tests with adequate protocols. Other EPA guidelines stated that, in general, a threshold is assumed for the dose-response curve for agents that produce developmental toxicity. EPA’s guidelines noted that this assumption is based on the known capacity of the developing organism to compensate for or repair a certain amount of damage at the cellular, tissue, or organ level. OSHA cited scientific evidence and the views of the Office of Science and Technology Policy on chemical carcinogenesis (the origin or production of a tumor) to support its choice to combine data on benign tumors with the potential to progress to malignancies with data on malignant tumors occurring in the same tissue and the same organ site. Even when basing a choice upon available scientific studies and data, professional judgment may still be required regarding which particular method or assumption to choose among competing alternatives. The scientific evidence might show a range of assumptions or methods that provide plausible results and may, in specific cases, vary in terms of which one best fits the available evidence. For example, different mathematical models can be used for estimating the low-dose effects of exposure to suspected carcinogens. A basic problem for risk assessors is that, while the results produced by different models may be similar at higher doses, the estimates can vary dramatically at the low doses that are of concern to agency regulators. One study of 5 dose-response models showed that all of the models produced essentially the same dose-response curves at higher doses, but the models’ estimates differed by 3 or 4 orders of magnitude (values 1,000 to 10,000 times different) at lower doses. Because the mechanism of carcinogenesis is not sufficiently understood, none of the mathematical procedures for extrapolation has a fully adequate biological basis. Furthermore, because of the limitations in the ability of toxicologic or epidemiologic studies to detect small responses at very low doses, dose- response relationships in the low-dose range are practically unknowable. Agencies can encounter similar problems in attempting to determine how much of a chemical will produce the same effect in humans that was observed in animals. An interagency group of federal scientists that studied this issue noted that, although many alternatives had been developed for such cross-species scaling, and despite considerable study and debate, “no alternative has emerged as clearly preferable, either on empirical or theoretical grounds.” The group noted further that the various federal agencies conducting chemical risk assessments therefore developed their own preferences and precedents, and this variation “stands among the chief causes of variation among estimates of a chemical’s potential human risk, even when assessments are based on the same data.” For purposes of consistency in federal risk assessments, the group recommended a method intermediate between the two methods most commonly used by federal agencies, but reiterated that methodologies in use “have not been shown to be in error.” Other reasons cited by the agencies for selecting assumptions or methods included the precedents established in prior risk assessments and policy decisions related to their regulatory missions and mandates. For example, FDA officials said that their practice of using the most sensitive species and sex when calculating the ADI of animal drug residues in food was based on historical precedents dating back to at least 1954. In other instances, FDA said that its use of precautionary assumptions was based on the agency’s statutory responsibility to ensure to a “reasonable certainty” that the public will not be harmed. Similarly, EPA guidelines pointed out that the default assumptions used in the agency’s risk assessments were chosen to be health protective because EPA’s overall goal is public health protection. For example, EPA’s neurotoxicity guidelines said that a choice to use the most sensitive animal species to estimate human risk “provides a conservative estimate of sensitivity for added protection to the public.” The agencies provided information in their guidelines on the likely effects of using particular assumptions or methods in about half of the examples that we reviewed. When that information was provided, it was usually in the context of whether and to what extent the agencies’ choices could be considered precautionary. In a number of cases, EPA and FDA characterized their assumptions and methods as precautionary in that they were intended to avoid underestimating risks in the interest of protecting public health. Such assumptions tend to raise an agency’s estimate of risk and lower the levels of exposure that are of regulatory concern. Precautionary assumptions and methodological choices were a common component of programs that have “tiered” approaches for conducting risk assessments (e.g., EPA’s Superfund and pesticides programs). In these tiered risk assessment approaches, agencies move from initial rough screening efforts to increasingly more refined and detailed levels of analyses. The initial screening assessments will typically involve very precautionary “upper-bound” or even “worst-case” assumptions to determine whether there is cause for concern. Successive tiers of assessment, if deemed necessary, are characterized in agency documents as more detailed and focused assessments that require more extensive data and rigorous analysis. For example, EPA indicated that its screening assessments might well use precautionary upper-bound point estimates of exposures (e.g., that a chemical is used on 100 percent of the eligible crop and at the maximum permissible limit). However, subsequent tiers of assessments might refine those estimates through the use of probability distributions of exposure parameters or the use of monitoring data on actual exposures, when feasible. OSHA and RSPA also use precautionary assumptions in certain parts of their risk assessment procedures. However, these agencies identified few of their risk assessment assumptions and methods as precautionary. In fact, OSHA sometimes selected assumptions or methods that it explicitly characterized as less precautionary than those used by other agencies in similar circumstances. For example, OSHA stated that its standard approach to low-dose extrapolation can be much less precautionary than EPA’s or FDA’s approaches because it tends to use central estimates of potency rather than upper-bound confidence limits. OSHA officials also noted that the algorithm they use is less precautionary because it may lead to models that are sublinear at low doses. The effect on risk estimates of using any one assumption is likely to be less significant than that of applying a series of assumptions while conducting a risk assessment, particularly if the assessment is compounding a string of largely precautionary assumptions. As we previously pointed out, assumptions and choices may be needed at many points during each step of an agency’s analysis. The agency’s policy may well be to use precautionary choices at most, if not all, of those points, if adequate information is not available to indicate that the precautionary choice is invalid in a specific case. The potential for such a string of precautionary assumptions is illustrated by the set of standard choices identified by FDA for risk assessments of carcinogenic animal drug residues in foods consumed by humans. 1. Regulation is based on the target tissue site exhibiting the highest potential for cancer risk for each carcinogenic compound. 2. If tumors are produced at more than one tissue site, the minimum concentration of the compound that produced a tumor is used. 3. Cancer risk estimates are generally based on animal bioassays, using upper 95-percent confidence limits of carcinogenic potency.4. Low-dose extrapolation is done using a nonthreshold, conservative, linear-at-low-dose procedure (i.e., assuming that there is no dose that would not cause cancer and that effects vary in proportion to the amount of the dose). 5. It is assumed that the carcinogenic potency in humans is the same as that in animals. 6. The concentration of the residue in the edible product is at the permitted concentration. 7. Consumption is equal to that of the 90th percentile consumer. 8. All marketed animals are treated with the carcinogen. 9. In the absence of information about the composition of the total residue in edible tissue, assume that the entire residue is of carcinogenic concern. FDA’s description of its risk assessment procedures acknowledged that these assumptions “result in multiple conservatisms” and stated that some of these choices are likely to overestimate risk by an unknown amount (although the fourth assumption could also underestimate risk by an order of magnitude). However, the agency also said that these assumptions are prudent because of the uncertainties involved and cited its statutory responsibility to ensure to a reasonable certainty that the public will not be harmed. It is important to keep in mind that the primary purposes for preparing such assessments are to identify safe concentration levels in edible tissues and residue tolerances (the amount permitted to remain on food) for postmarket monitoring rather than to produce a general estimate of the risk posed by use of the animal drug. Agency documents very rarely made direct comparisons of their assumptions and methodological choices to those used by other agencies, and there is no requirement that they do so. Our review indicated that EPA, FDA, and OSHA risk assessment procedures have many basic assumptions in common—for example, that one can use results of animal experiments to estimate risks to humans, and that most potential carcinogens do not have threshold doses below which adverse effects would not occur. There are other default or standard assumptions and models in the three agencies’ risk assessment procedures that are similar, but not identical. For example, all three agencies employ a linear mathematical model for low-dose extrapolation (in the absence of information indicating that a linear model is inappropriate in a particular case). However, the agencies prefer different options in the details of fitting such models, such as the point of departure to low doses. EPA and FDA also consider similar, but not identical, sets of uncertainty or safety factors when using the NOAEL approach for noncancer risk assessments. Finally, as the discussion above regarding low-dose extrapolation illustrates, there are also instances in which the agencies use different assumptions in similar circumstances. Table 1 compares and contrasts some of the risk assessment assumptions or analytical methods identified in the guidelines or other descriptive documents of EPA, FDA, and OSHA for use under similar circumstances. (Note that, for comparability, the examples in table 1 all focus on carcinogen risk assessments based on animal studies, but the agencies’ major assumptions and methods are not limited to only carcinogen risk assessments. Note also that the “circumstances” listed in the table also include that the assumption or method would be used in the absence of data to the contrary.) There appears to be some convergence in the agencies’ risk assessment assumptions in at least one area where there had been significant differences—their methods for cross-species dose scaling. In the absence of adequate information on differences between species, EPA’s standard practice in carcinogenic risk assessments had been to scale daily administered doses by body surface area, whereas FDA’s and OSHA’s standard practice had been to scale doses by body weight. Recently, the agencies have either adopted, or consider as one of their options, the expression of doses in terms of daily amount administered per unit of body weight to the ¾ power. All four of the agencies included in our review have also been incorporating more complex analytical methods and models into their risk assessment procedures. Some of these methods (such as the use of probabilistic analyses to provide distributions of exposure parameters) help to address issues of uncertainty and variability in risk assessments and lessen the need for some precautionary assumptions. Other advances, such as the use of PBPK models, can provide better insights into how and to what extent a chemical might produce adverse effects in humans. One outcome of the integration of these methods into agencies’ procedures is a diminishing of the traditional distinction between cancer and noncancer risk assessment methods. EPA, in particular, has noted that it is less likely to consider cancer and noncancer endpoints in isolation as it develops and incorporates more advanced scientific methods to measure and model the biological events leading to adverse effects. According to EPA, the science of risk assessment is moving toward a harmonization of the methodology for cancer and noncancer assessments. The use of newer, more complex models and methods also opens up a new range of choices and assumptions in the analysis—along with the potential for risk estimates to diverge because of the different assumptions that might be used. For example, in its methylene chloride final rule OSHA reported on the results of its analyses as well as risk assessments submitted to OSHA by other risk assessors. Although most of the risk assessments used a linearized multistage model to predict risk, there were differences in the estimates produced by these assessments. OSHA pointed out that the differences in risk estimates were not generally due to the dose-response model used, but to whether the risk assessor used PBPK modeling to estimate target tissue doses and what assumptions were used in the PBPK modeling. Appendices II through V present more detailed information on some of the major assumptions and methodological choices in each of the four selected agencies. In the risk characterization step of a risk assessment, agencies bring together the results of the preceding analyses in the form of estimates and conclusions about the nature and magnitude of a potential risk. Agencies’ risk characterizations play a crucial role in explaining to decision makers and other interested parties what the agency’s risk assessors have concluded and on what basis they reached those conclusions. Both EPA and DOT have agencywide written policies on risk characterization that emphasize the importance of providing comprehensive and transparent characterizations of risk assessment results. Although FDA and OSHA do not have written risk characterization policies, officials of those agencies pointed out that, in practice, they also tend to emphasize comprehensive characterizations of risk assessment results, discussions of limitations and uncertainties, and disclosure of the data and analytic methodologies on which the agencies relied. EPA’s program offices are generally responsible for completing risk characterizations, and EPA’s agencywide guidance on this issue includes a risk characterization policy, a guidance memorandum, and a handbook. EPA’s policy stipulates that risks should be characterized in a manner that is clear, transparent, reasonable, and consistent with other risk characterizations of similar scope. EPA said that all assessments “should identify and discuss all the major issues associated with determining the nature and extent of the risk and provide commentary on any constraints limiting fuller exposition.” EPA’s policy documents also recommend that risk characterization should (1) bridge the gap between risk assessment and risk management decisions; (2) discuss confidence and uncertainties involving scientific concepts, data, and methods; and (3) present several types of risk information (e.g., a range of exposures and multiple risk descriptors such as high-end estimates and central tendencies). It is also EPA’s policy that major scientifically and technically based work products related to the agency’s decisions normally should be peer-reviewed. In its guidelines for carcinogen risk assessment, EPA also suggests preparing separate “technical” characterizations to summarize the findings of the hazard identification, dose-response assessment, and exposure assessment steps. The agency’s risk assessors are then to use these technical characterizations to develop an integrative analysis of the whole risk case, followed by a less extensive and nontechnical summary intended to inform the risk manager and other interested readers. EPA identified several reasons for preparing separate characterizations of each analysis phase before preparing the final integrative summary. One is that different people often do the analytical assessments and the integrative analysis. The second is that there is very often a lapse of time between the conduct of hazard and dose-response analyses and the conduct of the exposure assessment and integrative analysis. Thus, according to EPA, it is necessary to capture characterizations of assessments as the assessments are done to avoid the need to go back and reconstruct them. Finally, several programs frequently use a single hazard assessment for different exposure scenarios. DOT’s policy principles regarding how the results of its risk or safety assessments should be presented are straightforward and encourage agency personnel to: make public the data and analytic methods on which the agency relied (for replication and comment); state explicitly the scientific basis for significant assumptions, models, and inferences underlying the risk assessment, and explain the rationale for these judgments and their influence on the risk assessment; provide the range and distribution of risks for both the full population at risk and for highly exposed or sensitive subpopulations and encompass all appropriate risk to health, safety, and the environment; place the nature and magnitude of risks being analyzed in context (including appropriate comparisons to other risks); and use peer review for issues with significant scientific dispute. FDA does not have a written risk characterization policy, but FDA officials said that, in practice, the agency uses a standard approach that is similar to EPA’s official policy. They said that FDA’s general policy is to reveal the risk assessment assumptions that have the greatest impact on the results of the analysis, and to state whether the assumptions used in the assessment were conservative. FDA officials also said that their risk assessors attempt to show the implications of different distributions and choices (e.g., the results expected at different levels of regulatory intervention). FDA may employ probabilistic methods, such as Monte Carlo analysis, to provide additional information on the effects of variability and uncertainty on estimates of risk, and there are some differences in FDA risk characterization procedures depending on the products being regulated and the nature of the risks involved. Although OSHA does not have written risk characterization policies, in recent rules the agency emphasized (1) comprehensive characterizations of risk assessment results; (2) discussions of assumptions, limitations, and uncertainties; and (3) disclosure of the data and analytic methodologies on which the agency relied. The agency devoted considerable effort to addressing uncertainty and variability in its risk estimates. Such efforts included performing sensitivity analyses and providing estimates produced by alternative analyses and assumptions (including analyses by risk assessors outside of OSHA). In its risk characterizations, OSHA provided both estimates of central tendency and upper limits (such as the 95th percentile of a distribution). Appendices II through V provide more detailed descriptions of the risk characterization policies or approaches of each of the four selected agencies. Risk assessment is an important, but extraordinarily complex, element in federal agencies’ regulation of potential risks associated with chemicals. The assessments can help agencies decide whether to regulate a particular chemical, select regulatory options, and estimate the benefits associated with regulatory decisions. Scientific studies in such areas as toxicology and epidemiology are often used to produce the information needed for risk assessment decisions. However, assessors frequently must produce estimates of risk without complete scientific information about the extent of exposures to potentially hazardous substances and the effects of those exposures on human health and safety or the environment. Therefore, professional judgment with regard to assumptions and methodological choices is an inherent part of conducting risk assessments. The appendices to this report identify many of the major assumptions and methods that can be used in risk assessments prepared for EPA, FDA, OSHA, and RSPA. The number and variety of those assumptions and methods illustrate the range of issues that risk assessors confront during the course of their analyses. Although there were more similarities than differences in the general risk assessment procedures of three of the four agencies, there were also some notable differences in the agencies’ specific approaches, methods, and assumptions. These differences can significantly affect the results and conclusions drawn from the assessments. Therefore, risk estimates prepared by different agencies, or by different program offices within those agencies, may not be directly comparable, even if the same chemical agent is the subject of the risk assessment. In some cases, the reasons for those differences are readily apparent, such as when agencies focus on different types of adverse effects (e.g., cancer versus noncancer) or different types and sources of exposure. For example, the same chemical (e.g., methylene chloride) might be identified as a significant hazard by one agency in one exposure setting (OSHA for occupational exposures) but as a low hazard by another agency in a different setting (EPA for Superfund hazard ranking screening). In other cases, the reasons for different estimates may be more subtle and harder to discern within the many layers of analyses and professional judgments used to prepare the risk assessment. Because of the range of assumptions and methods that are scientifically plausible in a given situation, the risk characterization phase of the risk assessment process takes on added importance. In their risk characterization policies or procedures, the four agencies acknowledge the importance of clearly communicating not only their conclusions about the nature and likelihood of a given risk but also disclosing (1) the assumptions, methods, data, and other choices that had the greatest impact on risk estimates; (2) why those choices were made; and (3) the effect that alternative choices would have had on the results of a risk assessment. Transparency is important with regard to both individual risk assessments and in agencies’ general procedures regarding how the assessments should be conducted. Those procedures encourage consistency in how agencies conduct risk assessments and provide insights into agencies’ decision making when analyzing risks. For example, frameworks delineated by EPA and OSHA for departing from certain default assumptions inform both agency personnel and external parties as to whether particular data or analyses are acceptable to the agency. Our review focused on describing the framework for agencies’ chemical risk assessments. We did not evaluate how that framework is applied in practice, or how risk assessment results affect risk management decisions by agencies and other policymakers. Nevertheless, our report highlights the value of policymakers and other interested parties becoming aware of the underlying risk assessment context, procedures, assumptions, and policies when using risk assessment data for risk management and other public policy decisions. For example, prudent use of risk data requires the user to be aware of the extent to which the data: represent estimates from screening assessments (which may rely heavily on precautionary assumptions) or estimates from subsequent, more rigorous assessments (which are likely to rely on more detailed and case-specific data and analyses); show the distribution of exposures and potential adverse effects across the population, including the extent to which the data address risks of the most exposed or sensitive subgroups of the population, or focus on only part of that distribution; were produced using directly relevant scientific data that were available or had to rely on general assumptions and models; and reflect the flexibility permitted in agencies’ standard procedures or guidelines to depart from past precedent and default choices to use alternative assumptions and models, when appropriate. In our review we also found that, although the underlying statutes specified the use of particular methods or assumptions in only three instances, the legal and situational context within which an agency is conducting a chemical risk assessment has a major effect on the specific focus, scope, and level of detail of the resulting assessment. Comparison of risk assessment estimates from different agencies and programs therefore requires careful consideration of these contextual differences. Because the central purpose of our review was to describe the framework for selected agencies’ chemical risk assessments, rather than to evaluate and critique how that framework is applied in practice, we are not making any recommendations in this report. At the end of our review, we sent a draft of this report to five experts in the field of risk assessment to ensure the technical accuracy of the report. The three experts who provided comments were (1) the Executive Director of the Presidential/Congressional Commission, (2) the individual who prepared the Survey of Methods for Chemical Health Risk Assessment Among Federal Regulatory Agencies for the Commission, and (3) an expert in risk assessment at Resources for the Future. The experts generally indicated that the report had no material weaknesses, but provided a number of technical suggestions that we incorporated as appropriate. For example, two of the reviewers suggested that the report’s discussion of the NAS four-step risk assessment paradigm, although reflecting the definitions generally relied upon by federal agencies, should also identify an updated view regarding the concept of risk characterization. The updated view is that risk characterization should be a decision-driven activity performed as part of the risk management decision making process rather than a stand-alone activity at the end of a risk assessment. We included this perspective in the report’s background section. During our review, we obtained technical comments from officials in each of the four agencies on a draft of the appendices to this report, which we incorporated as appropriate. On June 18, 2001, we sent a draft of the full report to the Secretaries of Health and Human Services, Labor, and Transportation, and the Administrator of EPA for their review and comment. None of the agencies provided formal comments on the report, but we received additional technical comments and suggestions from all four of the agencies, which we incorporated as appropriate. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the date of this report. At that time, we will send copies of this report to the Ranking Minority Member, House Committee on Energy and Commerce; the Ranking Minority Member, Subcommittee on Environment and Hazardous Materials, House Committee on Energy and Commerce; the Secretaries of Health and Human Services, Labor, and Transportation; and the Administrator of EPA. We will also make copies available to others on request. If you have any questions concerning this report, please call me or Curtis Copeland at (202) 512-6806. Key contributors to this assignment were Timothy Bober and Aaron Shiffrin. As requested, our review focused on the chemical risk assessment procedures, assumptions, and policies of four federal agencies with responsibilities for regulating or managing risks from potential exposure to chemicals—the Environmental Protection Agency (EPA), the Food and Drug Administration (FDA) within the Department of Health and Human Services (HHS), the Occupational Safety and Health Administration (OSHA) within the Department of Labor, and the Department of Transportation’s (DOT) Research and Special Programs Administration (RSPA—in particular the Office of Hazardous Materials Safety). Our specific objectives were to identify and describe (1) the general context for the agencies’ chemical risk assessment activities; (2) what the agencies view as their primary procedures for conducting risk assessments; (3) what the agencies view as the major assumptions or methodological choices in their risk assessment procedures; and (4) the agencies’ procedures or policies for characterizing the results of risk assessments. To the extent feasible, we were also asked to identify for the assumptions and choices identified in the third objective (a) at what stages of the risk assessment process they are used, (b) the reasons given for their selection, (c) their likely effects on risk assessment results, and (d) how they compare to the assumptions and choices used by other agencies or programs in similar circumstances. To address our objectives, we relied primarily on a detailed review and analysis of agencies’ general guidance documents on chemical risk assessment or, if there were no guidance documents, reviews of specific examples of agency risk assessments. We supplemented that information with material from secondary source reports on risk assessment and interviews with agency officials. Among the secondary sources that we used were relevant reports by the Congressional Research Service, National Academy of Sciences (NAS), and the Presidential/Congressional Commission on Risk Assessment and Risk Management (hereinafter referred to as the Presidential/Congressional Commission). In particular, as a starting point for our review we used a report on federal agencies’ chemical risk assessment methods that was prepared by Lorenz Rhomberg for the Presidential/Congressional Commission. That report provided the baseline descriptions of some of the chemical risk assessment procedures at EPA, FDA, and OSHA. We asked officials of those agencies to review Rhomberg’s report to identify information that was still relevant to addressing the objectives of this report as well as information that they felt should be revised or added to reflect the agencies’ current procedures. There are several important limitations to our review. First, chemical risk assessment is just one of several types of risk assessment being conducted in federal agencies. Therefore, our review cannot be used to characterize other types of risk assessments (e.g., risks associated with radiation exposure). In fact, FDA officials considered risk assessments related to the human drug approval process to be outside the scope of our review because a completely different protocol is used in those assessments. However, limiting the scope of our review to chemical risk assessments makes comparisons among the agencies included more relevant and meaningful. Second, our review did not include all agencies or programs that conduct risk assessments involving chemicals. For example, we did not include the Consumer Product Safety Commission, which periodically assesses products with potential risks from chemicals. Nor did we include the Agency for Toxic Substances and Disease Registry, which prepares “health assessments” that closely resemble risk assessments but has no regulatory authority. We focused on the risk assessment procedures in four federal agencies that regularly conduct chemical risk assessments in support of regulatory activities and/or could illustrate the diversity of risk assessment procedures. However, the results of our review cannot be considered representative of chemical risk assessments in all federal agencies. Third, our review does not describe every chemical risk assessment procedure or assumption used by the agencies we reviewed. The material describing the agencies’ procedures is both voluminous and extremely complex. The detailed information that we provide on agency assumptions is illustrative of the assumptions included in agencies’ procedures, but not a compendium of all such assumptions. In addition, we concentrated primarily on the human health and safety risk assessment procedures of the four agencies and, to a lesser extent, on ecological risk assessment procedures. Fourth, this report describes agencies’ general procedures and policies, but it is not a compliance review of how well those procedures and policies are applied with regard to individual assessments. The agencies’ guidelines represent suggested procedures and are not binding, so the agencies’ practices may justifiably vary from the general frameworks we describe. In practice, risk assessments do not follow a simple recipe or formula. Each assessment has unique issues or characteristics that require case-specific resolutions. Finally, this report does not address risk management issues—e.g., using the results of a risk assessment to determine what level of exposure to a risk agent represents an acceptable or an unacceptable risk and deciding what control options should be used. We conducted this review between February 2000 and March 2001 in the Washington, D.C., headquarters offices of the selected agencies in accordance with generally accepted government auditing standards. We obtained technical comments on our descriptions of the agencies’ procedures, assumptions, and policies in the appendices from knowledgeable agency personnel. We then provided the draft report to external experts in risk assessment, including the Center for Risk Analysis at the Harvard School of Public Health in Boston, MA; Resources for the Future in Washington, D.C.; the Executive Director of the Presidential/Congressional Commission; and Lorenz Rhomberg, the analyst who surveyed federal agencies’ chemical risk assessment procedures for the Commission. After incorporating their comments, we provided a draft of this report to the Secretaries of Health and Human Services, Labor, and Transportation; and the Administrator of the Environmental Protection Agency for their review and comment. In the following appendices, we provide more detailed information regarding the framework and methods applicable to chemical risk assessment activities of EPA, FDA, OSHA, and RSPA. There is a separate technical appendix covering each of these four agencies, along with their relevant offices, programs, or centers that are involved in conducting chemical risk assessments. For consistency and ease of presentation, we have generally organized the appendices on each agency according to a standard format with four major sections. 1. We describe the general context for the chemical risk assessment activities of each agency. This includes a summary of the primary risk statutes, mandates, and tasks related to potential risks from exposure to chemical agents. 2. We identify and summarize the standard risk assessment procedures of each agency and, if applicable, each agency’s various offices, programs, or centers. This section is generally organized by the major analytical steps of the risk assessment process: hazard identification, dose- response assessment, and exposure assessment. These correspond to the first three steps of the four-step paradigm for risk assessment as defined by NAS and used by three of the four agencies covered by our review. (We address the fourth step of the process, risk characterization, as a separate objective in the final section of each agency appendix.) Within the descriptions of those steps, we often distinguish between the procedures used for assessing cancer and noncancer effects. Given developments in risk assessment methods, these distinctions are sometimes more artificial than real.3. We present additional information about major assumptions and methodological choices in the agencies’ standard risk assessment procedures. For EPA, FDA, and OSHA, the primary focus of this section is a detailed table identifying some of the major agencywide or program-specific assumptions that may be used in chemical risk assessments. To the extent that such information was available, each of these tables also includes information on the agency’s reason(s) for selecting a particular assumption, when in the risk assessment process the agency would apply the assumption, and the likely effect of using the assumption on risk assessment results. (Because agencies very rarely made direct comparisons of their choices to those of other agencies in their risk assessment guidelines or related documents, we have not included a separate column on that topic in the appendix tables. That objective is, however, addressed in the letter portion of this report.) The appendix on RSPA does not include all of these elements because of differences in its context and approach to chemical risk assessment. 4. The final section of each appendix addresses each agency’s approach or policies for characterizing the results of risk assessments for agency decision makers and other interested parties. In particular, we describe the agency’s policies or practices with regard to the transparency of risk assessment results, such as reporting the range and distribution of risks and identifying the uncertainties in the risk analysis and underlying data. To avoid repetition in the appendices on agencies’ risk assessment procedures, our most detailed descriptions of basic methods and issues appear in the EPA appendix under the discussion of agencywide procedures. Descriptions of procedures used by other agencies or programs, including the individual program offices within EPA, then reference the EPA-wide descriptions of those particular methods, if they are similar. Although we provide much more detailed technical information in these appendices than in the main body of the report, it is still important to recognize that agencies’ risk assessment methods are more involved and complex than we have described in this report. In particular, the tables of assumptions do not represent a comprehensive listing of all assumptions and choices of the agencies. Agencies might use many different types and numbers of assumptions in any given assessment, and the assumptions are being altered over time to reflect scientific improvements and changes in risk approaches and the regulatory context. However, the information presented is intended to illustrate the types and diversity of procedures and assumptions employed by the agencies we examined. Chemical risk assessment at the Environmental Protection Agency (EPA) is a complex and diverse undertaking. The variety and range of the relevant regulatory authorities and activities has a major effect on the organization and conduct of risk assessment at the agency. An expanding set of agency guidelines reflects the evolving nature of EPA’s risk assessment procedures. EPA generally follows the four-step risk assessment process identified by the National Academy of Sciences (NAS). Changes are occurring in EPA’s approaches to cancer, noncancer, and exposure assessments, with a general trend toward the development and application of more complex and comprehensive methodologies. To a greater extent than the other agencies we reviewed, EPA has established a set of default assumptions (often precautionary in nature) and standard data factors for use by its risk assessors. In the “tiered” risk assessment approaches commonly employed by EPA’s program offices, precautionary default assumptions are most often used during initial screening assessments, when the primary task generally is to determine whether a risk might exist and more rigorous analysis is needed. However, the information necessary for more detailed analysis is not always available, so for regulatory purposes the agency may be limited to using results from its initial tiers of risk assessments. In presenting the results of its risk assessments, it is EPA’s policy that risk characterizations should be prepared in a manner that is clear, transparent, reasonable, and consistent with other risk characterizations of similar scope prepared across the programs in the agency. The following sections describe for EPA and its component offices, the context for chemical risk assessment, the general procedures for conducting risk assessments, major assumptions and methodological choices in those procedures, and the agency’s policy for risk characterization. Because chemical risk assessment at EPA is such a complex and diverse activity, this appendix can only summarize and illustrate the range of contexts, procedures, assumptions and methods, and policies that affect the conduct of EPA risk assessments. For example, as in our report as a whole, this appendix focuses primarily on human health and safety risk assessment and less on ecological risk assessment. However, we have included a brief section on EPA’s ecological risk assessment guidelines under our discussion of agencywide risk assessment procedures and illustrated the role played by ecological risk assessment in the risk assessment activities of some, but not all, of EPA’s program offices under our discussion of program-specific procedures. As a practical matter, this appendix reflects risk assessment topics that were addressed in agencywide or program-specific guidelines or descriptions of chemical risk assessment at EPA. To the extent that such activities were not explicitly addressed in the agency’s risk assessment guidelines and related documents, there may be little information on them in this appendix. EPA is responsible for a wide range of regulatory—and related risk assessment—activities pertaining to potential health, safety, and environmental risks associated with chemical agents. This range of activities reflects an equally broad and diverse range of underlying environmental statutes. According to EPA, close to 30 provisions within the major environmental statutes require decisions based on risk, hazard, or exposure assessment, with varying requirements regarding the scope and depth of the agency’s analyses. In general, EPA’s regulatory authority regarding chemical agents is compartmentalized according to the various kinds and sources of exposure—such as pesticides, drinking water systems, or air-borne pollutants—and reflected in the agency’s organization into various program offices—such as the Office of Air and Radiation, Office of Solid Waste, and Office of Water. Table 2 summarizes the principal statutes, regulatory tasks, and risk mandates associated with chemical risk assessment activities of EPA’s offices. A number of other contextual factors affect the extent of involvement by EPA offices in assessing and using risk assessment information in support of the various statutes, mandates, and tasks identified in table 2. Risk assessment information may not be the only, or even the primary, basis for the ultimate risk management decision. EPA statutes vary fundamentally by whether the basis for regulation is (1) risk (health and environmental) only, (2) technology-based, or (3) risk balancing (consideration of risks, costs, and benefits). For some chemical risk assessment activities, EPA has a secondary role. Instead, the main responsibility for determining the relative risk of a chemical, compiling and analyzing risk-related data, or completing other tasks associated with a particular statute might lie with industry, states, or local entities. In practical terms, the resources available for conducting a risk assessment for a given chemical might limit the depth and scope of EPA’s (or other parties’) analysis. Such resource limitations might include not only schedule and staffing constraints, but often the amount and quality of directly relevant scientific data available for analysis. Risk assessment activities involve both EPA’s program offices and its Office of Research and Development (ORD), which is the principal scientific and research arm of the agency. ORD often does risk assessment work for EPA program offices that focuses on the first two steps in the four-step NAS process—hazard identification and dose-response assessment—in particular, the development of “risk per unit exposed” numbers. The exposure assessment and risk characterization steps tend to be the responsibility of the various regulatory programs at EPA. However, according to agency officials, both program offices and ORD may conduct all of the risk assessment steps in particular cases. For example, OW’s Office of Science and Technology does all of the assessments for purposes of the SDWA, and, because of their particular statutory mandates, OPP and OPPT have developed the capability to conduct all steps of a risk assessment on their own. ORD carries out all steps of highly complex, precedent-setting risk assessments of specific chemicals, such as dioxin and mercury. ORD also helps to coordinate the development of EPA’s risk assessment methods, tools, models, and policies. In particular, much of EPA’s agencywide guidance on conducting risk assessments is developed and disseminated through ORD, with input from EPA’s program offices, Science Policy Council, and Science Advisory Board, as well as other external parties. Coordination of risk assessment activities also occurs through EPA’s Risk Assessment Forum and the agency workgroups that approve information for entry into EPA’s Integrated Risk Information System (IRIS). The Risk Assessment Forum is a standing committee of senior EPA scientists that was established to promote agencywide consensus on difficult and controversial risk assessment issues and to ensure that this consensus is incorporated into appropriate EPA risk assessment guidance. Managed by ORD, IRIS is a computerized database that contains information on human health effects that may result from exposure to various chemicals in the environment. IRIS was initially developed for EPA staff in response to a growing demand for consistent information on chemical substances for use in risk assessments, decision making, and regulatory activities. The entries in IRIS on individual chemicals represent a consensus opinion of EPA health scientists representing the program offices and ORD and have been subject to EPA’s peer review policy since its issuance in 1994. There are agencywide risk assessment procedures that EPA’s various program offices generally follow, but each office also has different statutory mandates and risk assessment tasks associated with its regulatory authority. These contextual differences contribute to some program-specific variations in the conduct of chemical risk assessments. In addition, EPA’s procedures are in transition from more simplistic traditional methods for identifying and assessing risks to increasingly complex models and methods. It is particularly important to recognize that, while most EPA guidelines (and this appendix) distinguish between cancer and noncancer procedures, this distinction is becoming increasingly blurred as new scientific methods are being developed and applied. In general, EPA follows the NAS four-step process for human health risk assessments: (1) hazard identification, (2) dose-response assessment, (3) exposure assessment, and (4) risk characterization. However, for ecological risk assessment, EPA’s guidelines recommend a three-step process: (1) problem formulation, (2) analysis, and (3) risk characterization. To a much greater extent than the other agencies we reviewed, EPA has documented its risk assessment procedures and policies in a voluminous and expanding set of guidelines, policy papers, and memoranda. These documents are primarily intended as internal guidance for use by risk assessors in EPA and those consultants, contractors, or other persons who perform work under EPA contract or sponsorship. However, the documents also make information on the principles, concepts, and methods used in EPA’s risk assessments available to other interested parties. EPA’s guidelines undergo internal and external peer review. Beginning in 1986, EPA published a series of risk assessment guidelines to set forth principles and procedures to guide EPA scientists in the conduct of agency risk assessments, and to inform agency decision makers and the public about these procedures. In general, EPA adopted the guiding principles of fundamental risk assessment works, such as the 1983 Red Book by the NAS’ National Research Council (NRC). EPA’s guidelines supplement these principles. Five sets of guidelines were finalized in 1986, including guidelines for carcinogen risk assessment, mutagenicity risk assessment, health risk assessment of chemical mixtures, health assessment of suspect developmental toxicants, and estimating exposures. In part to respond to advances and changes in risk assessment methods— but also in response to criticisms of its guidelines by NRC, among others— EPA has revised most of these guidelines, in either proposed or final form, and produced additional guidance documents. Statutory changes have also prompted revisions and expansions of EPA’s risk assessment guidelines and policy papers. In the Clean Air Act Amendments of 1990, for example, Congress directed EPA to revise its carcinogen risk assessment guidelines, taking into consideration the NAS recommendations, before making any determinations of the “residual risks” associated with emissions of hazardous air pollutants. The results of the NAS study appeared in the 1994 NRC report, Science and Judgment in Risk Assessment. Among other things, NRC recommended that EPA better identify the inference (default) assumptions in its guidelines, explain the scientific or policy bases for selecting them, and provide guidance on when it would be appropriate to depart from the assumptions. The current set of agencywide risk assessment guidelines and policies includes the following major topics: carcinogen risk assessment, neurotoxicity risk assessment, reproductive toxicity risk assessment, developmental toxicity risk assessment, mutagenicity risk assessment, health risk assessment of chemical mixtures, guidelines for exposure assessment, guidelines for ecological risk assessment, other risk assessment tools and policies, probabilistic analysis in risk assessment, use of the benchmark dose approach in health risk assessment, reference dose (RfD) and reference concentration (RfC), evaluating risk to children, and EPA risk characterization program. In addition to these agencywide documents, there are also numerous program-specific guidelines and policy documents. For example, the Risk Assessment Guidance for Superfund series covers various stages of human health evaluation as well as ecological risk assessment and probabilistic risk assessment. There are also guidelines and policy memoranda at the headquarters and regional office level that supplement these general Superfund guidelines. Similarly, OPP, with input from ORD, has developed a series of science policy papers specifically on issues related to pesticide risk assessments, in response to provisions of the Food Quality Protection Act of 1996. Describing EPA’s risk assessment procedures with any certainty is a difficult task, given the sheer volume of EPA guidance documents, the continuing evolution of risk assessment practices, and the extent to which many of EPA’s revisions are currently draft in nature. For example, the official guidelines for cancer risk assessment are still the 1986 version, but the agency published a proposed revision of those guidelines in 1996, and continued to revise them in 1999, but the revised guidelines have not yet been made final by EPA. Although the various revisions since 1986 do not represent official agency policy at this stage, the approaches that they describe are likely to provide a more accurate reflection of current practices and directions in EPA risk assessments. To some extent EPA is already applying these newer approaches, for example in the Office of Water’s revised methodology for deriving ambient water quality criteria for the protection of human health and the Office of Pesticide Programs’ Cancer Peer Review Committee. The following sections summarize the basic elements of EPA’s agencywide procedures for conducting risk assessments. Because most of EPA’s guidelines focus on human health risks, this section also focuses primarily on health assessments in describing EPA’s general approach. EPA generally uses the NAS four-step process for those assessments. However, a separate short section on EPA’s approach to ecological risk assessment appears at the end of this agencywide summary. Also, while this appendix (and most of the source material from which it was derived) discusses procedures for assessing cancer and noncancer effects separately, this distinction is increasingly artificial. As EPA noted in its Strategy for Research on Environmental Risks to Children, the agency is less likely to consider cancer and noncancer endpoints in isolation as it develops and incorporates more advanced scientific methods to measure and model the biological events leading to adverse effects. According to EPA, the science of risk assessment is moving toward a harmonization of the methodology for cancer and noncancer assessments. EPA’s approach to hazard identification changed significantly between the agency’s 1986 guidelines and its proposed revision. In its 1986 guidelines, EPA defined a hierarchical classification scheme for hazard identification of chemical agents (see table 3). In this scheme, analysis of whether an agent is a potential human carcinogen proceeds through distinct steps based on the type of human, animal, or “other” evidence available and its quality (whether such evidence is sufficient, limited, or inadequate), resulting in classification of the agent in one of six alphanumeric categories. In response to further developments in the understanding of carcinogenesis, and to address limitations of its 1986 scheme, EPA proposed a revised approach that melds the separate human-animal-other processes into a single comprehensive evaluation. In this approach, weighing the evidence and reaching conclusions about the carcinogenic potential of an agent would be accomplished in a single step after assessing all individual lines of evidence. Compared to the 1986 guidelines, the proposed revision also encourages fuller use of all biological information— instead of relying primarily on tumor findings—and emphasizes analysis of the agent’s mode of action in leading to tumor development. “Mode of action” is defined as a series of key events and processes, starting with interaction of an agent with a cell and proceeding through operational and anatomical changes resulting in cancer formation. EPA starts with a review and assessment of the toxicological database to identify the type and magnitude of possible adverse health effects associated with a chemical. Exposure to a given chemical might result in a variety of toxic effects, so EPA has produced separate guidelines for the assessment of mutagenicity, developmental toxicity, neurotoxicity, and reproductive toxicity. However, assessments for these noncancer health effects may also overlap. For example, developmental effects might be traced to exposures and factors also covered by reproductive toxicity assessments, and developmental exposures may result in genetic damage that would require evaluation of mutagenicity risks. The EPA guidelines for noncancer effects are not step-by-step manuals, and they do not prescribe a hazard identification classification scheme. Instead, they focus on providing general advice to risk assessors on different types of toxicity tests or data and on the appropriate toxicological interpretation of test results (e.g., which outcomes should be considered adverse effects). In addition to considering the types and severity of potential adverse effects, hazard identification would also consider and describe the nature of exposures associated with these effects. A review of the full range of possibilities would consider: acute effects—generally referring to effects associated with exposure to one dose or multiple doses within a short time frame (less than 24 hours, for example); short-term effects—associated with multiple or continuous exposure occurring within a slightly longer time frame, usually over a 14-day to 28- day time period; subchronic effects—associated with repeated exposure over a limited period of time, usually over 3 months; and chronic effects—associated with continuous or repeated exposure to a chemical over an extended period of time or a significant portion of the subject’s lifetime. Procedurally, there is an important variation from the distinct four steps of the risk assessment paradigm. In its guidelines, EPA notes that its normal practice for assessments of noncancer health effects is to do hazard identification in conjunction with the analysis of dose-response relationships. This is because the determination of a hazard is often dependent on whether a dose-response relationship is present. According to EPA, this approach has the advantages of (1) reflecting hazards in the context of dose, route, duration, and timing of exposure; and (2) avoiding the potential to label chemicals as toxicants on a purely qualitative basis. Risk assessors conducting dose-response assessments must make basic choices regarding which data to base analyses upon and which models and assumptions to use for extrapolation of study results to the potential human exposures of regulatory interest. Data choices focus on the availability and quality of human or animal studies. Three of the more important extrapolation tasks are estimation of low-dose relationships (i.e., those that fall below the range of observation in the studies supporting the agency’s analysis), calculation of toxicologically equivalent doses when dose-response data from animal studies are applied to human exposures, and extrapolating results from data on one route of exposure to another route. The two main types of studies that provide data useful in a quantitative dose-response assessment are (1) epidemiological studies of human populations and (2) toxicological laboratory studies using animals or, sometimes, human cells. Epidemiological studies examine the occurrence of adverse health effects in human populations and attempt to identify the causes. At a minimum, such studies can establish a potential link between exposures to chemical agents and the occurrence of particular adverse effects by comparing differences in exposed and nonexposed populations. If there is adequate information on the exposure levels associated with adverse effects, these studies can also provide the basis for a dose- response assessment. Because such data obviate the need to extrapolate from animals to humans, EPA (like other agencies) prefers to use data from epidemiological studies, if available. Often, however, the available data for dose-response assessment will come from animal studies. A common assumption underlying risk assessments by EPA (and other agencies) is that an agent that produces adverse effects in animals will pose a potential hazard to humans. EPA’s guidelines emphasize that case-specific judgments are necessary in considering the relevance of particular studies and their data. However, in the absence of definitive information to the contrary, EPA’s guidelines establish some standard default choices to assist risk assessors in selecting which studies and data to use. (See the section on assumptions in this appendix for more information on such default choices and assumptions.) Quantifying risks engenders another set of issues and choices. In particular, some type of low-dose extrapolation is usually necessary, given that the doses observed in studies tend to be higher than the levels of exposure of regulatory concern. There are limits to the ability of both epidemiological and toxicological studies to detect changes in the likelihood of health effects with acceptable statistical precision, especially at the low-dose exposures typical of most environmental exposures and given practical limits to the sizes of research studies. A number of different models might be used for extrapolation, all giving plausible results. In its proposed revision of the carcinogen risk assessment guidelines, EPA identifies use of a biological extrapolation model as the preferred approach for quantifying risk. Such models integrate events in the carcinogenic process throughout the dose-response range from high to low doses and include physiologically based pharmacokinetic (PBPK) and biologically based dose-response models. PBPK models address the exposure-dose relationship in an organism taken as a whole, estimating the dose to a target tissue or organ by taking into account rates of absorption into the body, metabolism, distribution among target organs and tissues, storage, and elimination of an agent. Biologically based dose-response models describe specific biological processes at the cellular and molecular levels that link target-organ dose to the adverse event. These models are useful in extrapolation between animals and humans and between children and adults because they allow consideration of species- and age-specific data on physiological factors affecting dose levels and responses. However, biological models require substantial quantitative data and adequate understanding of the carcinogenic process for a specific agent. EPA cautions that the necessary data for using such models will not be available for most chemicals. Therefore, the agency’s guidelines describe alternative methods. Dose-response assessment is a two-step process when a biologically based model is not used. The first step is the assessment of observed data to derive a point of departure, and the second step is extrapolation from that point of departure to lower (unobserved) exposures. According to EPA guidelines, the agency’s standard point of departure for animal studies is the effective dose (ED) corresponding to the lower 95-percent confidence limit on a dose associated with 10-percent extra risk (LED) compared to the control group. EPA may use a lower point of departure for data from human studies of a large population or from animal studies when such data are available. For the extrapolation step, EPA’s proposed guidelines provide three default approaches which assume, respectively, that the dose-response relationship is linear, nonlinear, or both. The choice of which default approach to apply is to be based on the available information on the mode(s) of action of the chemical agent. is chosen to account protectively for experimental variability and is an appropriate representative of the lower end of the observed range, because the limit of detection in studies of tumor effects is about 10 percent. EPA’s program offices usually perform the exposure assessment step, given the different exposure scenarios of interest for the separate regulatory programs. However, EPA has published agencywide guidelines for exposure assessment that describe general principles and practices for conducting such assessments. The focus of EPA’s guidelines is on human exposures to chemical substances, but the agency noted that much of the guidance also applies to wildlife exposure to chemicals or human exposure to biological, physical (e.g., noise), or radiological agents. EPA points out, though, that assessments in these other areas must consider additional factors that are beyond the scope of the exposure assessment guidelines. EPA’s guidelines establish a broad framework for agency exposure assessments by describing the general concepts of exposure assessment, standardizing the terminology (such as defining concepts of exposure, intake, uptake, and dose), and providing guidance on the planning and implementation of an exposure assessment. The guidelines are not, however, intended to serve as a detailed instructional guide. EPA’s guidance prescribes no standard format for presenting exposure assessment results, but recommends that all exposure assessments, at a minimum, contain a narrative exposure characterization section that provides a statement of purpose, scope, level of detail, and approach used in the assessment, including key assumptions; presents the estimates of exposure and dose by pathway and route for individuals, population segments, and populations in a manner appropriate for the intended risk characterization; provides an evaluation of the overall quality of the assessment and the degree of confidence the authors have in the estimates of exposure and dose and the conclusions drawn; interprets the data and results; and communicates the results of the exposure assessment to the risk assessor, who can then use this information with the results from other risk assessment elements to develop the overall risk characterization. The guidelines encourage agency staff to use multiple “descriptors” of both individual and population risks, rather than a single descriptor or risk value. The exposure guidelines also emphasize the use of more realistic estimates of high-end exposures than had been the case in some previous practices. In the past, EPA sometimes relied on exposure estimates derived from a hypothetical “maximally exposed individual” who might spend, for example, a 70-year lifetime drinking only groundwater with the highest concentrations of contaminants detected. According to the 1997 report of the Presidential/Congressional Commission, this approach was often based on such unrealistic assumptions that it impaired the scientific credibility of risk assessments. Now, however, EPA has adopted the use of distributions of individual exposures as the preferred practice. EPA’s guidance indicates that risk assessments should include both central estimates of exposure (based on either the mean or median exposure) and estimates of the exposures that are expected to occur in small, but definable, high-end segments of the population. EPA states that a high-end exposure estimate is to be a plausible estimate of the individual exposure for those persons at the upper end of an exposure distribution. The agency’s intent is to convey an estimate of exposure in the upper range of the distribution, but to avoid estimates that are beyond the true distribution. EPA has identified several new directions in its approach to exposure assessment. First is an increased emphasis on total (aggregate) exposure via all pathways. EPA policy directs all regulatory programs to consider in their risk assessments exposures to an agent from all sources, direct and indirect, and not just from the source that is subject to regulation by the office doing the analysis. Another area of growing attention is the consideration of cumulative risks, when individuals are exposed to many chemicals at the same time. The agency is also increasing its use of probabilistic modeling methods, such as Monte Carlo analysis, to analyze variability and uncertainty in risk assessments and provide better estimates of the range of exposure, dose, and risk in individuals in the population. EPA policy directs regulatory programs to pay special attention to the risks of children and infants. EPA has produced some reference documents for exposure assessments, such as the Exposure Factors Handbook. This handbook is intended to provide parameter values for use across the agency and to encourage use of reasonable exposure estimates by providing appropriate data sources and suggested methods. The handbook provides a summary of available statistical data on various factors used to assess human exposure to toxic chemicals. These factors include: drinking water consumption; soil ingestion; inhalation rates; dermal factors including skin area and soil adherence factors; consumption/intake of fruits and vegetables, fish, meats, dairy products, homegrown foods, and breast milk; human activity patterns, such as time spent performing household tasks; consumer product use; and residential characteristics. EPA provides recommended values for the general population and also for various segments of the population who may have characteristics different from the general population (e.g., by age, gender, race, or geographic location). EPA guidance cautions, though, that these general default values should not be used in the place of known, valid data that are more relevant to the assessment being done. The default values used in EPA risk assessments, however, sometimes vary slightly from the recommended values appearing in the handbook. For example, while the handbook’s mean recommended value for adult body weight is 71.8 kilograms (kg), the handbook also noted that a value of 70 kg has been commonly assumed in EPA’s risk assessments. Similarly, the recommended value to reflect average life expectancy of the general population is 75 years, but 70 years also has been commonly assumed in EPA risk assessments. Officials from EPA program offices pointed out that they may use different exposure factors in their risk assessments because they sometimes develop exposure assessment methods specific to their programs using different data sources or population characteristics than those used by ORD for the Exposure Factors Handbook. Ecological risk assessment is different from human health risk assessment in that it may examine entire populations of species and measure effects on partial or whole ecosystems. Often, the focus is on not just a single ecological entity, but on the potential adverse effects on multiple species and their interactions (for example, on the food chain). While human health risk assessment is primarily concerned with an agent’s toxicity to humans, ecological risk assessment might consider a range of adverse effects on natural resources (such as crops, livestock, commercial fisheries, and forests), wildlife (including plants), aesthetic values, materials or properties, and recreational opportunities. For example, a chemical agent could be considered a risk to wildlife if exposure to it caused death, disease, behavioral abnormalities, mutations, or deformities in the members of a species or their offspring. It could be considered a risk to aesthetic values if it affected the color, taste, or odor of a water source. By EPA’s definition, ecological risk assessment is a process that evaluates the likelihood that adverse ecological effects may occur or are occurring as a result of exposure to one or more “stressors.” In other words, ecological risk assessments may be prospective or retrospective, and, in many cases, both approaches are included in a single risk assessment. Chemicals are only one of the possible ecological stressors that EPA might consider, along with physical and biological ones. EPA’s guidance focuses on stressors and adverse ecological effects generated or influenced by human activity, which could be addressed by the agency’s risk management decisions. In comparison to human health risk assessment procedures, the approaches for ecological risk assessment are more recent and less well developed. However, as these methods have changed to incorporate and better characterize dynamic, interconnected ecological relationships, EPA has updated its guidance documents on the subject, with input from multiple interested internal and external parties. According to EPA, the solicitation of input from an array of sources is based, in part, on the need to establish a framework for characterizing risks based on numerous stressors, interconnected pathways of exposure, and multiple endpoints (adverse effects). The most recent version of EPA’s framework appears in Guidelines for Ecological Risk Assessment, published in 1998. EPA’s guidelines describe an iterative three-phase process consisting of problem formulation, analysis, and risk characterization. These guidelines incorporate many of the concepts and approaches called for in human health risk assessments. However, particularly in the addition of a problem formulation phase, the ecological risk assessment framework deviates from the standard four-step process used for human health risk assessments. EPA pointed out that, unlike human health assessments where the species of concern and the endpoints (e.g., cancer) have been predetermined, ecological risk assessments need a phase that focuses on the selection of ecological entities and endpoints that will be the subject of the assessment. Table 4 summarizes the activities and expected outcomes for each of the three phases of an ecological risk assessment. Prior to these phases, according to EPA, a planning stage occurs during which risk assessors, risk managers, and other interested parties are to have a dialogue and scope the problem. Among the things considered during problem formulation is the selection of assessment endpoints, which are “explicit expressions of the actual environmental value that is to be protected.” This is unlike human health assessments, where the species of concern and the endpoints have been predetermined. The selection of endpoints at EPA has traditionally been done internally by program offices, but more recently, affected parties or communities are assisting in the selection of endpoints with their selection based on ecological relevance, susceptibility, and relevance to management goals. Furthermore, conceptual models are developed during the problem formulation phase. Such models contain risk hypotheses in the form of written descriptions and visual representations, outlining predicted relationships between ecological entities and the stressors to which they may be exposed. According to EPA the hypotheses are in effect assumptions, being based on theory and logic, empirical data, mathematical models, probability models, and professional judgment. Subsequently, during the analysis phase data are selected that will be used on the basis of their utility for evaluating risk hypotheses. The major items considered during this phase are the sources and distribution of stressors in the environment, the extent of contact and stressor-response relationships, the evidence for causality, and the relationship between what was measured and the assessment endpoint(s). Field studies involving statistical techniques (i.e., correlation, clustering, or factor analysis), surveys, the formation of indices, and the use of models are approaches to evaluating the determined risk hypotheses. (EPA’s guidance on the risk characterization phase of an ecological risk assessment is discussed in the final section of this appendix.) EPA’s various program offices generally follow the agencywide risk assessment procedures and guidelines described above. The major exception to this is the Chemical Emergency Preparedness and Prevention Office, which does not follow the NAS four-step process for its risk assessment procedures because of its focus on risks associated with accidental chemical releases. Overall, there is great diversity in the context for risk assessment activities across EPA’s program offices. Each program has different statutory mandates and risk assessment tasks associated with its specific regulatory authority, and these contribute to variations in the way the offices conduct risk assessments. In particular, there are differences in the exposure assessment step across, and sometimes within, EPA’s program offices. This is not surprising, given that EPA’s regulatory authorities regarding chemical agents primarily vary according to types and sources of exposure. Although there are overlaps in these various exposures to chemicals, EPA’s program offices generally assess and regulate different aspects of the risks associated with exposures to humans and/or the environment. There are also some variations in the conduct of hazard identification and dose-response analysis. The following sections summarize the risk assessment activities and procedures of those EPA program offices that are most likely to conduct assessments involving chemical risks. The descriptions highlight some of the major variations and similarities across the program offices. OPP is part of EPA’s Office of Prevention, Pesticides and Toxic Substances (OPPTS). The primary risk assessment-related activities of OPP are the registration of pesticides and the setting of tolerances for pesticide residues. Registration involves the licensing of pesticides for sale and use in agriculture and extermination. No chemical may be sold in the United States as a pesticide without such registration, which establishes the conditions of legal use. All uses within the scope of the registration conditions and limits are permissible, although actual practice may vary. Pesticide tolerances are the concentrations (maximum pesticide residue levels) permitted to remain in or on food, as it is available to the consumer. Registrations and tolerances are obtained through petitions to OPP. The petitioner has the primary responsibility to provide the data needed to support registration and tolerances, including information on the toxicological effects of the pesticide. There are three major risk statutes affecting EPA’s actions regarding pesticides. Registration is carried out under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA). Tolerances are established under the Federal Food, Drug, and Cosmetic Act (FFDCA). In 1996, Congress amended both FIFRA and FFDCA through the FQPA, which mandated some key changes in risk assessment of pesticides. Major features and characteristics of chemical risk assessment by OPP are summarized below. OPP conducts all steps of risk assessments. Because OPP generally follows the NAS four-step process for human health risk assessment and the EPA-wide risk assessment guidelines, most of its procedures mirror those used elsewhere in the agency. OPP officials noted that, over the last three decades, their office has developed a rigorous process to support the development of chemical risk assessments. This process includes regulations to establish baseline data requirements and published guidelines for conducting required studies. OPP officials emphasized the transparency of the process used to develop EPA’s risk assessment procedures and the transparency of the procedures EPA uses to make decisions on the risk of individual pesticides. As an example, they noted that their program has consulted with outside experts and asked for public comment on its guidelines for reviewing studies, science policies for assessing the significance of study data, and standard operating procedures for implementing these policies in the development of a hazard identification or exposure assessment for a chemical. They also pointed out that OPP adopted a public participation process for reregistration and tolerance reassessment decisions on registered pesticides and that they publish for public comment proposed tolerances for proposed new uses of pesticides. In some circumstances, OPP consults with outside experts concerning a risk assessment of an individual pesticide. Pesticide registration decisions are based primarily on OPP’s evaluation of the test data provided by petitioners (applicants). EPA has established a number of requirements, such as the Good Laboratory Practice Standards, to ensure the quality and integrity of pesticide data. OPPTS has also developed harmonized test guidelines for use in the testing of pesticides and toxic substances and the development of test data that must be submitted to EPA for review under federal regulations. Depending on the type of pesticide, OPP can require more than 100 different tests to determine whether a pesticide has the potential to cause adverse effects to humans, wildlife, fish, and plants. The FQPA established a single, health-based standard—“reasonable certainty of no harm”—for pesticide residues in all foods. All existing tolerances that were in effect when the FQPA was passed are to be reevaluated by 2006 to ensure that they meet the new safety standard. The law requires EPA to place the highest priority for tolerance reassessment on pesticides that appear to pose the greatest risk. To make the finding of “reasonable certainty of no harm” OPP considers: 1. the toxicity of the pesticide and its break-down products; 2. how much of the pesticide is applied and how often; and 3. how much of the pesticide remains in or on food by the time it is marketed and prepared (the residue). Among other key changes affecting OPP’s risk assessments when setting tolerances, the FQPA requires the agency to: 1. Explicitly address risks to infants and children and to publish a specific safety finding before a tolerance can be established. It also requires an additional tenfold uncertainty factor (unless reliable data show that a different factor will be safe) to account for the possibly greater sensitivity and exposure of children to pesticides. 2. Consider aggregate exposure from a pesticide, including all anticipated dietary and all other exposures for which there is reliable information. These include exposures through food, drinking water, and nondietary exposures encountered through sources in the home, recreational areas, and schools. 3. Consider cumulative exposures to pesticides with a common mechanism of toxicity, which previously had been considered separately. Title III of the FQPA also requires certain data collection activities of the Secretary of Agriculture, in consultation or cooperation with the Administrator of EPA and the Secretary of Health and Human Services, regarding food consumption patterns, pesticide residue levels, and pesticide use that, according to EPA, affect its risk assessments when setting tolerances. Also as a result of the FQPA, OPP uses a population adjusted dose (PAD), which involves dividing the acute or chronic reference dose by the FQPA uncertainty factor. According to OPP officials, this allowed OPP to be consistent with the rest of the agency regarding setting RfDs, but still use the FQPA factor for regulating pesticides. OPP is concerned with both cancer and noncancer toxicity. However, for noncancer effects, OPP has paid special attention to neurotoxicity (because many pesticides work through this mechanism) and, more recently, to endocrine disrupting effects (those affecting the body’s hormone system). OPP officials noted that, while their agency has made important use of “real life” monitoring or incident data, it primarily relies on studies conducted in laboratory animals and on laboratory or limited field studies. They stated that, in their experience, “real life” data have profound limitations and that such data are inconsistent, expensive, inconclusive, and are not available for premarket decision making. They said that, most importantly, by the time there are observable health or environmental effects, it is too late to prevent the harm that could have been predicted from judicious use of animal or environmental fate studies conducted in the laboratory. During the exposure assessment step, OPP is concerned with a variety of routes, sources, and types of exposure. The three routes by which people can be exposed to pesticides are inhalation, dermal (absorbing pesticides through the skin), and oral (getting pesticides in the mouth or digestive tract). Depending on the situation, a pesticide could enter the body by any one or all of these routes. Typical sources of pesticide exposure include food, home and personal use of pesticides, drinking water, and work-related exposure to pesticides (in particular, to pesticide applicators or vegetable and fruit pickers). In its approach to exposure assessment, OPP distinguishes between residential and occupational types of exposures. OPP officials noted that their program is further developing procedures to conduct drinking water exposure assessments and residential exposure assessments and that they have new procedures for ecological risk assessments. OPP calculates estimates of acute (i.e., short-term) pesticide exposure slightly differently from those for chronic (i.e., longer-term) exposures. This is because an acute assessment estimates how much of a pesticide residue might be consumed in a single day, while a chronic assessment estimates how much might be consumed on a daily basis over the course of a lifetime. In an important difference, acute assessments are based on high-end individual exposure assumptions, while chronic assessments use average exposure assumptions. In assessing both acute and chronic risks, OPP uses a tiered approach, starting with an initial screening tier and proceeding through progressively more elaborate risk assessments, if needed. The analytical tiers proceed from more conservative to less conservative assumptions. For the first-tier risk assessment, OPP uses “worst-case” assumptions (e.g., that pesticide residues are at tolerance levels and that 100 percent of the food crop is treated with the pesticide) that give only an upper-bound estimate of exposure. For more refined analyses, OPP officials noted that they have new procedures for conducting probabilistic dietary exposure assessments. Generally, the level of resources and the data needed to refine exposure estimates increase with each tier. Typically, if risks from pesticide residues are not of concern using lower-tier exposure estimates, OPP does not make further refinements through additional tiers. However, with the aggregate and cumulative exposure assessments now required by the FQPA, EPA notes that it is likely that higher-tier exposure estimates will be needed. The agency has developed procedures for modeling the environmental fate of pesticides. OPP officials said that these models use real data on the physical and chemical properties of the pesticide, information on the proposed or actual uses of the pesticide, and real data on the movement of pesticides or other materials through soil, air, water, skin, textiles, or other media to predict potential exposures to a pesticide. These models are guided by scientific judgments that are based upon data and scientists’ experience in drawing inferences from these data. OPPT (formerly the Office of Toxic Substances) is also part of OPPTS. OPPT was established to implement the Toxic Substances Control Act (TSCA), which authorizes EPA to screen existing and new chemicals used in manufacturing and commerce to identify potentially dangerous products or uses. TSCA focuses on the properties of a chemical and paths of exposure to that chemical. Risk assessment activities are primarily related to four sections of TSCA: Section 4 directs EPA to require manufacturers and processors to conduct tests for existing chemicals when: (1) their manufacture, distribution, processing, use, or disposal may present an unreasonable risk of injury to health or the environment; or (2) they are to be produced in substantial quantities and the potential for environmental release or human exposure is substantial or significant. Under either condition, EPA must issue a rule requiring testing if existing data are insufficient to predict the effects of human exposure and environmental releases and testing is necessary to develop such data. Rhomberg pointed out that these conditions require OPPT to do some preliminary risk assessment and that, unlike testing mandates under other statutes (e.g., regarding pesticides), the agency has the burden of showing that such testing is necessary. Section 5 addresses future risks through EPA’s premanufacture screening—the premanufacture notification (PMN) process. This also applies to a “significant new use” of an existing chemical. Section 6 directs EPA to control unreasonable risks presented or that will be presented by existing chemicals. Section 8 requires EPA to gather and disseminate information about chemical production, use, and possible adverse effects to human health and the environment. This section requires EPA to develop and maintain an inventory of all chemicals, or categories of chemicals, manufactured or processed in the United States. All chemicals not on the inventory are, by definition, “new” and subject to the notification provisions of section 5. Once a chemical enters commerce through the section 5 process, it is listed as an existing chemical. Although TSCA gives EPA general authority to seek out and regulate any “unreasonable risk” associated with new or existing chemicals, there are two major limitations on the agency’s regulatory actions. First, as implemented by EPA, regulation under TSCA involves consideration of both risks and applying the least burdensome requirement needed to regulate the risk. The term “unreasonable risk” is not defined in TSCA. However, according to EPA, the legislative history indicates that unreasonable risk involves the balancing of the probability that harm will occur, and the magnitude and severity of that harm, against the effect of a proposed regulatory action on the availability to society of the expected benefits of the chemical substance. The second major limitation on EPA’s authority under TSCA is a requirement to defer to other federal laws. Generally, if a risk of injury to health or the environment could be eliminated or reduced to a sufficient extent by actions taken under another federal law, that other law must be deferred to unless it can be shown to be in the public interest to regulate under TSCA. The major distinction in the procedures that apply to OPPT risk assessments is between the evaluation of potential risks associated with exposures to new versus existing chemicals. For EPA to control the use of a chemical listed on the inventory of existing chemicals, according to OPPT, a legal finding has to be made that the chemical will present an unreasonable risk to human health or the environment. According to OPPT, this standard requires the agency to have conclusive data on that particular chemical. The agency noted, in comparison, that newly introduced chemicals (or uses) can be regulated under TSCA based on whether they may present an unreasonable risk, and this finding of risk can be based on data for structurally similar chemicals. Because industrial chemicals in commerce in 1975-1977 were “grandfathered” into the inventory without considering whether they were hazardous, there are situations in which existing chemicals might not be controlled, while EPA would act to control a new chemical of similar or less toxicity under the PMN program. Additional information on the major features and characteristics of assessments for new versus existing chemicals is presented below. Premanufacture notification for new chemicals or significant new uses TSCA requires manufacturers, importers, and processors to notify EPA at least 90 days prior to introducing a new chemical into the U.S. or undertaking a significant new use of a chemical already listed on the TSCA inventory. If available, test data and information on the chemical’s potential adverse effects on human health or the environment are to be submitted to EPA. Much of this submission must be kept confidential by OPPT. However, there is no defined toxicity data set required before PMN, and, unless EPA promulgates a rule requiring the submission of test data, TSCA does not require prior testing of new chemicals. Consequently, according to EPA, less than half of the PMNs submitted include toxicological data. OPPT reviews approximately 1,500 PMNs annually. EPA has 90 days after notification to evaluate the potential risk posed by the chemical. EPA must then decide whether to (1) permit manufacture and distribution (the default if EPA takes no action), (2) suspend manufacture and distribution or to restrict use pending the development of further data, or (3) initiate rulemaking to regulate manufacture or distribution. OPPT typically has very limited chemical-specific data on toxic effects and exposure associated with new chemicals. When no data exist on the effects of exposure to a chemical, EPA may make its determination on what is known about the chemical’s molecular structure (called the structure-activity relationship, or SAR) and the effects of other chemicals that have similar structures and are used in similar ways. OPPT’s New Chemicals Program has issued a document entitled Chemical Categories that describes information for numerous classes of chemicals. In assessing exposures for new chemicals where exposure monitoring data are unavailable, OPPT uses several screening- level approaches, including (1) estimates based on data on analogous chemicals; (2) generic scenarios (i.e., standardized approaches for assessing exposure and release for a given use scenario); (3) mathematical models based on empirical and theoretical data and information; and (4) assumptions of compliance with regulatory limits, such as OSHA Permissible Exposure Limits (PELs). Rhomberg noted that OPPT cannot require full testing for all chemicals, because of statutory limitations under TSCA. He therefore characterized OPPT’s assessments as “rough screens” designed to flag situations in which further testing should be required. Chemicals that OPPT assesses for regulation under sections 4 or 6 of TSCA are subject to a more rigorous risk assessment process. Compared to PMN reviews, such assessments are much more similar to those conducted elsewhere in EPA, so the EPA-wide guidelines generally apply. For hazard identification and dose-response assessment of carcinogens and noncancer effects, OPPT follows EPA-wide procedures. Because TSCA focuses on the properties of a chemical, rather than on a specific pathway or mode of exposure, OPPT considers the potential hazards posed through multiple routes of exposure. In lieu of information to the contrary, OPPT typically presumes that the results for one route are applicable to other routes. Similarly, in exposure assessment OPPT considers a variety of types and routes of exposure. Unlike other programs that focus on exposure through one medium, assessments under TSCA must assess all potential exposures to a chemical that may lead to unreasonable risk, considering, for example, both residential and occupational exposures. These risks may be assessed separately for each mode of exposure, even if occurring in the same setting. Overall, OPPT aims to provide both central estimates and upper-bound estimates of exposure, and it considers population risks as well as individual risks. OPPT shares overlapping concerns about a number of different kinds of exposure with other federal regulatory agencies. However, some aspects of OPPT’s exposure assessments may differ from those of other programs or agencies concerned with similar exposures. For example, with regard to occupational exposures OPPT assumes that a working lifetime is 40 years, rather than the 45 years assumed by OSHA. Another example is the assumption of body weight; OPPT uses 70kg, whereas ORD recommends a value of 71.8 kg in its Exposure Factors Handbook. In addition to the assessment of chemicals for regulation under sections 4 and 6 of TSCA, OPPT has recently launched a new program to voluntarily add screening-level hazard information on approximately 2,800 high- production-volume industrial chemicals and has proposed a second new voluntary program to address the risks of certain industrial chemicals to which children may be exposed. These two new programs operate under the same risk assessment processes used in the other OPPT programs noted above. OERR is part of EPA’s Office of Solid Waste and Emergency Response (OSWER). Risk assessments are a required component of a larger remediation process established by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA or Superfund), as amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA). Congress enacted CERCLA to facilitate the cleanup of hazardous waste sites. The act gave EPA broad authority to respond to releases of hazardous substances. SARA requires EPA to emphasize cleanup remedies that treat—rather than simply contain—contaminated waste to the maximum extent practicable and to use innovative waste treatment technologies. Hazardous substances are defined by CERCLA to include substances identified under the Solid Waste Disposal Act, the Clean Water Act, the Clean Air Act, and the Toxic Substances Control Act, or designated by EPA. After investigating potentially hazardous sites, EPA ranks them according to the severity of their waste problems and places the worst on its National Priorities List for Superfund cleanup. Under CERCLA section 105, EPA uses a Hazard Ranking System to decide which sites to include on the list. Section 105 states that priorities are to be based upon relative risk or danger to public health or welfare or the environment, taking into account the population at risk, the hazard potential of the hazardous substances, and the potential for contamination of air and drinking water, among other factors. OERR has developed a human health and environmental evaluation process as part of its remedial response program. Major features and characteristics of the Superfund risk assessment procedures are summarized below. Overall, the risk scenarios for Superfund can be very complex. Superfund sites are often associated with multiple potential pathways and routes of exposure, and mixtures of chemicals at Superfund sites are common. In addition, the Superfund program is required to consider ecological as well as human health risks. A risk assessment is performed after a particular site has been identified according to the National Contingency Plan, EPA’s regulation outlining requirements relevant to response action(s) for hazardous substances. The remedial response process under the National Contingency Plan— and the role of risk information in the process—is summarized in the following seven steps: 1. Site discovery or notification: report determinations about which substances are hazardous. 2. Preliminary assessment and site inspection: collect and review all available information to evaluate the source and nature of hazardous substances. 3. Hazard ranking system: compile data from steps one and two in a numerical scoring model to determine a relative risk measure. 4. Possible inclusion of site on the National Priorities List based on one of the following criteria: the release scores sufficiently high pursuant to the Hazard a state designates a release as its highest priority, or the release satisfies all of the following criteria: the Agency for Toxic Substances and Disease Registry has issued a health advisory that recommends dissociation of individuals from the release, EPA determines that the release poses a significant threat to public health, and EPA anticipates that it will be more cost effective to use its remedial authority than to use removal authority to respond to the release. 5. Remedial investigation and feasibility study: characterize the contamination at site where data is obtained to identify, evaluate, and select cleanup alternatives. 6. Selection of a remedy: choose remedy that is protective of human health and the environment by eliminating, reducing, or controlling risks posed through each pathway, and utilize risk information obtained during step five. 7. 5-year review. One intended result of the remedial steps is the facilitation of a site- specific baseline risk assessment, designed to support risk management decision making. Human health and ecological risk assessments occur during step five, the Remedial Investigation/Feasibility Study stage. For human health risk assessments, Superfund procedures approximate the NAS paradigm, using the following four stages. 1. A data collection and evaluation stage that involves: gathering and analyzing site data relevant to the human health identifying substances present at the site that are the focus of the risk assessment process. 2. An exposure assessment that involves: analyzing contaminant releases, identifying exposed populations, identifying potential exposure pathways and estimating exposure concentrations for pathways, and estimating contaminant intakes for pathways. 3. A toxicity assessment stage that considers: types of adverse health effects associated with chemical exposures, relationships between magnitude of exposure and adverse effects, related uncertainties such as the weight evidence of a particular chemical’s carcinogenicity in humans, and existing toxicity information developed through hazard identification and dose-response assessment. 4. A risk characterization that involves: characterizing potential for adverse health effects (cancer or noncancer) to occur, evaluating uncertainty, and summarizing risk information. For ecological risk assessments, EPA’s guidelines suggest that Superfund remedial actions generally should not be designed to protect organisms on an individual basis, but should protect local populations and communities of biota. Furthermore, except for a few very large sites, Superfund ecological risk assessments typically do not address effects on entire ecosystems. Instead, they gather data regarding the effects on individuals in order to predict or postulate potential effects on local wildlife, fish, invertebrate, and plant populations and communities that occur or that could occur in specific habitats at sites (e.g., a wetland, floodplain, stream, estuary, or grassland). Specifically, the guidelines recommend that ecological risk assessments performed at every site follow an eight-step process: 1. Screening-level problem formulation and ecological effects evaluation: site history, site visit, problem formulation, and ecological effects evaluation. 2. Screening-level exposure estimate and risk calculation: exposure estimate, and risk calculation. 3. Baseline risk assessment problem formation: ecotoxicity literature review, exposure pathways, assessment endpoints and conceptual model, and risk questions. 4. Measurement endpoints and study design. 5. Verification of field sampling design. 6. Site investigation and data analysis. 7. Risk characterization. 8. Risk management. OERR uses a tiered approach for Superfund risk assessments, in which the agency employs more conservative methods and assumptions in the initial screening phases, followed by a more rigorous, multistage risk assessment if screening results indicate the need. Under Superfund, decisions generally are made on a site-by-site basis. According to agency officials, early activities at Superfund sites are often based on initial tier screening. However, they pointed out that the remedial cleanup decision is supported by a site-specific risk assessment that is usually quite detailed with either site-specific exposure assumptions or national default assumptions appropriate to the site which result in “high-end” reasonable risk estimates. Although the Superfund program initially employed an approach of using a hypothetical “worst case” scenario for exposure assessments, EPA’s exposure assessment guidance now emphasizes use of a more realistic upper-bound exposure scenario. The EPA guidelines emphasize that this exposure scenario should be in the range of plausible real exposures, and also call for a central tendency case. In addition, guidelines put forth by the Superfund program office emphasize streamlining the process and reducing the cost and time required, focusing on providing information necessary to justify action and select the best remedy for a Superfund site. In doing so, Superfund guidelines suggest using standardized assumptions, equations, and values wherever appropriate. The Superfund program uses extensive additional program-specific guidance documents addressing human health and ecological risk assessments, as well as analytical tools, such as probabilistic analysis. These documents supplement applicable EPA-wide guidelines. The Superfund guidelines for human health risk assessment, for example, cover developing a baseline risk assessment (Part A), developing or refining preliminary remediation goals (Part B), performing a risk evaluation of remedial alternatives (Part C), and standardizing, planning, reporting, and completing a review (Part D). There are also other headquarters and regional office documents that further supplement the program-specific guidelines and manuals. The Office of Solid Waste, like OERR, is part of OSWER. OSW regulates the management of solid waste and hazardous waste through federal programs established by the Resource Conservation and Recovery Act of 1976, as amended (RCRA). Congress enacted RCRA to protect human health and the environment from the potential hazards of waste disposal, conserve energy and natural resources, reduce the amount of waste generated, and ensure that wastes are managed in a manner that is protective of human health and the environment. The act defines solid and hazardous waste, authorizes EPA to set standards for facilities that generate or manage hazardous waste, and establishes a permit program for hazardous waste treatment, storage, and disposal facilities. The RCRA hazardous waste program has a “cradle to grave” focus, regulating facilities that generate, transport, treat, store, or dispose of hazardous waste from the moment it is generated until its ultimate disposal or destruction. RCRA regulations interact closely with other environmental statutes, especially CERCLA. EPA notes that both programs are similar in that they are designed to protect human health and the environment from the dangers of hazardous waste, but each has a different regulatory focus. RCRA mainly regulates how wastes should be managed to avoid potential threats to human health and the environment. On the other hand, according to EPA, CERCLA is relevant primarily when mismanagement occurs or has occurred, such as when there has been a release or a substantial threat of a release in the environment of a hazardous substance. Regulatory activity under RCRA focuses primarily on specifying procedures and technology to be used to ensure proper handling and disposal of wastes, but risk assessments play a role in several supporting tasks, particularly those involving hazardous waste regulation under RCRA Subtitle C. For example, risk assessment information may be used in the processes for defining (and delisting) substances as hazardous wastes, evaluating the hazards posed by waste streams, assessing the need for corrective action at disposal sites, and granting waste disposal permits (such as incinerator permits). In its RCRA Orientation Manual, OSW expressed an increasing emphasis on making the RCRA hazardous waste program more risk based (with the intention of ensuring that the regulations correspond to the level of risk posed by the hazardous waste being regulated). Major features and characteristics of risk assessment for hazardous waste regulation are summarized below. Making the determination of whether a substance is a hazardous waste is a central component of the waste management program. The Subtitle C program includes procedures to facilitate this identification and classification of hazardous waste. Under the RCRA framework, hazardous wastes are a subset of solid wastes. In RCRA §1004(5), Congress defined hazardous waste as a solid waste, or combination of solid wastes, which because of its quantity, concentration, or physical, chemical, or infectious characteristics may: cause, or significantly contribute to, an increase in mortality or an increase in serious irreversible, or incapacitating reversible, illness; or pose a substantial present or potential hazard to human health or the environment when improperly treated, stored, transported, or disposed of, or otherwise managed. EPA developed more specific criteria for defining hazardous waste using two different mechanisms: (1) listing certain specific solid wastes as hazardous and (2) identifying characteristics (physical or chemical properties) which, when exhibited by a solid waste, make it hazardous. The agency has done so, and risk assessment information may be used to support both mechanisms. “Listed wastes” are wastes from generic industrial processes, wastes from certain sectors of industry, and unused pure chemical products and formulations. EPA uses four criteria to decide whether or not to list a waste as hazardous. 1. The waste typically contains harmful chemicals (and exhibits other factors, such as risk and bioaccumulation potential) which indicate that it could pose a threat to human health and the environment in the absence of special regulation. Such wastes are known as toxic listed wastes. 2. The waste contains such dangerous chemicals that it could pose a threat to health or the environment even when properly managed. These wastes are fatal to humans and animals even in small doses and are known as acute hazardous wastes. 3. The waste typically exhibits one of the four characteristics of hazardous waste: ignitability, corrosivity, reactivity, and toxicity. 4. EPA has cause to believe that, for some other reason, the waste typically fits within the statutory definition of hazardous waste. Listed hazardous wastes can exit Subtitle C regulation through a site- specific delisting process initiated by a petition from a waste handler to an EPA region or a state. The petition must demonstrate that, even though a particular waste stream generated at a facility is a listed hazardous waste, it does not pose sufficient hazard to merit RCRA regulation. “Characteristic wastes” are wastes that exhibit measurable properties that indicate they pose enough of a threat to deserve regulation as hazardous wastes. EPA established four hazardous waste characteristics. 1. Ignitability identifies wastes that can readily catch fire and sustain combustion. 2. Corrosivity identifies wastes that are acidic or alkaline. Such wastes can readily corrode or dissolve flesh, metal, or other materials. 3. Reactivity identifies wastes that readily explode or undergo violent reactions (e.g., when exposed to water or under normal handling conditions). 4. Toxicity is used in a rather narrow and specific sense under this program to identify wastes that are likely to leach dangerous concentrations of chemicals into ground water if not properly managed (and thus expose users of the water to hazardous chemicals and constituents). EPA developed a specific lab procedure, known as the Toxicity Characteristic Leaching Procedure, to predict whether any particular waste is likely to leach chemicals into ground water at dangerous levels. In this procedure, liquid leachate created from hazardous waste samples is analyzed to determine whether it contains any of 40 different common toxic chemicals in amounts above specified regulatory levels. The regulatory levels are based on ground water modeling studies and toxicity data that calculate the limit above which these toxic compounds and elements will threaten human health and the environment. For OSW, the task of identifying and assessing hazardous wastes is made more difficult because waste may be in the form of a mixture of constituents, some of which may be hazardous and some not. (This is also a common issue for the Superfund program.) The EPA-wide guidelines on assessments of chemical mixtures therefore could come into play in OSW risk assessments. For dose-response data on the toxicity and potency of hazardous substances, OSW largely relies on information from other EPA sources. For example, OSW may use the chemical-specific assessments prepared by ORD, data in EPA’s IRIS database, and regulatory standards from other EPA program offices, in particular the Office of Water. However, OSW combines this information with its own exposure analyses. Rhomberg categorized exposure assessment by OSW as either hypothetical or site specific. He noted that hypothetical exposures principally come into play when the agency is defining hazardous wastes and evaluating disposal options. These exposure analyses cover hypothetical waste-handling and disposal practices anywhere in the nation, and OSW focuses on the question of whether such practices might cause undue risks to individuals, not on characterizing the actual distribution of exposures across the population. One of the principal concerns in OSW exposure assessments is leaching to groundwater, but OSW evaluates other exposure pathways from virtually all treatment and disposal practices, with the specific pathways for any particular analysis being decided on a case-by-case basis. Site-specific exposure assessments might be needed when OSW is making regulatory decisions regarding actual waste disposal facilities, as when assessing the need for remedial action at a given site or permitting incineration or other disposal activities. In such cases, the office can focus exposure estimates on the off-site migration of the particular toxic compounds associated with that location. In general, an important part of OSW’s exposure assessments is evaluating the “relative contribution” of hazardous wastes to the overall exposure to a hazardous chemical (which is very similar to assessments by EPA’s Office of Water). In exposure assessments, OSW’s deterministic analyses follow EPA’s risk characterization guidance by setting only two sensitive parameters at high-end values, with the rest of the parameters being set at their central tendency values. According to OSW, this approach is meant to produce a risk estimate above the 90th percentile of the risk distribution but still on the actual distribution. CEPPO is also part of OSWER. It provides leadership, advocacy, and assistance to: (1) prevent and prepare for chemical emergencies; (2) respond to environmental crises; and (3) inform the public about chemical hazards in their community. To protect human health and the environment, CEPPO develops, implements, and coordinates regulatory and nonregulatory programs. It carries out this work in partnership with EPA regions, domestic and international organizations in the public and private sectors, and the general public. CEPPO is responsible for the risks associated with accidental chemical releases. Under the Emergency Planning and Community Right-to-Know Act (EPCRA) in Title III of the Superfund Amendments and Reauthorization Act of 1986, CEPPO must evaluate, develop, and maintain a list of chemicals and threshold quantities that are subject to reporting for emergency planning. In addition, CEPPO develops the emergency reporting and planning requirements, guidance for industry, and guidance and tools for use of the reporting information by Local Emergency Planning Committees. These reporting and planning requirements serve to provide the necessary information to be used at the local level to manage the risks associated with accidental chemical releases. CEPPO is also responsible for accidental chemical release prevention. Under Section 112(r) of the Clean Air Act, as amended by the Clean Air Act Amendments of 1990, CEPPO must evaluate chemicals for acute adverse health effects, likelihood of accidental release, and magnitude of exposure to develop a list of at least 100 substances that pose the greatest risk of causing death, injury, or serious adverse effects to human health or the environment from accidental releases. Each listed substance must have a threshold quantity that takes into account the chemical’s toxicity, reactivity, volatility, dispersability, combustibility, or flammability. Facilities handling a listed substance above its threshold quantity must implement a risk management program and develop a risk management plan. The risk management program must address a hazards analysis, prevention program, and emergency response program. According to CEPPO officials, they scaled these regulatory requirements according to the risk posed by the wide range of facilities subject to the requirements— the greater the risk, the greater the risk management responsibilities. The facilities submit their risk management plans to EPA and to state and local officials for use in emergency planning and local risk management and reduction. CEPPO investigates chemical accidents, conducts research, and collects information about chemical and industrial process hazards to issue Chemical Safety Alerts and other publications to raise awareness about chemical accident risks. CEPPO also develops tools, methods, and guidance necessary to identify and assess the risks to human health from accidental releases. Major features and characteristics of CEPPO’s risk assessment procedures are summarized below. The chemical risk assessments conducted by CEPPO are unique from the risk assessments conducted by other EPA offices. CEPPO’s procedures do not follow the NAS four-step risk assessment approach, but are similar to the chemical risk assessment approach used by the Department of Transportation’s (DOT) Research and Special Programs Administration (RSPA) in that hazards are identified and a measure of exposure (or consequence) is determined to yield a “threat” associated with an accidental release. While RSPA focuses on risks associated with accidents involving unintentional releases of hazardous materials during transportation, CEPPO focuses on risk associated with accidental releases from a fixed facility. According to CEPPO, for accidental release risks, because these events are high consequence and low probability, the hazard and exposure typically can be estimated with some degree of confidence. However, the likelihood or probability of an accidental release is very uncertain. Consequently, likelihood is addressed only in a limited way and the “threat” is judged to be a surrogate for risk. CEPPO’s approaches with respect to chemical accident risk are published mainly in two rulemakings—“List of Regulated Substances and Thresholds for Accidental Release Prevention and Risk Management Programs for Chemical Accident Release Prevention,” 59 FR 4478 (Jan. 31, 1994) and “Accidental Release Prevention Requirements: Risk Management Programs under the Clean Air Act, Section 112(r)(7),” 61 FR 31668 (June 20, 1996)—and in guidelines, especially “Technical Guidance for Hazards Analysis, Emergency Planning for Extremely Hazardous Substances,” which was issued jointly by EPA, DOT, and the Federal Emergency Management Agency (Dec. 1987). For hazard identification, CEPPO identifies the hazards that pose a risk to human health and the environment from an analysis of chemical accidents and of the physical/chemical properties of substances that make them more likely to cause harm as a result of an accidental chemical release. For example, the catastrophic chemical release in Bhopal, India, in December 1984 involved methyl isocyanate, a chemical that is toxic when inhaled. CEPPO identified the criteria necessary to identify those substances that are so toxic that, upon exposure (i.e., inhalation, dermal contact, or ingestion) to a small amount, they cause death or serious irreversible health effects in a short time (acute toxicity). CEPPO also has developed criteria to identify other substances, such as highly flammable substances that can trigger a vapor cloud explosion harming the public and environment. CEPPO is also working to understand the long-term (chronic) effects that might be generated by a single acute exposure. As part of its identification of hazards, CEPPO also evaluates the quantity of a chemical that would need to be released and travel off-site to establish a threshold quantity. If a facility handles more than this quantity, there is a presumption of risk triggering some action by the facility’s owner(s) and operator(s). The hazardous chemicals and threshold quantities identified by CEPPO are published in rulemakings. According to CEPPO, the exposure assessment (or consequence analysis) phase of a chemical accident release assessment is somewhat unique from the classical risk assessment approaches and procedures. The actual exposure to humans after an accidental release is often not known. In addition, the amount and rate of chemical released and the precise conditions (e.g., weather) are usually not known. However, these parameters can be estimated using engineering calculations and mathematical models to generate the concentration likely to have been present or that could be present in a certain type of accidental release. Using these techniques, chemicals that possess the physical/chemical properties most likely to harm the public or the environment can be evaluated to estimate the degree of “threat” that they may pose in an accidental release. CEPPO uses these exposure assessment (consequence analysis) techniques to understand the potential magnitude of exposure associated with a variety of hazardous chemicals. In addition, CEPPO publishes the techniques in guidelines and as software to assist facilities in their assessment of accidental release risk. According to CEPPO, industry has a fundamental responsibility to understand the risks associated with chemical accidents. In addition, the Risk Management Plan requirements under section 112(r) of the Clean Air Act require that this information be made available to the public so that industry and the community can work together to manage the risks that might be present. CEPPO may characterize the risks associated with accidental releases using a number of parameters, such as the presence of a large quantity of a highly hazardous substance in proximity to a large facility that has had a number of accidental releases in the past. CEPPO uses these parameters to place more responsibility on such facilities (e.g., greater accidental release prevention measures under the Risk Management Program requirements), to investigate the underlying reasons for their accidental releases, or to assist in audits and inspections of their accident prevention programs. OAR oversees the air and radiation protection activities of the agency. Radiation risk assessments conducted by OAR are outside the scope of this report, but chemical risk assessments do have a part in OAR’s efforts to preserve and improve air quality in the United States. Such air quality concerns are the primary mission of OAR’s Office of Air Quality Planning and Standards (OAQPS), which, among other activities, compiles and reviews air pollution data and develops regulations to limit and reduce air pollution. The Risk and Exposure Assessment and the Health and Ecosystem Effects Groups within OAQPS provide the scientific and analytical expertise to conduct and support human health and ecological risk assessments in this area, in coordination with ORD. The Clean Air Act, as amended, provides the statutory basis for air-related risk assessments by OAR. The CAA requires EPA to establish national standards for air quality, but it gives states the primary responsibility for assuring compliance with the standards. Chemical risk assessments are primarily associated with regulation of (1) criteria air pollutants and (2) hazardous air pollutants, also referred to as “air toxics.” The CAA requires EPA to set health-based air quality standards (National Ambient Air Quality Standards, or NAAQS) for criteria pollutants, which are common throughout the United States and mostly the products of combustion. Under the CAA, EPA is also required to review the scientific data upon which the standards are based and revise the standards, if necessary, every 5 years. The criteria pollutants are particulate matter, carbon monoxide, sulfur oxides, nitrogen dioxide, ozone, and lead. Of these pollutants, ozone is not directly emitted by a source, but rather is the product of the interaction of nitrogen oxide, volatile organic compounds, and sunlight. Therefore, regulations targeting ozone focus on controlling emissions of nitrogen oxide and volatile organic compounds. The CAA requires EPA to set health-based standards with an “adequate margin of safety,” but according to EPA it is not required to set air quality standards at a zero-risk level to achieve an adequate margin of safety, but simply at a level that avoids unacceptable risks. EPA therefore sets the standards to protect the substantial part of the national population, including sensitive or at-risk populations, but not necessarily the most sensitive or exposed individuals. The CAA also contains provisions, first added in 1970, for the regulation of emissions to the atmosphere of hazardous air pollutants—toxic chemicals other than the six criteria pollutants. The 1970 amendments to the CAA required EPA to identify and control hazardous air pollutants so as to achieve “an ample margin of safety.” However, Congress passed another major set of amendments, the Clean Air Act Amendments of 1990 (CAAA), which revised the hazardous air pollutant provisions and substantially affected the application of risk assessment regarding air toxics. The amendments explicitly wrote into the act a list of 189 hazardous air pollutants to be regulated. In addition, the amendments replaced the former health-based criterion for standards with a criterion that is primarily technology based, mandating the maximum achievable control technology (MACT) for the specified list of chemicals. The act further mandates that EPA evaluate residual risks remaining after implementation of the MACT standards to determine if additional standards are needed to protect the public health with an ample margin of safety. Additional information on the major features and characteristics of chemical risk assessments related to these air quality protection activities is presented below. There are several unique features that affect risk assessments for criteria air pollutants. Compared to many other agents assessed by EPA, the agency generally has extensive human data available on health effects at relevant exposure levels. Therefore, risk assessments for criteria air pollutants require little extrapolation across species or to low doses and few default assumptions. These are the least likely of EPA’s risk assessments to use precautionary or conservative methods and assumptions, and the results are intended to be unbiased estimates without any built-in conservatism. For criteria air pollutants, “hazard identification” information on health effects appears primarily in air quality criteria documents prepared by ORD and staff papers prepared by OAQPS to support the review and development of national ambient air quality standards. These documents are intended to reflect the available scientific evidence on toxicity endpoints of concern. The definition of what responses constitute “adverse” outcomes is ultimately left to the Administrator’s judgment, informed by staff recommendations, advice from the Clean Air Scientific Advisory Committee (part of EPA’s Science Advisory Board), and public comments. EPA’s principal concern regarding criteria pollutants is for noncancer health effects. In contrast to most other EPA noncancer risk assessments, however, EPA does not apply a threshold approach in the case of criteria pollutants. Instead, the agency models response curves as though they have no threshold, recognizing that, as a practical matter, at least some members of the general population will have their thresholds exceeded at or near the lowest exposure levels. EPA characterizes these response relationships without any conservative upper-bound methods. However, probabilistic methods are used to characterize uncertainty in the fitted exposure-response relationships. In addition, there is temporal variation in pollution concentrations, so characterization of exposure-time relationships is also an important component of EPA’s assessments of criteria pollutants. Although EPA’s exposure assessments (and risk characterization) for criteria pollutants focus on population risks, rather than individual risks, the agency does consider effects on more sensitive or exposed populations. Exposure assessments are also affected by the need to establish air quality standards for both annual and daily concentrations for some pollutants. The annual standards are intended to provide protection against typical day-to-day exposures as well as longer-term exposures, while the daily standards are intended to provide protection against days with high peak concentrations of pollutants. EPA’s exposure assessments therefore need to address these types of variations. Rhomberg noted that, because of the long history of analysis of standard pollutants, EPA’s exposure modeling has been continually improved and expanded, resulting in sophisticated models with capabilities well beyond models used in other situations that do not have the benefit of decades of experience and application. Finally, it is important to recognize that one of the most important uses of risk assessments regarding criteria air pollutants is to characterize the population exposure levels and health effects that would be expected given various specified air quality criteria. In other words, one of the primary uses of risk assessment is to estimate what the effects would be if standards were set at various specified levels, rather than using the tool simply to estimate what health risks these pollutants pose. Hazardous air pollutants (air toxics) Although the Clean Air Act Amendments of 1990 shifted the focus in hazardous air pollutant regulation to technology-based controls, several activities may still involve risk assessments, including listing and delisting of hazardous air pollutants, which depends on whether a chemical may present a threat of adverse effects to humans and the environment; de minimis delisting of source categories, which requires sources be listed unless they pose less than a 10-6 risk to the maximally exposed individual (MEI); triggering the consideration of further regulation to address residual risks that remain after applying MACT standards (triggered if the MEI suffers a 10-6 or greater lifetime risk); and offset trading of one pollutant for another based on whether the increase in emissions is offset by an equal or greater decrease in a “more hazardous” air pollutant. According to section 112(o) of the amended CAA, prior to the promulgation of any residual risk standard, EPA shall revise its guidelines for carcinogen risk assessment or provide an explanation of the reasons regarding any NAS report section 112(o)(4) recommendations that have not been implemented. The amended act also had a major impact on hazard identification for air toxics. The amendments defined hazardous air pollutants as air pollutants listed pursuant to section 112(b) of the act. Section 112(b) included an initial list of 189 compounds incorporated by reference into the law. Dose-response analysis for air toxics has in the past been done largely through Health Assessment Documents produced by ORD for the air office, according to the methods discussed in the earlier section on EPA- wide risk assessment procedures. Carcinogen potency calculations for de minimis delisting and residual risk determination will be done under the revised carcinogen assessment guidelines, once they are finalized. EPA addresses noncancer risks for hazardous air pollutants with its usual methodologies (e.g., NOAEL/LOAEL, benchmark dose, or others). With the 1990 amendments, exposure assessments for air toxics will focus on assessing the residual risk for the most exposed individual after MACT has been applied. OAR uses a population-based risk assessment to generate estimates of how risks are distributed within the population, not just for specific conservative scenarios. According to Rhomberg (and confirmed by OAR officials), OAR’s intent is to define the actual most exposed person in the population, rather than a hypothetical person with an unrealistically high estimated exposure. EPA has adopted a tiered approach to analyzing residual risk consistent with the recommendations from NAS and the Presidential/Congressional Commission. In the screening phase, default conservative assumptions are used to ensure that risks will not be underestimated. Sources and hazardous air pollutants that exceed some benchmark in the screening analysis will be evaluated further. According to OAR, the more refined assessments will utilize more site- specific information and more realistic assumptions, especially as they relate to exposure. EPA estimates exposures to air toxics using a general-purpose model largely based on fate and transport considerations for stack emissions. OAR officials noted that they are updating their modeling methodology, updating their Human Exposure Model with the current state-of-the-art dispersion model (ISCST3), and will be updating the census data they use with the 2000 Census numbers when they become available. OW is responsible for the agency’s water quality activities, including development of national programs, technical and science policies, regulations, and guidance relating to drinking water, water quality, ground water, pollution source standards, and the protection of wetlands, marine, and estuarine areas. Chemical risk assessments are associated, in particular, with EPA’s ambient water quality criteria, under the CWA, and drinking water quality regulations, under the SDWA. The goal of CWA is to maintain and improve the cleanliness and biological integrity of the nation’s waters, including lakes, rivers, and navigable waters. Under CWA, EPA publishes water quality criteria defining the degree of water quality that is compatible with intended uses and states of different water bodies. The criteria are health based, but they are not rules and are themselves unenforceable. States use these criteria as guidance for developing state water quality standards and setting enforceable limits in permits for facilities that discharge pollutants into surface waters. CWA distinguishes “conventional” from “toxic” pollutants. Toxic water pollutants are evaluated as exposures to toxic chemicals (similar to EPA’s treatment of hazardous air pollutants). The goal of SDWA is to protect the quality of public drinking water systems. The law focuses on all waters actually or potentially designed for drinking use, whether from above ground or underground sources. SDWA requires EPA to set drinking water standards to control the level of contaminants in drinking water provided by public water systems, which the water systems are required to meet. Congress passed extensive amendments to SDWA through the Safe Drinking Water Act Amendments of 1996 (PL 104-182). Among other key changes, the amendments increased regulatory flexibility, focused regulatory efforts on contaminants posing the greatest health risks, and added risk assessment and risk communication provisions to SDWA. There are several risk-related mandates in these acts. Under CWA, EPA is to establish criteria for water quality solely on the basis of health and ecological effects and “accurately reflecting the latest scientific knowledge… on the kind and extent of all identifiable effects on health and welfare.” CWA defines a toxic pollutant as one that after discharge and upon exposure, ingestion, inhalation, or assimilation into any organism, either directly from the environment or indirectly by ingestion through food chains, will, on the basis of information available to the Administrator, cause death, disease, behavioral abnormalities, cancer, genetic mutations, physiological malfunctions (including malfunctions in reproduction), or physical deformities in such organisms or their offspring. Federal water quality criteria are unenforceable, but states develop enforceable permit limits based on them. In contrast to the unenforceable federal water quality criteria, CWA also provides for the promulgation of enforceable federal performance standards for sources of effluent (waste discharged into a river or other water body) that do include consideration of technological and economic feasibility. Since 1977, establishment of effluent standards for toxic pollutants has been based on the best available technology (BAT) economically achievable by particular source category. The compounds to be regulated are specified in a list, and there are provisions for additions and deletions to the list. Standards must be at that level which the Administrator determines provides “an ample margin of safety,” so that standards more stringent than BAT may be named at EPA discretion. Under SDWA, the EPA Administrator is to “promulgate national primary drinking water regulations for each contaminant… which… may have any adverse effect on the health of persons and which is known or anticipated to occur in public water systems.” An important feature of such regulations, however, is that a standard specifies two levels of contamination. First, a maximum contaminant level goal (MCLG) is set solely on health grounds “at a level at which no known or anticipated adverse effects on the health of persons occur and which allows an adequate margin of safety.” For each such goal there is also a maximum contaminant level (MCL). This MCL is to be as close to the MCLG “as is feasible,” where feasible means “with the use of the best technology, treatment techniques and other means which… are available (taking cost into consideration).” The MCL is the enforceable standard. The 1996 amendments to SDWA added several provisions that increased the importance of risk assessment and risk communication in EPA’s regulation of drinking water quality. For example, the amendments Require EPA, when developing regulations, to (1) use the best available, peer-reviewed science and supporting studies and data and (2) make publicly available a risk assessment document that discusses estimated risks, uncertainties, and studies used in the assessment. Require EPA to conduct a cost-benefit analysis for every new standard to determine whether the benefits (health risk reduction) of a drinking water standard justify the costs. Permit consideration of “risk-risk” issues by authorizing EPA to set a standard other than the feasible level if the feasible level would lead to an increase in health risks by increasing the concentration of other contaminants or by interfering with the treatment processes used to comply with other SDWA regulations. Require EPA to review and revise, as appropriate, each national primary drinking water regulation promulgated by the agency at least every 6 years. Of particular relevance to the use of risk assessment information, any revisions must “maintain, or provide for greater, protection of the health of persons.” Require EPA to identify subpopulations at elevated risk of health effects from exposure to contaminants in drinking water and to conduct studies characterizing health risk to sensitive populations from contaminants in drinking water. Additional information on major features and characteristics of chemical risk assessments related to water quality protection activities is presented below. The various offices within OW—the Office of Ground Water and Drinking Water; Office of Science and Technology; Office of Wastewater Management; and Office of Wetlands, Oceans, and Watersheds—have developed extensive technical and analytical guidance on water quality monitoring and the development of water quality criteria. One recently finalized document particularly relevant for describing OW’s current risk assessment procedures is the revision to the methodology for deriving ambient water quality criteria (AWQC) for the protection of human health. Published pursuant to section 304(a)(1) of the CWA, OW noted that this revised methodology supersedes EPA’s 1980 guidelines and methodology on this subject. In addition to describing OW’s approach to developing new and revising existing AWQC, it defines the default factors that EPA will use in evaluating and determining consistency of state water quality standards with the requirements of the CWA. Although there are different statutory bases and risk mandates for the regulation of ambient and drinking water, OW’s risk assessment procedures in support of CWA and SDWA are mostly similar. However, risk assessments in support of CWA consider not just human health effects but also the ecological effects associated with exposure to pollutants. With regard to human health risks, perhaps the most notable difference between the ambient water and drinking water parts of OW is the additional focus, during exposure assessments for CWA purposes, on exposures to contaminated water through consumption of contaminated fish or shellfish. (This is a primary reason for potential differences in the resulting drinking water and ambient water quality criteria or standards for the same chemical.) OW’s Office of Science and Technology does all of the risk assessments for SDWA maximum contaminant level goals and CWA’s AWQC. For cancer risk evaluation, OW has been applying the principles in EPA’s proposed revision of the carcinogen guidelines. For hazard identification purposes, SDWA originally had specified a list of compounds to be regulated as toxic pollutants and required EPA to regulate an additional 25 contaminants every 3 years. However, the 1996 amendments eliminated that requirement and revised OW’s approach for listing, reviewing, and prioritizing the drinking water contaminant candidate list. The new risk-based contaminant selection process provides EPA the flexibility to decide whether or not to regulate a contaminant after completing a required review of at least five contaminants every 5 years. EPA must use three risk-related criteria to determine whether or not to regulate: (1) that the contaminant adversely affects human health; (2) it is known or substantially likely to occur in public water systems with a frequency and at levels of public health concern; and (3) regulation of the contaminant presents a meaningful opportunity for health risk reduction. The 1996 amendments also included specific requirements to assess health risks and set standards for arsenic, sulfate, radon, and disinfection byproducts. There are a number of important features regarding OW’s exposure assessments in support of CWA and SDWA regulations. OW’s primary exposure question during the criteria/standard-setting process for drinking or ambient water is hypothetical: What health effects might be expected if people consumed water and/or finfish and shellfish contaminated at the level of a candidate standard? The main function of exposure assessment is to link criteria or water concentrations to doses of chemicals and the associated health effects that might be projected. For its exposure assessments, OW uses estimates of water and food ingestion in the United States based on a variety of surveys and studies. One of the major sources of per capita water and fish ingestion is the Department of Agriculture’s Continuing Survey of Food Intakes by Individuals (CSFII), which presents results for the general population and for certain subpopulations (e.g., pregnant and lactating women, children). For assessing standards under SDWA, the linking of water concentration to dose is conducted through standardized consumption values. For example, the default exposure scenario of lifetime consumption by individuals is 2 liters of water per day. However, OW uses other default values to address consumption by sensitive subpopulations, especially children and infants. For assessing AWQC under the CWA, EPA uses the same water consumption rate as under SDWA. In addition, though, the agency adds the dose resulting from the daily average consumption of 17.5 grams of fish. An important change in EPA’s approach for developing AWQC, reflected in the 2000 Human Health Methodology, has been the move toward use of a bioaccumulation factor (BAF) to estimate potential human exposure to contaminants via the consumption of contaminated fish and shellfish. BAFs reflect the accumulation of chemicals by aquatic organisms from all surrounding media (e.g., water, food, and sediment). EPA’s 1980 method used a bioconcentration factor that reflected only absorption directly out of the water column, and therefore tended to underestimate actual contaminant levels in fish and shellfish. EPA’s revised methodology also gives preference to the use of high-quality field data over laboratory or model-derived estimates of BAFs. OW considers indirect exposures to a substance from sources other than drinking water (e.g., food and air) when establishing AWQC. This is particularly important for noncarcinogens, where the fact that several exposure sources might individually be below the RfD level does not mean that collectively the exposure is below this presumably safe level. OW has revised and expanded its policy on accounting for nonwater sources of indirect exposures known as the “relative source contribution.” The procedures for calculating the relative source contribution vary depending on the adequacy of available exposure data, levels of exposure, sources and media of exposure relevant to the pollutant of concern, and whether there are multiple health-based criteria or standards for the same pollutant. (See table 5 in the next section for a more detailed description of these assumptions.) EPA’s risk assessment guidelines and other related documents identify many default assumptions, standardized data factors, and methodological choices that may be used in chemical risk assessments. As pointed out by NAS, assumptions and professional judgment are used at every stage of a risk assessment, because there are always uncertainties in risk assessments that science can not directly answer. For the most part, these assumptions and choices are intended to address various types of uncertainties—such as an absence or limited amount of available data, model uncertainty, and gaps in the general state of scientific knowledge— or variability in the population. They are also intended to provide some consistency and transparency to agency risk assessments. Defaults are generally used in the absence of definitive information to the contrary, but also reflect policy decisions. In its guidelines, EPA characterizes many of its choices as conservative or public-health protective in that they are intended to help the agency avoid underestimating possible risks. Agency guidelines often cited the scientific studies and other evidence that supported the agency’s choice and the plausibility of the resulting risk estimates. In our recent report on EPA’s use of precautionary assumptions, we identified three major factors influencing the agency’s use of such assumptions: (1) EPA’s mission to protect human health and safeguard the natural environment (including specific requirements in some of the underlying environmental statutes), (2) the nature and extent of relevant data, and (3) the nature of the risk being evaluated. EPA’s program offices commonly employ tiered risk assessment approaches that progress from rough screening assessments (for which only limited data may be available) through increasingly detailed and rigorous analyses, if needed. EPA’s guidelines and program-specific documents indicate that conservative default assumptions are most often used during initial screening assessments, when the primary task is to determine whether a risk might exist and further analysis is called for. Such screening assessments may use “worst case” assumptions to determine whether, even under those conditions, risk is low enough that a potential problem can be eliminated from further consideration. According to guidelines and related descriptive materials from the program offices, conservative assumptions are used less often in later tiers, as the agency attempts to gather and incorporate more detailed data into its analyses. Several circumstances may lead to conservative choices playing a less prominent role in EPA risk assessments. For example, the development of more complex and sophisticated models for cancer and noncancer effects places more emphasis on using the full range of available data and characterizing the full range of potential adverse outcomes and effects. Similarly, the increased use of probabilistic analytical methods to derive parameter values will tend to reduce the “compounding” effect of picking conservative point values for each factor. As noted above, the use of tiered risk assessment approaches may also limit the use of default assumptions if more rigorous and case-specific analysis is done beyond initial screening assessments. However, all of these developments may require substantial additional effort and the availability of considerable data, which might not be possible in many cases. Although not intended to be comprehensive, table 5 illustrates in detail some of the specific assumptions, default data values, or methodological choices that are used in EPA chemical risk assessments. The table concentrates primarily on default choices from EPA’s various agencywide risk assessment guidelines. However, to also provide a sense of how default choices are used at the program level, we have included examples of standard assumptions and values employed by two of EPA’s program offices. One set of examples illustrates assumptions and choices used by OPP. The second set presents more detailed descriptions of the standard assumptions and choices identified in OW’s risk assessment methodology for deriving AWQC for the protection of human health. OW’s policy reflects many of the same basic choices that would apply to assessments conducted across the agency, such as the use of uncertainty factors when estimating an RfD. To the extent that EPA’s documents identified for each of these assumptions or choices a reason for its selection, when it would be applied in the risk assessment process, and its likely effect on risk assessment results, we have reported that information. However, it is important to recognize that there is no requirement that agencies provide such information in their guidelines (or even that they have guidelines). In particular with regard to the “likely effects” column, EPA officials cautioned that it is not always appropriate to characterize a single assumption separate from the rest and that it is not always possible to quantify the effect of each default assumption. They noted that, in general, their default assumptions are intended to be public-health protective. The information presented in table 5 was taken primarily from EPA risk assessment guidelines and related documents but also reflects additional comments provided by EPA officials. (GAO notes and comments appear in parentheses.) As with exposure assessment, the program offices typically are responsible for completing the risk characterization. EPA does, however, have several documents that provide agencywide guidance on how such characterization is to be done. The guidance includes a February 26, 1992, memorandum from the EPA Deputy Administrator entitled, “Guidance on Risk Characterization for Risk Managers and Risk Assessors,” and a March 21, 1995, document issued by the EPA Administrator entitled, “Policy for Risk Characterization at the U.S. Environmental Protection Agency.” EPA also has developed a Risk Characterization Handbook to provide more detailed guidance to agency staff. In the statement accompanying its 1994 report Science and Judgment in Risk Assessment, NRC said that although EPA’s overall approach for assessing risks was fundamentally sound, the agency “must more clearly establish the scientific and policy basis for risk estimates and better describe the uncertainties in its estimates of risk.” In March 1995, the EPA Administrator issued the agency’s risk characterization policy and guidance, which reaffirmed the principles and guidance in the agency’s 1992 policy. EPA’s guidance document defined risk characterization as the final step in the risk assessment process that (1) integrates the individual characterizations from the hazard identification, dose-response, and exposure assessments; (2) provides an evaluation of the overall quality of the assessment and the degree of confidence the authors have in the estimates of risk and conclusions drawn; (3) describes the risks to individuals and populations in terms of extent and severity of probable harm; and (4) communicates the results of the risk assessment to the risk manager. Discussing “guiding principles” for risk characterization, EPA emphasized that the integration of information from the three earlier stages of risk assessment, discussion of uncertainty and variability, and presentation of information to risk managers requires the use of both qualitative and quantitative information. For example, when assumptions are made in exposure assessment, EPA said that the source and general logic used to develop the assumptions should be described, as well as the confidence in the assumptions made and the relative likelihood of different exposure scenarios. In the 1995 policy statement, EPA said that risks should be characterized in a manner that is clear, transparent, reasonable, and consistent with other risk characterizations of similar scope. EPA said that all assessments “should identify and discuss all the major issues associated with determining the nature and extent of the risk and provide commentary on any constraints limiting fuller exposition.” The policy also said risk characterization should (1) bridge the gap between risk assessment and risk management decisions; (2) discuss confidence and uncertainties involving scientific concepts, data, and methods; and (3) present several types of risk information (i.e., a range of exposures and multiple risk descriptors such as high ends and central tendencies). The policy stated that each risk assessment used in support of decision making at EPA should include a risk characterization that follows the principles and reflects the values outlined in the policy. However, the policy statement went on to say that it and the associated guidance did not establish or affect legal rights or obligations. Some of EPA’s other risk assessment guidelines also discuss and recommend certain approaches to the risk characterization phase. For example, EPA’s proposed guidelines for carcinogen risk assessment call for greater emphasis on the preparation of “technical” characterizations to summarize the findings of the hazard identification, dose-response assessment, and exposure assessment steps. The agency’s risk assessors are then to use these technical characterizations to develop an integrative analysis of the whole risk case. That integrative analysis is in turn used to prepare a less extensive and nontechnical Risk Characterization Summary intended to inform the risk manager and other interested readers. EPA identified several reasons for individually characterizing the results of each analysis phase before preparing the final integrative summary. One is that the analytical assessments are often done by different people than those who do the integrative analysis. The second is that there is very often a lapse of time between the conduct of hazard and dose-response analyses and the conduct of the exposure assessment and integrative analysis. Thus, according to EPA, it is necessary to capture characterizations of assessments as the assessments are done to avoid the need to go back and reconstruct them. Finally, several programs frequently use a single hazard assessment for different exposure scenarios. The guidelines also point out that the objective of risk characterization is to call out any significant issues that arose within the particular assessment being characterized and inform the reader about significant uncertainties that affect conclusions, rather than to recount generic issues that are covered in agency guidance documents. In another example, EPA’s ecological risk guidelines emphasize that risk characterization is a means for clarifying relationships between stressors, adverse effects, and ecological entities. In addition, this phase of the risk assessment process is a time to reach conclusions regarding the occurrence of exposure(s) and the adversity of existing or anticipated effects. Specifically, EPA guidance describes three ecological risk characterization activities: (1) risk estimation (i.e., integrating exposure and effects data and evaluating uncertainties); (2) risk description (i.e., interpreting and discussing available information about risks to the assessment endpoints); and (3) risk reporting (i.e., estimating risks indicating the overall degree of confidence in such estimates, citing lines of evidence to support risk estimates, and addressing assumptions and uncertainties). Similar to EPA-wide guidance on risk characterization, EPA’s ecological risk characterization guidelines emphasize open communication with risk managers and other interested parties to clearly convey information needed for decision making in a risk management context. It is also EPA’s policy that major scientifically and technically based work products related to the agency’s decisions normally should be peer reviewed to enhance the quality and credibility of the agency’s decisions. With regard to EPA’s chemical risk assessments, peer review can be used for evaluating both specific assessments and the general methods EPA uses in its risk assessments. Peer review generally takes one of two forms: (1) internal peer review by a team of relevant experts from within EPA who have no other involvement with respect to the work product that is to be evaluated or (2) external peer review by a review team that consists primarily of independent experts from outside EPA. In December 2000, EPA released a revised edition of its Peer Review Handbook for use within the agency. The Food and Drug Administration (FDA) within the Department of Health and Human Services regulates the safety of a large number and wide variety of consumer products, including foods, cosmetics, human and animal medicines, medical devices, biologics (such as vaccines and blood products), and radiation-emitting products (such as microwave ovens). Chemical risk assessments are primarily conducted by three of FDA’s five product-oriented centers—the Center for Food Safety and Applied Nutrition (CFSAN), the Center for Veterinary Medicine (CVM), and the Center for Devices and Radiological Health (CDRH). The chemical risk assessment activities of these centers vary depending on factors such as the underlying statutory requirements, the substances being regulated, whether cancer or noncancer effects are of concern, and whether a product is under pre- or postmarket scrutiny. FDA officials said that the agency generally follows the National Academy of Sciences’ (NAS) four- step risk assessment process, although it has not developed written internal guidelines. FDA often incorporates conservative assumptions into its assessments when information essential to a risk assessment is not known, but such assumptions are supposed to be scientifically plausible and consistent with agency regulations or policies. For example, CFSAN assumptions are expected to be reasonably protective of human health. FDA does not have an official policy on how risk assessment results should be characterized and communicated to policymakers and the public. However, FDA officials said that, in practice, they use a standard approach that typically highlights the assumptions with the greatest impact on the results of an analysis, states whether the assumptions used were conservative, and shows the implications of different choices. FDA’s regulatory authority is primarily derived from the Federal Food, Drug, and Cosmetic Act, as amended (FFDCA), although several related public health laws (e.g., the Food and Drug Administration Modernization Act of 1997, or FDAMA) provide additional authority. FDA administers its regulatory responsibilities through its five product-oriented centers: (1) CFSAN, (2) CVM, (3) CDRH, (4) the Center for Drug Evaluation and Research, and (5) the Center for Biologics Evaluation and Research. FDA officials said that, although each of these five product centers conducts some type of risk assessments, the first three primarily conduct the chemical risk assessments that are the focus of this report. Each of these centers has different responsibilities, authorities, and constraints on its regulatory and risk assessment activities. CFSAN is responsible for the regulation of food additives, color additives used in food, and cosmetic additives. Under the FFDCA, the regulation of substances intentionally added to food or used in contact with food must be based solely on the safety of the substances for their intended uses (i.e., consideration of benefits and costs is not allowed). A food containing an unapproved food or color additive is considered “unsafe” unless FDA issues a regulation approving its use or, in the case of a food contact substance, there exists an effective notification. To obtain an authorizing regulation or an effective notification, the sponsor of a food or color additive must show that it is safe for its intended use. FDA regulations under the FFDCA define a product as safe if there is “a reasonable certainty in the minds of competent scientists that the substance is not harmful under the intended conditions of use.” For food additives and color additives that are not themselves carcinogenic but contain carcinogenic impurities, CFSAN uses a quantitative risk assessment to determine whether the risk posed by a carcinogenic impurity is acceptable (i.e., a lifetime risk below one per million) under the FFDCA’s general safety clause of “reasonable certainty of no harm.” Nevertheless, if the food or color additive itself is a known carcinogen, under the “Delaney Clause” amendments to FFDCA, it cannot be deemed safe and is prohibited from use in food. CFSAN is also involved with substantial activities in the area of postmarket concerns with contaminants and naturally occurring toxicants. For example, in the past year, CFSAN participated in a number of major, international chemical risk assessments in the areas of dioxins and various mycotoxins. CVM’s primary role is to implement the FFDCA requirement that animal drugs and medicated feeds are safe and effective for their intended uses and that food from treated animals is safe for human consumption. Under the FFDCA, the regulation of residues of animal drugs that become a part of food because of the use of the animal drug must be based solely on health factors (i.e., consideration of benefits and costs is not allowed). A carcass or any of its parts that contain residues of an unapproved drug, or residues of an approved drug above approved levels, is considered to be unsafe and the carcass is considered adulterated. CVM uses risk assessment to help develop safe concentration levels in edible tissues, residue tolerances for postmarket monitoring, and withdrawal periods for slaughter following drug treatment. For noncancer effects, the applicable safety standard under FFDCA is that that these concentrations, tolerances, and withdrawal periods should represent a “reasonable certainty of no harm.” FFDCA includes provisions that permit FDA to authorize extralabel uses of an animal drug that would pose a “reasonable probability” of risk to human health if residues of the drug are consumed. The agency may establish a safe level for the residue and require that the drug sponsor provide an analytical method for detecting residues of such a compound. However, the act prohibits use in food-producing animals of any compound found to induce cancer when ingested by people or animals unless it can be determined that “no residue” of that compound will be found in the food produced from those animals under conditions of use reasonably certain to be followed in practice. FDA has interpreted the intention of the “no residue” language in the statute as meaning that any remaining residues should present an insignificant risk of cancer to people. As a matter of policy, FDA accepts a lifetime risk below one per million as an insignificant level. CDRH administers the medical device provisions of FFDCA, and assesses risks posed by chemicals that might leach out from medical devices (e.g., breast implants) into surrounding tissue. The center’s basic mission is to protect the public health by ensuring that there is reasonable evidence of the safety and effectiveness of medical devices intended for human use. CDRH usually evaluates risks in the context of a premarket review system, and the decision to clear or approve a product to treat a specific condition is based on a benefit-risk analysis for the intended population and use (not just on the basis of safety or human health as in the case of food regulation). Because all medical products are associated with risks, CDRH considers a medical product to be safe if it has reasonable risks given the magnitude of the benefit expected and the alternatives available. Another unit of FDA, the National Center for Toxicological Research (NCTR), has an important supporting role in the risk-related activities of the product centers. NCTR conducts much of the agency’s methodological research on risk assessment methods and helps to develop and modify FDA’s quantitative methods, in conjunction with experts from the various product centers. NCTR also provides toxicology research supporting all components of FDA. It performs fundamental and applied research designed specifically to define biologic mechanisms of action underlying the toxicity of products regulated by FDA. Although FDA has long been a pioneer in the development of risk assessment methods, the agency has not developed written internal guidance specifically on conducting risk assessments. FDA officials noted that much of their work is done before products are placed on the market and, in those instances, the burden of proof is on sponsors seeking FDA approval for new products. The documents are meant to represent the agency’s current thinking on the scientific data and studies considered appropriate for assessing the safety of a product. However, the guidance documents are not legal requirements and do not preclude the use of alternative procedures or practices by either FDA or external parties. Some of these guidelines include detailed descriptions of risk assessment methods deemed appropriate to satisfy FDA’s reviews under various statutory provisions. FDA has also adopted a number of domestic and international consensus standards that prescribe certain risk assessment methods (e.g., approaches for assessing the safety of medical devices and default consumption values for meat products). This is not true with regard to dietary supplements. The Dietary Supplement Health and Education Act of 1994 created a new framework for FDA’s regulation of dietary supplements, which do not have to undergo preapproval by FDA to determine their safety or efficacy. FDA officials said they currently have no standard procedures for dietary supplement risk assessment. FDA risk assessment procedures have also been described by individuals and organizations from within and outside of the agency in scientific and professional journal articles. For example, a 1997 journal article written by a panel of officials from across FDA summarized the risk assessment approaches of each of FDA’s product centers. A 1996 report on federal agencies’ chemical risk assessment methods described CFSAN’s methods, but did not describe the approaches used by the other centers within FDA. FDA’s food safety risk assessment procedures were also described in “Precaution in U.S. Food Safety Decisionmaking: Annex II to the United States’ National Food Safety System Paper,” which was prepared for the Organization for Economic Cooperation and Development in March 2000. FDA officials said that the agency generally follows the four-step risk assessment process identified by NAS: hazard identification, dose-response assessment (which FDA prefers to call “hazard characterization”), exposure assessment, and risk characterization. They said that they also rely on past precedent and other seminal works on risk assessment, such as the 1985 Office of Science and Technology Policy guidance document on cancer risk assessment. However, they emphasized that FDA does not presume there is a “best way” of doing a risk assessment and is continually updating its procedures and techniques with the goal of using the “best available science.” FDA officials also said that there are variations in the risk assessment approaches used among the agency’s different product centers and, in some cases, within those centers. In general, those variations are traceable to differences in the following factors: the substances being regulated, the nature of the health risks involved (particularly carcinogens versus statutory and regulatory requirements, whether the risk assessment is part of the process to review and approve a product before it can be marketed and used (premarket) or whether the assessment is for risks that might arise during monitoring of a product once it is being used (postmarket), and the nature and extent of the scientific information available. The nature and extent of scientific information varies on a case-by-case basis. The other factors, however, are more generic, and table 6 illustrates how they are similar or different across CFSAN, CVM, and CDRH. The subsections following the table describe more specifically how CFSAN, CVM, and CDRH conduct the first three stages of risk assessment. CFSAN’s procedures for hazard identification and dose-response assessment vary depending on whether noncancer or cancer risks are at issue. For noncancer effects, CFSAN starts with the largest dose in a chronic animal study that did not appear to lead to an increase in toxic effects above the level measured in unexposed control animals— the “no observed adverse effect level” or NOAEL. CFSAN then divides this NOAEL by one or more safety factors to arrive at an “acceptable daily intake” (ADI) intended to be an amount that can be ingested daily for a lifetime without harm. For example, CFSAN typically divides the NOAEL by 10 to allow for the possibility that humans might be more sensitive to a chemical than the experimental animals and then by another 10 to account for the possibility that some individuals might have greater sensitivity than others might. Therefore, for ADIs derived from long-term animal studies, CFSAN commonly uses a combined safety factor of 100. Additional safety factors may also be applied to account for long-term effects versus short- term experiments, inadequacies of the experimental data, or other factors. For cancer effects, CFSAN uses two different hazard assessment/dose- response approaches, depending on the nature of the products being regulated. For food and color additives that are themselves known carcinogens, the Delaney provisions in FFDCA make risk assessment rather straightforward. If a petition to market a food ingredient contains an adequately conducted animal cancer study, and if results of that study indicate that the food ingredient produces cancer in animals, CFSAN identifies the substance as a carcinogen under the conditions of the study. No further corroboration or weight-of-evidence analysis is required, and there is no need for a detailed dose-response assessment, exposure assessment, or risk characterization for the purpose of determining a specific level of the carcinogenic substance in food that may be considered to be safe. CFSAN uses more elaborate procedures for known or suspected carcinogenic impurities in food additives. The center’s method for low- dose cancer risk estimation is similar to EPA’s method (presented in app. II) on extrapolation for carcinogens (see fig. 3). On the dose- response curve of tumor incidence versus dose for a chemical, CFSAN chooses a point below which the data are no longer considered reliable, usually in the range of a tumor incidence of 1 percent to 10 percent. A straight line is drawn from the upper-confidence limit on the estimated risk at that point to the origin (i.e., zero incremental dose/zero incremental response). This provides the slope of the line used to provide upper-bound estimates of cancer risk at low doses. CFSAN does not specify a particular mathematical form for the dose-response relationship in the experimental dose range; the only requirement is an adequate fit to the data. According to FDA officials, CFSAN risk assessors use one of two different methods in animal-to-human scaling when extrapolating this dose-response curve to the estimation of upper bounds on human risk. In one of the methods, CFSAN assumes that cancer risks are equal in animals and humans when doses are similar on a lifetime-averaged milligram/kilogram/day basis (i.e., body weight scaling). In the other method, CFSAN bases its interspecies dose scaling on body weight to the ¾ power (in the absence of information to the contrary). Although the literature suggests that scaling methods can have a significant impact on risk assessment results, FDA officials said that using one approach versus the other makes relatively little difference. Also, because tumor rates can be biased by intercurrent mortality in animal studies (i.e., some animals die during the study from causes other than the tumor type being investigated), CFSAN uses a statistical procedure to make adjustments for intercurrent mortality in testing and estimating tumor rates. CFSAN procedures for exposure assessments to food and color additives are largely driven by the FFDCA requirement that the safety of a chemical compound be assessed in terms of the total amount of the compound in the diet. Therefore, to determine exposure, CFSAN risk assessors must consider all potential uses of the compound being reviewed. Similarly, in defining the allowable limits, the assessors must conclude that the sum total of all of these uses is within safe limits. CFSAN generally assumes in its exposure assessments that the compound is present at its maximum proposed use level in all foods in which it may be used, that any contaminants are present at residue levels established through chemical analysis, and that consumers are exposed to the additive every day. Although most of the agency’s focus is on chronic (long-term) exposures, the agency must also sometimes focus on very short-term, or even single, exposures, especially for contaminants associated with acute toxic effects. The first component in CFSAN’s exposure assessment for food safety is the determination of the concentrations (i.e., use levels or residue levels, in the case of a chemical contaminant) of a chemical in foods. In the premarket approval process, the sponsor of the petition or notification provides this information. For postmarket assessments, information may come from focused field surveys or from established monitoring programs such as the Total Diet Study, which has provided data since 1961 on dietary intakes of a variety of food contaminants, including pesticides, industrial chemicals, toxic and nutritional elements, and vitamins and radionucleides. Analyses are performed on foods prepared for consumption in order to provide a realistic measure of human intake. The second component of CFSAN’s exposure assessment is determining the extent of consumption of different foods. In this process, CFSAN primarily relies on multiple-day national food consumption surveys, and focuses on the upper end of the food intake distribution (i.e., the heaviest consumers of particular foods). CFSAN assumes that, within demographic subgroups, all variation in the survey data represents variation among individuals. That is, the average daily consumption of a food during the survey period is assumed to apply to that person for his or her whole life, and the intakes for different survey participants are assumed to reflect differences from one person to the next in each person’s lifetime consumption. This default assumption has acknowledged biases that result in both overestimating high-end chronic exposures and underestimating the proportion of the population ever consuming particular foods. To complete the exposure assessment, levels of an additive or contaminant in each food type are combined with estimates of daily consumption of each food type to give a total estimated daily intake. FDA may calculate exposures for various demographic groups, attempting to characterize both a mean exposure and an exposure for the heavy consumer (typically consumers at the 90th percentile of the intake distribution). FDA officials also pointed out that the exposure models they use for direct food additives are very different from those for food-contact substances (e.g., packaging). For the latter, they said that the bottom line is usually a mean exposure. FDA officials said that for risk management purposes they may attempt to show the implications of different scenarios used to estimate risk. FDA noted that a computer program that employs Monte Carlo techniques has been developed to study the effects of variability and uncertainty of potency and exposure estimates on estimates of risk. Such complex analyses have been applied principally to contaminants rather than in the premarket evaluations for food and color additives. CVM uses risk assessment in both the premarket approval process and postmarket surveillance. Risk assessments support risk management decisions such as the development of safe concentration values and residue tolerances for these drugs in foods. The primary human health concern in chemical risk assessment for CVM is animal drug residues in food. Residue is defined as any compound present in edible tissues (including milk and eggs) of the food-producing animal that results from the use of the chemical compound, including the compound, its metabolites, or other substances formed in or on food because of the use of the compound. Like CFSAN, CVM’s risk assessment procedures vary based on whether noncancer or cancer risks are at issue. According to FDA officials, the center’s risk assessment procedures for noncarcinogens are similar to those used by the rest of FDA, and are based on laboratory animal data, estimated daily food consumption, drug and metabolite residue data, and appropriate safety factors. CVM’s guidelines for industry note that the agency will calculate the ADI from the results of the most sensitive study in the most sensitive species. The center will normally use different safety factors depending on the type of study supporting the ADI calculation. When using the ADI to calculate the “safe concentration” for an animal drug product, CVM uses standard values for residues of veterinary drugs in edible tissues for the weight of an average adult and the amount and proportion of meat products, milk, and eggs consumed per day. CVM officials pointed out that the consumption values in their guidelines for industry are standard values used by the Joint Expert Committee on Food Additives, sponsored by the World Health Organization and Food and Agriculture Organization, that provides food safety recommendations to the Codex Committee on Residues of Veterinary Drugs in Foods. For carcinogen risk assessments, CVM uses a nonthreshold, conservative, linear-at-low-dose extrapolation procedure to estimate an upper limit of low-dose risk (as described under CFSAN). Cancer risk estimates are generally based on animal bioassays, and upper 95-percent confidence limits of carcinogenic potency are used to account for inherent experimental variability. FDA officials noted that some elements and assumptions of its dose-response analysis procedures are likely to overestimate risk by an unknown amount. Similarly, some of its assumptions on exposure may also overestimate cancer risks. For example, CVM’s risk assessment procedures assume that the concentration of residue in the edible product is at the permitted concentration and that consumption is equal to that of the 90th percentile consumer. In addition, the agency assumes that all marketed animals are treated with the carcinogen. While acknowledging that all of these assumptions result in multiple conservatisms, FDA also states that they are prudent because of the uncertainties involved. Medical devices, supplies, and implants may contain chemicals that can leach out of the devices into surrounding tissues. Risks from these types of chemical contaminants are considered during the premarket review of the material safety of a device, but concerns may also arise during CDRH’s postmarket surveillance activities. According to FDA officials, the concentrations of such leachants in human tissues are generally small and amenable to typical safety risk assessment procedures. CDRH has issued guidance for the preclinical (premarket) biological safety evaluation of medical devices. In that guidance, CDRH recognizes and uses a number of domestic and international consensus standards that have been developed to address aspects of medical device safety, including risks posed by exposure to compounds released from medical devices. However, CDRH officials pointed out that they and medical device approval applicants may use approaches other than those described in the consensus standards to conduct risk assessments. They said the standard that comes closest to describing CDRH’s approach for chemical risk assessment is International Organization for Standardization (ISO)/FDIS 10933-17. CDRH officials noted that, although this international standard is still in draft and has not been formally recognized by the center, the methods that it describes represent the primary procedures used by CDRH to assess the risk posed by patient exposure to compounds released from medical devices. They also pointed out that this standard is unique among risk assessment guidelines in that it provides methods to derive health- based exposure levels for local effects such as irritation, which often “drive” the risk assessment for compounds released from implanted devices. According to CDRH, hazards posed by patient exposure to a device are typically determined after subjecting the device to a series of tests defined by the preclinical evaluation guidance. Evaluation of potential toxicity is supposed to cover a number of adverse effects, including local or systemic effects, cancer, and reproductive and developmental effects. Unless justification is otherwise provided, CDRH assumes that the results obtained in animal studies are relevant for humans. One notable exception for medical device risk assessment, according to CDRH, is that implantation-site sarcomas (malignant tumors) found in rodents are not assumed to be relevant for humans. One option available to applicants is to use a risk assessment approach involving: (1) characterization of the chemical constituents released from a device; (2) derivation of a tolerable intake (TI) value for the compound; and (3) comparing the dose of each constituent received by a patient to its respective TI value. A TI value is a dose of a compound that is not expected to produce adverse effects in patients following exposure to the compound for a defined period. According to CDRH, it is conceptually similar to EPA’s reference dose, but different TI values can be derived for a compound depending on the route and duration of exposure to the medical device. CDRH’s procedures recommend establishing TI values for noncancer adverse effects using standard uncertainty factors in order to account for interspecies and inter-individual differences in sensitivity. However, CDRH permits flexibility in the event that data are available to characterize these uncertainties more accurately. CDRH also uses a lumped uncertainty factor to adjust for limitations in data quality such as (1) the use of short-term studies in the absence of long-term studies, (2) the absence of supporting studies, and (3) use of studies involving different routes or rates of exposure. According to CDRH, this lumped uncertainty value typically does not exceed 100, but can exceed 100 when acute (short-term) toxicity data are the only basis of the calculation of a TI value for permanent exposure. CDRH considers this provision especially important for medical device risk assessment because of the paucity of long-term toxicity data for many of the compounds released from medical devices. For carcinogenic leachants, FDA often uses low-dose linear extrapolation techniques. For a device-released compound that has been determined to be a carcinogen, CDRH uses a weight-of-the-evidence approach to determine the likelihood that it exerts its carcinogenic effect via a genotoxic mechanism. If the evidence suggests that the compound is genotoxic, then CDRH uses quantitative risk assessment to estimate a TI consistent with a risk level of 1 per 10,000. No specific quantitative risk assessment approaches have been identified as better than others for conducting the cancer risk assessment. If, however, the weight-of-the- evidence test suggests that the compound is a nongenotoxic carcinogen, the uncertainty factor approach described above should be employed to derive the TI. Once the TI is derived for each compound released from a device, it is then converted to a tolerable exposure value by taking into account the body weight of the patient and the usage patterns of the device that releases the compound. Overall, the agency noted that one of the most challenging problems in risk assessments for devices is determining the level of exposure to leached chemicals. As previously noted, FDA does not require the use of a specific risk assessment protocol or of specific default assumptions. However, the summary of FDA procedures also demonstrated that assumptions and methodological choices are an integral part of a risk assessment. FDA officials noted that they employ many default assumptions or choices by precedent. In particular, FDA officials and several reference documents on FDA risk assessment procedures pointed out that the agency routinely incorporates conservative assumptions into its assessments in the face of uncertainty. The report on the U.S. food safety system emphasized that precaution is embedded in the underlying statutes and the actions of regulatory agencies to ensure acceptable levels of consumer protection. Therefore, precautionary approaches are very much a part of the agency’s risk analysis policies and procedures. Although not intended to be comprehensive, the following table illustrates in detail some of the specific assumptions or methodological choices that are used in FDA as a whole and within particular FDA product centers. The information in the table was taken primarily from FDA documents, but also reflects additional comments provided by FDA officials. (GAO notes and comments appear in parentheses.) Unlike EPA, FDA does not have an official policy on how the results of the agency’s risk assessments should be characterized to decision makers and the public. However, FDA officials said that, in practice, the agency uses a standard approach for risk characterization that is similar to EPA’s official policy. They said that FDA’s general policy is to reveal the risk assessment assumptions that have the greatest impact on the results of the analysis, and to state whether the assumptions used in the assessment were conservative. FDA officials also said that their risk assessors attempt to show the implications of different distributions and choices (e.g., the results expected at different levels of regulatory intervention). As noted earlier, FDA may employ methods such as Monte Carlo techniques to provide additional information on the effects of variability and uncertainty on estimates of risk. There are some differences in FDA risk characterization procedures depending on the products being regulated and the nature of the risks involved. For food ingredients (direct and indirect food additives, color additives used in food, and substances generally recognized as safe) and animal drug residues that are not carcinogenic, risk characterization under the FFDCA focuses on whether the mandate of reasonable certainty of no harm will be achieved given the proposed limits on use and permissible residues. The main issue is whether the higher end (the 90th percentile) of the distribution of estimated daily intakes is below the ADI calculated from toxicity data. The statutory mandate is interpreted as requiring that, for a food additive to be declared safe, heavy consumers of particular foods should be reasonably assured of protection even if residues were at the maximum level allowed. For carcinogenic impurities, FDA’s focus is also on characterizing whether there is reasonable certainty of no harm. However, because of the Delaney clause, risk characterization is not needed for carcinogenic food ingredients. Residues of carcinogenic animal drugs are also evaluated separately under the DES proviso. CDRH officials pointed out that the draft ISO/FDIS 10933-17 international standard explicitly addresses one risk characterization issue—how sensitive subpopulations should be taken into account when setting allowable limits for compounds released from devices. Although it states that “idiosyncratic hypersusceptibility” should not normally be the basis of the tolerable exposure or allowable limit, the ISO standard does not preclude setting standards in this manner. Furthermore, the standard says that limits should be based on the use of the device by the broadest segment of the anticipated user population. Therefore, if a device is intended for a specific population, such as pregnant women, estimates should be based on that population. Although the Occupational Safety and Health Administration (OSHA) generally follows the standard four-step National Academy of Sciences’ (NAS) paradigm for risk assessment, there are several distinguishing characteristics of its assessments. Under its statutory mandate, OSHA has a specific and narrow focus on the potential risks to workers in an occupational setting. Further, the underlying statute and court decisions interpreting the statute have required the agency to focus on demonstrating, with substantial evidence, that significant risks to workers exist before it can regulate. In addition to presenting its own best estimates of risk, OSHA may present estimates based on alternative methods and assumptions. Much of what is distinct about risk assessment at OSHA can be traced to statutory provisions, court decisions, and the nature of workplace exposures to chemicals. OSHA, an agency within the Department of Labor, was created by the Occupational Safety and Health Act of 1970 (the OSH Act). The central purpose of the act is to ensure safe and healthful working conditions. As one of the primary means of achieving this goal, the act authorizes the Secretary of Labor to promulgate and enforce mandatory occupational safety and health standards. Certain provisions in the act stipulate both the nature and the manner in which these standards should be established. For example: Under section 3(8) of the OSH Act, a safety or health standard is defined as a standard that requires conditions, or the adoption or use of one or more practices, means, methods, operations, or processes, reasonably necessary or appropriate to provide safe or healthful employment or places of employment. According to OSHA, a standard is reasonably necessary or appropriate within the meaning of section 3(8) if it eliminates or substantially reduces significant risk and is economically feasible, technologically feasible, cost effective, consistent with prior OSHA action or supported by a reasoned justification for departing from prior OSHA actions, supported by substantial evidence on the record as a whole, and is better able to effectuate the act’s purposes than any national consensus standard it supersedes. Section 6(b)(5) of the act states that “The Secretary, in promulgating standards dealing with toxic materials or harmful physical agents… shall set the standard which most adequately assures, to the extent feasible, on the basis of the best available evidence, that no employee will suffer material impairment of health or functional capacity even if such employee has regular exposure to the hazard dealt with by such standard for the period of his working life.” A significant factor influencing the interpretation of the OSH Act provisions and OSHA’s approach to risk assessment is the Supreme Court ruling in its 1980 “Benzene” decision that, before issuing a standard, OSHA must demonstrate that the chemical involved poses a “significant risk” under workplace conditions permitted by current regulations and that the new limit OSHA proposes will substantially reduce that risk. This decision effectively requires OSHA to evaluate the risks associated with exposure to a chemical and to determine that these risks are “significant” before issuing a standard. However, the court provided only general guidance on what level of risk should be considered significant. The court noted that a reasonable person might consider a fatality risk of 1 in 1000 (10-3) to be a significant risk and a risk of one in one billion (10-9) to be insignificant. Thus, OSHA considers a lifetime risk of 1 death per 1,000 workers to represent a level of risk that is clearly significant. The court also stated that “while the Agency must support its findings that a certain level of risk exists with substantial evidence, we recognize that its determination that a particular level of risk is significant will be based largely on policy considerations.” Later Court of Appeals decisions have interpreted the Supreme Court’s “Benzene” decision to mean that OSHA must quantify or explain the risk for each substance that it seeks to regulate unless it can demonstrate that a group of substances share common properties and pose similar risks. Although this decision does not require OSHA to quantitatively estimate the risk to workers in every case, it does preclude OSHA from setting new standards without explaining how it arrives at a determination that the standard will substantially reduce a significant risk. According to OSHA officials, the other important contextual influence on OSHA risk assessment is the very nature of workplace exposures to chemicals. Generally, workplace exposures to chemicals are at higher levels than most environmental exposures to chemicals experienced by the general public. Workers are often exposed to many chemical agents at levels not much lower than those used in experimental animal studies. According to agency officials, this is one of the unique features of OSHA’s chemical risk assessments. Also, OSHA frequently has relevant human data available on current exposures, in contrast to most other agencies regulating toxic substances. OSHA currently has no formal internal risk assessment guidance. Instead, OSHA has primarily described its general risk assessment methods, as well as the rationale for specific models and assumptions selected, in the record of each risk assessment and regulatory action. One reason for this, according to agency officials, is that OSHA performs risk assessments only for its standards. Overall, they said the agency only publishes two or three proposed or final rules per year, and not all of these rules involve a chemical risk assessment. The officials also emphasized the incremental nature of advances in risk assessment methods and science, with successive assessments establishing precedents for methods that may be used for succeeding analyses. Like EPA and FDA, OSHA uses the basic NAS four-step process for risk assessment. Another fundamental source for OSHA’s (and EPA’s and FDA’s) methods was the 1985 document on chemical carcinogens produced by the Office of Science and Technology Policy. OSHA often refers to the reference sources of other entities, including other federal agencies, in both specific rulemakings and as general technical links to its on-line information on occupational risks. Despite these common elements and procedures, several features of OSHA’s approach differ from those of other federal agencies. Because OSHA does not currently have written internal guidance on its risk assessment procedures, the information in the following sections is derived primarily from an examination of OSHA’s chemical risk assessments. We also relied on secondary sources, such as Lorenz Rhomberg’s report on federal agencies’ risk assessment methods. In OSHA’s risk assessments, the hazard identification step results in a determination that an exposure to a toxic substance causes, is likely to cause, or is unlikely or unable to cause, one or more specific adverse health effects in workers. According to OSHA, this step also shows which studies have data that would allow a quantitative estimation of risk. OSHA defines hazardous and toxic substances as those chemicals present in the workplace that are capable of causing harm. In this definition, the term chemicals includes dusts, mixtures, and common materials such as paints, fuels, and solvents. OSHA currently regulates exposure to approximately 400 such substances. In the workplace environment, chemicals pose a wide range of health hazards (e.g., irritation, sensitization, carcinogenicity, and noncancer acute and chronic toxic effects) and physical hazards (e.g., ionizing and nonionizing radiation, noise, and vibration). Most of OSHA’s chemical risk assessments have addressed occupational carcinogens. In assessing potential carcinogens, OSHA may consider the formal hazard classification or ranking schemes of other entities as part of the available evidence on a particular chemical. Ultimately, though, OSHA makes its own determinations on the risk posed by particular compounds and their classification as potential occupational carcinogens. OSHA’s chemical risk assessments may also discuss noncancer hazards. For example, in the final rule on methylene chloride the agency discussed the evidence regarding central nervous system, cardiac, hepatic (liver), and reproductive toxicity, as well as carcinogenicity. Similarly, the agency’s rulemaking on 1,3-butadiene addressed adverse health effects such as developmental and reproductive toxicity and bone marrow effects in addition to the evidence on carcinogenicity. OSHA quantifies the risks of noncancer effects if it determines that there are adequate data on exposure and response for the substance of interest. OSHA officials also noted that OSHA has a hazard communication standard, which requires manufacturers, shippers, importers, and employees to inform their employees of any potential health hazard when handling these chemicals. This is usually done through container labeling and material safety data sheets. Although this standard does not address specific risks posed by individual chemicals, it is a comprehensive hazard information standard for nearly all chemicals in commerce. OSHA’s general procedures for dose-response assessment are similar to those of EPA and FDA, especially in the choice of data sets to use for quantitative assessments. However, OSHA probably uses a linear low-dose extrapolation model less often than is the case for other agencies. OSHA differs from the other federal regulatory agencies also in being less conservative in setting its target risk levels when conducting low-dose extrapolation. As previously noted, the main points of OSHA’s risk assessments for regulatory purposes are to determine whether significant risks exist and to demonstrate in a broad sense the degree to which the standard would reduce significant risk. The specific choice of where to set the standard is tempered by the statutory mandate that standards must be technologically and economically feasible. Like other agencies, OSHA states that, all things being equal, epidemiological data are preferred over data from animal studies whenever good data on human cancer risks exist. More often than some other agencies regulating exposures to toxic substances, OSHA may have relevant human data on adverse health effects available for consideration in its risk assessments. However, the rulemaking examples we reviewed also illustrate that these epidemiological data may be considered inadequate for quantitative dose-response assessment, while animal data may provide more precise and useful dose-response information. In both the methylene chloride and 1,3-butadiene dose-response assessments, for example, OSHA had both epidemiological and animal data available, but based its quantitative estimates on data from rodent models. However, OSHA did use its analysis of the epidemiological data when examining the consistency of the results derived from animal studies. When faced with the choice of several animal data sets, OSHA tends not to combine tumor sites but to choose the data set showing the highest sensitivity (i.e., most sensitive sex, species, and tumor site). The agency will, however, frequently present information from alternative data sets and analyses. The agency is likely to include benign tumors with the potential to progress to malignancy along with malignant tumors in the data set used for its quantitative assessments. OSHA cited the Office of Science and Technology Policy’s views on chemical carcinogens in support of this practice, as well as noting that other federal agencies, including EPA and FDA, have also included benign responses in their assessments. Because occupational exposures tend to be closer to the range of experimentally tested doses in animal studies, extrapolation may pose less of a challenge for OSHA than for other regulatory agencies. OSHA’s preferred model for quantitative analysis of animal cancer dose-response data and for extrapolation of these data to low doses is the “multistage model,” which is based on the biological assumption that carcinogens induce cancer through a series of independent ordered viable mutations, and that cancer develops through stages. Unlike EPA and FDA, however, OSHA tends to focus on the maximum likelihood estimate (MLE) of the fitted dose-response curve rather than on an upper bound, although the agency also provides estimates for the 95-percent upper confidence limit (UCL) of the dose-response function. This procedure generally leads to a less conservative risk estimate than the procedures used by EPA or FDA. Like EPA and FDA, OSHA generally assumes no threshold for carcinogenesis. In contrast to the other agencies, OSHA’s default dose- metric for interspecies extrapolation is body weight scaling (mg/kg/day − i.e., risks equivalent at equivalent body weights). According to OSHA, this default is used to be consistent with prior chemical risk assessments, but it also reflects a conscious policy decision that its methodology should not be overly conservative. OSHA says it may in the future move to ¾ -power scaling, as agreed to by EPA, FDA, and the Consumer Product Safety Commission some years ago. OSHA also says it is currently considering developing a different form of the multistage model, which will provide more stable MLE estimates than does the current form. OSHA also considered data from physiologically based pharmacokinetic (PBPK) models in the risk assessment examples we reviewed. PBPK models provide information on target organ dose by estimating the time distribution of a chemical or its metabolites through an exposed subject’s system. OSHA noted that PBPK modeling can be a useful tool for describing the distribution, metabolism, and elimination of a compound of interest under conditions of actual exposure and, if data are adequate, can allow extrapolation across dose levels, routes of exposure, and species. In particular, pharmacokinetic information is useful in modeling the relationship between administered doses and effective doses as a function of the exposure level. However, PBPK models are complicated and require substantial data, which may not be available for most chemicals. OSHA pointed out in the methylene chloride rule that differences in the risk estimates from alternative assessments (including those submitted by outside parties) were not generally due to the dose-response model used, but to whether the risk assessor used pharmacokinetic modeling to estimate target tissue doses and what assumptions were used in that modeling. In the methylene chloride standard, OSHA developed a set of 11 criteria to judge whether available data are adequate to permit the agency to rely on PBPK analysis in place of administered exposure levels when estimating human equivalent doses. Although it is beyond the scope of this appendix to provide a full technical explanation of the following criteria, they do illustrate the complex nature of PBPK analysis and, more generally, the types of issues that risk assessors consider in weighing the available data. 1. The predominant as well as all relevant minor metabolic pathways must be well described in several species, including humans. 2. The metabolism must be adequately modeled. 3. There must be strong empirical support for the putative mechanism of carcinogenesis. 4. The kinetics for the putative carcinogenic metabolic pathway must have been measured in test animals in vivo and in vitro and in corresponding human tissues at least in vitro.5. The putative carcinogenic metabolic pathway must contain metabolites that are plausible proximate carcinogens. 6. The contribution to carcinogenesis via other pathways must be adequately modeled or ruled out as a factor. 7. The dose surrogate in target tissues used in PBPK modeling must correlate with tumor responses experienced by test animals. 8. All biochemical parameters specific to the compound, such as blood:air partition coefficients, must have been experimentally and reproducibly measured. This must especially be true for those parameters to which the PBPK model is sensitive. 9. The model must adequately describe experimentally measured physiological and biochemical phenomena. 10. The PBPK models must have been validated with other data (including human data) that were not used to construct the models. 11. There must be sufficient data, especially data from a broadly representative sample of humans, to assess uncertainty and variability in the PBPK modeling. In the 1,3-butadiene standard, which came out after the methylene chloride standard, OSHA used these same 11 criteria to judge the adequacy of the 1,3-butadiene PBPK models for dose-response assessment. In the butadiene case, the PBPK models did not meet all of these criteria. For dose-response analyses from human cancer data, OSHA tends to use similar methodologies to the other regulatory agencies. Mostly these are simple linear models, such as relative risk models, and estimates of risk are based on the MLE. No specific approach or procedure for the assessment of noncancer effects was evident in the examples of OSHA rulemakings we reviewed. However, OSHA clearly considered a range of noncancer toxic effects in its analyses. In its rulemakings, OSHA focused on describing and analyzing a variety of relevant studies, case reports, and other information found in the scientific literature. Rhomberg noted that, in the past, OSHA used methods that were comparable to those of other agencies. However, the federal court in the AFL-CIO v. OSHA case questioned the use of standard safety factors, noting that “application of such factors without explaining the method by which they were determined… is clearly not permitted.” OSHA has produced quantitative risk estimates for reproductive and developmental effects (glycol ethers, 1993), heart disease and asthma (environmental tobacco smoke, 1994), Hepatitis B virus infection (bloodborne pathogens, 1992), tuberculosis, and kidney toxicity from cadmium exposure. OSHA is currently working on quantitative risk assessments for such adverse health effects as cardiovascular disease mortality, neural effects, asthma, and respiratory tract irritation for a number of substances. OSHA states that new methodology has been used for these assessments, but review drafts were not yet ready and we cannot comment further. Under the OSH Act, OSHA has a relatively specific and narrow focus on exposure assessment. OSHA’s primary focus is estimating the risk to workers exposed to an agent for a working lifetime. This risk is calculated in terms of a person exposed at a constant daily exposure level for 45 years at 5 days per workweek and 8 hours per workday. The goal is to set standards, in the form of permissible exposure limits (PELs), so workers would suffer no impairment during the course of their lifetime under a continuous exposure scenario. Although this is a hypothetical exposure scenario, Rhomberg observed that it is not conservative compared with the actual distribution of exposures in the workplace. He also noted that, in assessing the exposures and risks associated with the new proposed standard, OSHA assumes that the standard is applied to newly exposed workers who will work under the new standard for their entire working lives. No allowance is made for the fact that current workers may already have had exposures higher than the new standard. Despite the primary focus on long-term working lifetime exposures, there may also be some risks posed by acute, short-term exposures. Therefore, although part of OSHA’s risk assessment could focus on longer-term risks and deal with 8-hour time-weighted average (TWA) exposure, the agency’s analysis may also cover short-term exposure effects. In the methylene chloride rule, for example, OSHA set the 8-hour TWA PEL primarily to reduce the risk of employees developing cancer, while the 15-minute short- term exposure limit (STEL) was primarily designed to protect against noncancer risks, such as negative effects on the central nervous system. Finally, Rhomberg pointed out the following distinct features of occupational exposure assessments: Compared to environmental exposures, exposures in the workplace tend to be much better defined. The workplace is a confined setting within which practices and behaviors tend to be standardized. Exposure levels are often high enough to be easily measured, and many workplaces have ongoing monitoring of environmental levels of compounds. As previously noted, OSHA’s risk assessment procedures, including its default assumptions and methodological preferences, tend to be established through the precedents of prior rulemakings. In contrast to EPA and FDA, OSHA also appears to choose somewhat less conservative options, even though the agency notes that Congress and the courts have permitted and even encouraged it to consider “conservative” responses to both uncertainty and human variability. The Supreme Court’s Benzene decision, in particular, affirmed that “the Agency is free to use conservative assumptions in interpreting the data with respect to carcinogens, risking error on the side of over-protection rather than under protection.” On the other hand, OSHA explicitly stated in rulemakings that it takes various steps to be confident that its risk assessment methodology is not designed to be overly conservative (in the sense of erring on the side of overprotection). Although not intended to be comprehensive, table 8 illustrates some of the specific assumptions or methodological choices used by OSHA. It also illustrates the overt balancing of more and less conservative choices that characterizes OSHA’s approach to risk assessment. The information presented in table 8 was taken primarily from OSHA risk assessment documents but also reflects additional comments provided by OSHA officials. (GAO notes and comments appear in parentheses.) Although OSHA does not have written risk characterization policies, recent OSHA rulemakings showed that the agency emphasized (1) comprehensive characterizations of risk assessment results; (2) discussions of assumptions, limitations, and uncertainties; and (3) disclosure of the data and analytic methodologies on which the agency relied. Rhomberg noted that OSHA’s usual practice is to present the results and methodological bases of outside parties’ risk assessments for a chemical in addition to OSHA’s own assessment, and to feature several possible bases for risk calculation in its characterization of risks. In checking examples of recent OSHA rulemakings, we also observed this emphasis on showing a range of alternative assessments, both those of external parties and OSHA’s own sensitivity analyses. At least three factors help to explain this proclivity to characterize risks using different data sets, assumptions, and analytical approaches, all of which are rooted in the statutory context for OSHA standards setting. First, the agency’s statutory mandate, reinforced by the Supreme Court’s Benzene decision, is that it must demonstrate “significant” risk from workplace exposure to a chemical with “substantial evidence.” Second, the OSH Act directs OSHA to base health standards on the “best available evidence” and consider the “latest scientific data.” The third factor is that the standard selected will be limited by consideration of its technological and economic feasibility and cost effectiveness. Together, these provisions provide ample incentive to show that a compound presents a significant risk even when using a range of alternative estimates and scientific evidence. (This does not preclude the agency from focusing on one analysis as the most appropriate to support its final estimate of risk at a particular level of exposure.) The bottom line is that OSHA uses risk assessment to justify a standard by showing, in general, that significant risks exist and that reducing exposure as proposed in the agency’s standard will reduce those risks. In recent OSHA rulemakings, the agency devoted considerable effort to addressing uncertainty and variability in its risk estimates. Such efforts included performing sensitivity analyses, providing the results produced by alternative analyses and assumptions, and using techniques such as Monte Carlo and Bayesian statistical analyses. In its risk characterizations, OSHA provided both estimates of central tendency (such as the mean) and upper limits (such as the 95th percentile of a distribution). In the methylene chloride rule, OSHA noted that, in its past rulemakings, it had frequently estimated carcinogenic potencies via the MLE of the multistage model parameters. However, in this particular rule it chose for its final risk estimate to couple one measure of central tendency (the MLE of the dose- response parameters) with a somewhat conservative measure of its PBPK output (the 95th percentile of the distribution of human internal dose). OSHA concluded that this combination represented “a reasonable attempt to account for uncertainty and variability.” The chemical risk assessments conducted by the Department of Transportation’s (DOT) Research and Special Programs Administration (RSPA) focus primarily on acute (short-term) risks associated with potential accidents involving unintentional releases of hazardous materials (HAZMAT) during transportation. As such, they are very different from risk assessments that focus on chronic health risks. According to agency officials, RSPA’s assessments are done using a flexible, criteria-based system. RSPA’s HAZMAT transportation safety program begins with a hazard analysis that results in material classification. There are international standards on the transportation and labeling of dangerous goods that classify the type of hazard associated with a given substance (e.g., whether it is flammable, explosive, or toxic) and the appropriate type of packaging. Once a hazard is classified, RSPA’s analysis focuses on identifying the potential circumstances, probability, and consequences of unintentional releases of hazardous material during its transportation. DOT has written principles on how the results of its risk or safety assessments should be presented. Those principles emphasize transparency regarding the methods, data, and assumptions used for risk assessments and encourage DOT personnel to not only characterize the range and distribution of risk estimates, but also to put the risk estimates into a context understandable by the general public. According to DOT officials, chemical risks may be an element of almost any departmental risk assessment. For example, they said that one of the alternatives they explored regarding air bags involved potential exposure to chemicals used in the inflation mechanism. They also noted that Federal Aviation Administration (FAA) safety analyses include some elements related to potential exposures to the chemicals that are always found in aircraft mechanisms. However, DOT’s risk assessment most commonly focus on chemical risks when considering the transportation of hazardous materials. Unintentional releases of hazardous materials during transportation, whether due to packaging leaks or transportation accidents, may pose risks to human health and safety, the environment, and property. The potential consequences of such incidents include deaths or injuries caused by an explosion, fire, or release of gases that are toxic when inhaled. Under the Federal Hazardous Materials Transportation Act, as amended, the Secretary of Transportation has the regulatory authority to provide adequate protection against risks to life and property inherent in transporting hazardous materials in commerce. DOT officials pointed out that, because this act tends to be more general than those relevant to other agencies’ regulation of risks from chemicals, it gives DOT more flexibility to define what is “adequate” to address potential risks. The statute directs the DOT Secretary to designate a material or group or class of materials as hazardous when he or she decides that transporting the material in commerce in a particular amount and form may pose an unreasonable risk to health and safety or property. The Secretary is also directed to issue regulations for the safe transportation of such materials. The hazardous materials regulations apply to interstate, intrastate, and foreign transportation in commerce by aircraft, railcars, vessels (except most bulk carriage), and motor vehicles. The Secretary has delegated authority for implementing these hazardous materials responsibilities to various components within DOT. In particular, RSPA issues the Hazardous Materials Regulations and carries out related regulatory functions, such as issuing, renewing, modifying, and terminating exemptions from the regulations. The Superfund Amendments and Reauthorization Act of 1986 mandated that RSPA also list and regulate under the Hazardous Materials Regulations all hazardous substances designated by EPA. According to DOT officials, RSPA conducts most of the department’s risk assessments regarding the transportation of chemical hazardous materials. RSPA and the modal administrations in DOT—FAA, the United States Coast Guard, the Federal Motor Carrier Safety Administration, and the Federal Railroad Administration—share enforcement authority for hazardous materials transportation. RSPA’s Office of Hazardous Materials Safety (OHMS) has the primary responsibility for managing the risks of hazardous materials transportation within the boundaries of the United States, unless such materials are being transported via bulk marine mode (in which case the Coast Guard is responsible). Overall, OHMS notes that its Hazardous Materials Safety Program and resulting regulations (1) are risk based; (2) use data, information, and experience to define hazardous materials and manage the risk hazardous materials present in transportation; and (3) are prevention oriented. Therefore, the analysis of risk is an important element of OHMS’ responsibilities. Within OHMS, the Office of Hazardous Materials Technology (OHMT) provides scientific, engineering, radiological, and risk analysis expertise. Other entities may also be involved in conducting transportation-related chemical risk and safety assessments. For example, OHMS sponsored a quantitative threat assessment by the John A. Volpe National Transportation Systems Center (the Volpe Center), which is operated by RSPA, to determine the probability that a life-threatening incident would occur as a result of transporting hazardous materials in aircraft cargo compartments. OHMS also sponsored a multiyear research effort by the Argonne National Laboratory to characterize the risk associated with transportation of selected hazardous materials on a national basis. One of the most distinctive aspects regarding the regulation of hazardous materials transportation is the role that is played by international agreements and definitions. Criteria for classifying and labeling dangerous chemicals being transported have been internationally harmonized through the United Nations Recommendations on the Transport of Dangerous Goods. This UN classification system is internationally recognized, and RSPA has essentially adopted the UN recommendations into the domestic hazardous materials regulations. (A more detailed description of this classification system appears in the following section.) Because of the particular regulatory context in which it operates—in particular, its focus on acute (short-term) risks associated with transportation accidents—RSPA does not follow the four-step risk assessment paradigm identified by NAS and used by EPA, FDA, and OSHA. However, RSPA’s procedures do address similar generic questions, such as whether a particular material or activity poses a threat and the likelihood and consequences of potential accidents. The agency uses a criteria-based system to assess the hazards to human health and safety, property, and the environment that are associated with potential accidents during hazardous materials transportation. Chemicals are identified and classified as hazards according to a classification system in the Hazardous Materials Regulations that is largely harmonized with internationally recognized criteria. The risk analyses by RSPA then focus on assessing the potential circumstances under which exposure could occur during transportation, their causes, consequences, and probability of occurrence. The general risk assessment procedures applicable to RSPA are found within DOT-wide policies on conducting regulatory analyses and also in descriptive materials about the agency’s Hazardous Materials Safety Program. DOT included general guidelines for conducting a risk assessment as part of its broader Methods for Economic Assessment of Transportation Industry Regulations (Office of the Assistant Secretary for Policy and International Affairs, June 1982). The DOT guidelines for risk assessment are grouped under three major topics: procedural guidelines that recommend formats for presentation of risk analyses, formats for conducting risk analyses, and reporting of assumptions and limits of analyses; methodology guidelines that discuss some of the more frequently used risk methods and their applicability; and data guidelines that discuss data sources, collection and presentation of data, and raw and derived statistics. The primary focus of the DOT-wide risk assessment methodology and guidelines is on estimating the risk reduction attributable to proposed transportation safety regulations. DOT’s guidelines are intended to be applicable to risk assessment of hazardous material transport by any mode as well as assessment of other types of transportation risk. However, DOT stated that the guidelines are not intended to be a “cookbook,” or a prescriptive methodology, specifying each step in a risk assessment. DOT pointed out in the guidelines that such an approach is not desirable, because there is no single “correct” set of methods for assessing transportation risk. In addition to the DOT-wide guidelines, RSPA has produced written materials specifically on the Hazardous Materials Safety Program. These materials describe the role of risk assessment in the management of risks associated with transportation of hazardous materials and the general process used for analysis of risks, and they define risk assessment and management terms for purposes of hazardous materials safety. There also are a number of general guidance documents and reports on various aspects of hazardous materials transportation safety that provide additional insights into the identification and assessment of risks. RSPA does not apply the same NAS four-step paradigm for risk assessment as generally used by EPA, FDA, and OSHA. According to RSPA officials, the main reason for this difference between their risk assessments and most of those conducted by the other three agencies is the focus of RSPA’s assessments. RSPA’s concerns relative to hazardous materials transportation are primarily directed at short-term or acute health risks due to relatively high exposures from the unintentional release of hazardous materials. The officials said that, in contrast, the four basic steps of the NAS paradigm were intended to focus on chronic health risks due to long- term, low-level background chemical exposure. The main exceptions to this difference in general risk assessment procedures occur when other agencies’ assessments are similarly directed at risks associated with unintentional releases of chemicals. In particular, RSPA officials said that there are parallels between their risk assessment and management efforts and those of EPA and OSHA programs that are directed at chemical accidents. (See, for example, the description of the risk assessment procedures for EPA’s Chemical Emergency Preparedness and Prevention Office in app. II.) In sharp contrast to most of the risk assessment procedures we described for EPA, FDA, and OSHA, toxicity is simply one of several potentially dangerous properties of a hazardous material of concern to RSPA. Where toxicity is a factor, RSPA’s risk assessments tend to center on exposure levels that pose an immediate health hazard. This focus is reflected in the types of chemical toxicity information that RSPA helps develop. For example, RSPA actively participates on a National Advisory Committee developing Acute Exposure Guideline Levels for chemicals. In specific cases where chronic toxicity or environmental values play a role in RSPA analyses, agency officials said that they rely on what EPA, FDA, OSHA, and other agencies have developed. Despite such differences, RSPA’s risk assessments address similar basic issues as the chemical risk assessments of the other three agencies (e.g., whether a particular material or activity poses a threat and the severity and likelihood of potential exposures). The DOT-wide risk assessment guidelines primarily discuss “consequence” and “probability” analyses, but also describe a preliminary step for defining scenarios of concern (essentially part of a hazard identification step) and a final step to summarize results and conclusions from the preceding analyses (essentially a risk characterization). The Hazardous Materials Safety Program materials outline a similar risk assessment process that progresses from the identification of hazards to an evaluation of incident causes, frequencies, and consequences. RSPA begins with a hazard analysis that results in material classification. In RSPA risk assessments, hazardous materials are chemical, radioactive, or infectious substances or articles containing hazardous materials that can pose a threat to public safety or the environment during transport. Hazardous materials pose this threat through chemical, physical, nuclear, or infectious properties that can make them dangerous to transport workers or the public. For example, RSPA is concerned with the potential for the unintentional release of hazardous materials to lead to adverse outcomes such as explosions, fires, or severely enhanced fires that can cause deaths, injuries, or property damage. The agency is also concerned with the potential toxic, corrosive, or infectious effects of released materials on humans and the environment. According to DOT officials, their hazard classification approach is a criteria-based system that provides them considerable flexibility in their analysis and regulation of potential hazards. They noted that their criteria are geared more toward the hazard a material may pose in an accident scenario than toward a chronic health risk. The Director of the Office of Hazardous Materials Technology characterized this hazard classification approach as a more open system than used in other agencies (e.g., EPA). He explained that, in this system, any new chemical or substance that fits within RSPA’s matrix of hazard criteria falls under the hazardous materials transportation regulations. Hazard identification for these assessments is based largely on international agreements regarding transportation of dangerous goods. Of particular importance, there is an internationally recognized system for the classification, identification, and ranking of all types of hazardous materials that was created by the UN Committee of Experts on the Transport of Dangerous Goods. This system is revised biennially and published as the “United Nations Recommendations on the Transport of Dangerous Goods.” Under this classification system, all hazardous materials are divided into nine general classes according to physical, chemical, and nuclear properties. The system also specifies subdivisions and packing group designations (that indicate a relative level of hazard) for some classes. (See table 9.) These are broad categories that may include large numbers of diverse materials. For example, the air cargo threat assessment noted that there were 535 different flammable liquid entries in the hazardous materials table and more than 700 toxic material entries. Because there are hazardous materials with multiple dangerous properties, these classes and subdivisions are not mutually exclusive. Compressed or liquefied gases, for example, also may be toxic or flammable. The UN Committee of Experts created more than 3,400 possible identification numbers, proper shipping descriptions, and hazard classes to be assigned to various hazardous material compounds, mixtures, solutions, and devices. There are also generic “not otherwise specified” identification numbers and shipping descriptions that allow the material to be classed by its defined properties. RSPA uses essentially the same framework as the UN recommendations for the hazard classes and packing requirements of its Hazardous Materials Regulations. Table 10 shows the hazard classification system in the regulations. The classification system in these regulations can be very detailed for some subjects. For example, the regulations specifically identify the types of toxicity tests and data that should be used to determine whether something would be classified as poisonous material (class 6, division 6.1). The regulations define poisonous material as a material, other than a gas, which is known to be so toxic to humans as to afford a hazard to health during transportation, or which, in the absence of adequate data on human toxicity, is presumed to be toxic to humans because it falls within one of several specified categories for oral, dermal, or inhalation toxicity when tested on laboratory animals; or is an irritating material, with properties similar to tear gas, which causes extreme irritation, especially in confined spaces. Of particular relevance to comparisons with chemical risk assessments of other agencies, the regulations contain precise definitions of what constitutes oral, dermal, or inhalation toxicity for purposes of the Hazardous Materials Regulations. For example, one threshold for inhalation toxicity is defined as a dust or mist with an LC for acute toxicity on inhalation of not more than 10 mg per liter of air. (A different definition applies to the inhalation toxicity of a vapor.) The regulations also address other testing requirements and conversion factors. The regulations state that, whenever possible, animal test data that have been reported in the chemical literature should be used. The Hazardous Materials Regulations include an extensive Hazardous Material Table with itemized information about specific hazardous materials. The number of HAZMAT table entries corresponds closely with the number created by the UN. RSPA officials noted that the number of specific chemicals covered by the regulations is many multiples of the more than 3,400 entries, though, because of the generic nature of the “not otherwise specified” descriptions. The table includes, but is not limited to, information such as the material’s description, hazard class or division, identification number, packing group, label codes, limits to the quantity of the material permitted in a single package, and special provisions concerning its transportation. Allyl chloride, for example, is identified as a class 3 material (flammable and combustible liquid), is in packing group I (indicating great danger), is forbidden on passenger aircraft and rail, and has two special provisions regarding the tanks used for transporting this substance. A material that meets the definition of more than one hazard class or division, but is not specifically listed in the table, is to be classed according to the highest applicable hazard class or division according to a descending order of hazard. For example, the division of poisonous gases is ranked as a greater hazard than the division of flammable gases. According to OHMS, the process of classifying a material in accordance with these hazard classes and packing groups is itself a form of hazard analysis. Another important feature of this process is that the regulations require the shipper to communicate the material’s hazards through the use of the hazard class, packing group, and proper shipping name on the shipping paper and the use of labels on packages and placards on the transport vehicle. Therefore, the shipping paper, labels, and placards communicate the most significant findings of the shipper’s hazard analysis to other parties. This communication aspect is particularly important in emergency response situations if an accident occurs during transport of these materials. The classification system, by itself, is not sufficient for all risk assessment purposes. For example, RSPA and OHMS still need to identify potential scenarios in which transportation accidents, spills, and leaks could occur. As evidenced by the air cargo threat assessment, such scenarios include the possibility that hazardous materials might be transported in a manner not in compliance with current regulations. Also, as emphasized in a November 2000 report for RSPA, the hazardous materials transport system is highly heterogeneous and complex. The report pointed out that this system involves not only many different materials posing a variety of hazards (as reflected in the classification system outlined in table 9) but also: a chain of events involving multiple players having different roles in the process of moving hazardous materials (such as shippers, carriers, packaging manufacturers, freight forwarders, and receivers of shipments) and the possibility of multiple handoffs of a material from one party to another during transport; several different modes of transport (principally highway, rail, waterway, and air), with some shipments that switch from one mode to another during transit; and multiple possible routes of transit. All of these complex features might need to be considered in identifying hazard scenarios. However, in identifying (and analyzing) potential hazard scenarios, RSPA and OHMS benefit from being able to use data, information, and experience on hazardous materials transportation incidents. For example, risk assessors can review data from sources such as the DOT Hazardous Materials Information System (HMIS) that catalogues transportation-related incidents that involve a release of hazardous materials. An OHMS official pointed out that the agency also uses fairly sophisticated models in analyzing various scenarios. He said that such models were used, for example, to provide a scientific basis for determining evacuation zones when developing the 2000 Emergency Response Guidebook. In contrast to the other agencies covered in this report, determining the toxicity of a particular chemical (dose-response assessment) is not a central focus of risk assessment in RSPA and OHMS. Toxicity is only one of many risk factors under consideration (and should already be addressed through the hazard classification system). Instead, the primary focus of analysis is on the potential for hazardous materials to (1) spill or leak while in transit or (2) cause, contribute to, or multiply the consequences of a transportation-related accident. Analysis regarding the first item is primarily concerned with the packaging and containers used for transportation of hazardous materials, while analysis of the second item also considers other elements, such as the modes and routes of transportation for these materials. As the DOT risk assessment guidelines state, “Hazardous materials accidents generally are transportation accidents in which hazardous materials happen to be present.” DOT documents use a variety of terms to describe and refer to the analysis of hazards or risks of concern to the department and its component offices (e.g., hazard analysis, risk analysis, threat assessment). However, the core of the analysis remains the same—an evaluation of the causes, consequences, and likelihood of transportation incidents involving hazardous materials. The general model in DOT’s guidelines for risk assessment of transportation activities or operations partitions the analysis of risk into two main parts: prediction of possible consequences in terms of loss from accidents (or, more broadly, incidents) while transporting materials in a specified way; and estimation of the probabilities or frequencies of occurrence of the consequences of such accidents (e.g., the likelihood or expected number of accidents occurring that would result in the above loss). For purposes of estimating the risk reduction attributable to transportation safety regulations, the expected loss or “risk” is computed by summing the products of each possible loss multiplied by its probability. (In other words, risk in this context is the probability-weighted average loss.) According to DOT definitions, consequence analysis is the evaluation of the severity and magnitude of impacts associated with the occurrence of postulated accident scenarios. For purposes of analysis, the DOT guidelines recommend partitioning this evaluation into three segments: (1) initiating events (i.e., causes of an accident that can result in loss), (2) effects (i.e., the possible mechanisms by which an initiating event might result in injury or damage); and (3) consequences (i.e., the loss of life, injuries, property damage, or other losses expected from the effects). The evaluation of consequences reflects many factors, including the characteristics of the agent involved, the type of packaging or container used, the amount of material being transported, and the particular modes and routes of transportation (which also affect the extent of potential exposure by the public and environment). DOT defines probability analysis as the evaluation of the likelihood of individual accident scenarios and outcomes of adverse events. The likelihood of a particular hazard might be expressed either as a frequency or probability. The analyses of consequences and probabilities are based on a variety of data sources, including, to the extent possible, “experience” data. Among the sources of information identified in OHMS materials to address consequences and probabilities are: data from the Hazardous Materials Information System (HMIS); commodity flow surveys; chemical substance manufacturing, use, and transportation studies; special analyses (such as the National Transportation Risk Analysis and Air Cargo reports mentioned earlier in this appendix, as well as shipment counts); and public comments on rulemakings. Such sources can provide valuable information for risk assessment in general and the statistical analysis of hazardous material transportation incidents in particular. The HMIS database provides a good illustration of the types of baseline data available. This database provides incident counts according to time, transportation phase (i.e., en route from origin to destination, loading or unloading, and temporary storage), and transportation mode (e.g., air, highway, and rail). For each incident, the database includes information on the hazardous materials involved, including the name of the chemical shipped, container type and capacity, number of containers shipped, number of containers that fail, and the amount of material released. The database also contains information concerning the occurrence of fire, explosion, water immersion, environmental damage, and the numbers of deaths, major and minor injuries, and persons evacuated. However, because DOT’s risk assessments are often used to estimate the “risk impact” of proposed regulations, the DOT guidelines caution that lack of directly applicable experience data for assessing the impacts is probably the rule rather than the exception. This is because the controls provided by the proposed regulations constitute changes from present conditions, and experience data, by definition, relate to present conditions. The guidelines also emphasize that, to evaluate the impact on risk of a proposed regulation or its alternatives, it is necessary to perform a “with and without” type of assessment, considering the potential effects on any or all of the elements of the risk model. As was the case with the classification of hazardous materials and packaging, the agency may employ criteria-based classifications of the consequences of potential adverse events and their likelihood of occurrence. A 1995 guidance document illustrates how consequence and frequency categories were combined into a “risk assessment matrix” to assist decision makers in their risk management decisions. (See table 11 below.) As was the case with the three other agencies covered by our review, some of the chemical risk assessments produced by or for DOT have begun using more sophisticated methods and models. For example, the Director of OHMT characterized the National Transportation Risk Assessment study prepared for OHMS by the Argonne National Laboratory as using state-of- the-art risk assessment techniques to characterize risks associated with the transportation of selected hazardous materials on a national basis. The consequence assessments in this study employed the Chemical Accident Statistical Risk Assessment Model that predicts distributions of hazard zones (i.e., areas in which a threshold chemical concentration is exceeded) resulting from hazardous material release. That model, in turn, reflected the input of other physical models on subjects such as hazardous material release rates of toxic-by-inhalation materials. The Director noted that his office believed this study to be the first comprehensive application of these techniques in this arena for this purpose. Although generally very structured and criteria based, RSPA’s risk assessments for hazardous materials transportation also use assumptions. DOT-wide guidance documents provide a general framework for the use of assumptions. In general, DOT guidance recognizes that assumptions may be made when data are lacking or uncertain, or when it is necessary to limit the scope of an analysis. However, the assumptions, while not empirically verifiable, are supposed to be reasonable, logically credible, and supportable in comparison with alternative assumptions. The DOT risk assessment methodology guidance specifically states that every assessment should include a list of the major assumptions, conditions, and limitations of the risk analysis, as well as the reasons why the assumptions were made. As noted earlier in this appendix, RSPA has access to a number of sources of directly relevant data and statistics on the transportation of hazardous materials. However, there are limitations to these systems and data. For example, the authors of the national transportation risk assessment for selected hazardous materials cautioned that the information in DOT’s data systems was not always sufficient or detailed enough to directly support a quantitative risk assessment. For example, incidents involving most hazardous materials (other than gasoline-truck accidents) typically occur too infrequently to provide statistically reliable data for directly projecting future risks. In his introduction to the study, the Director of OHMT also stated that the quantitative results of this study should be used with caution. Specifically, he noted, “While the model of the hazardous materials transportation system employed in this study is sophisticated, the accuracy of the data used in the model is often less precise. Estimates, assumptions, and aggregate numbers have been used in many cases.” Some of the topics that might require assumptions or choices during a hazardous materials transportation assessment include: the probability of the release of a hazardous material, depending on the nature of the accident, type of material being transported, and the containers used; the amount of material released in an accident, depending again on factors such as the severity of the accident, nature of the material, and type of container, but also depending on assumptions about the size of holes in containers; commodity flows of the materials (e.g., modes of transportation used, classes of rail tracks, types of highways, routing through urban and rural areas and related population density); the dispersion of released hazardous material, including assumptions about climate and meteorological conditions and the type of surface that a liquid might “pool” on if spilled; the probability of a fire or explosion being ignited (both as a consequence of a release or as a cause of a release); and the extent to which humans potentially exposed to released materials would be sheltered or protected (both within a given mode of transportation, such as an aircraft, or external to the carrier). In addition to these topics, RSPA sometimes uses a factor to adjust data in the HMIS database to address underreporting. However, RSPA officials noted that, for certain purposes, it might be inappropriate to extrapolate information in the database. Although assumptions may be needed in RSPA assessments, RSPA officials said that they do not have default assumptions for their risk assessments. According to the officials, assumptions must be developed and described as part of each risk assessment and are specific to the risk assessment. RSPA officials also noted that they do not use “safety factors” in risk assessments, but rather base their assessments on expected levels or ranges of performance. Therefore, unlike in the appendices on EPA, FDA, and OSHA, we have not included a table in this DOT appendix to identify major default choices, the reasons for their selection, when they would be used in the process, and their likely effects on risk assessment results. However, with regard to some of the case-specific assumptions or choices we identified during our review, we did observe that DOT’s assessments typically discussed the reasons for particular choices (as with the other agencies, often citing an interpretation of related research studies). In some instances, information was also provided on the likely effect (e.g., that a particular value represented a conservative estimate or an upper limit) or level of uncertainty (e.g., that a particular parameter value might be high by a factor of 3 to 10 times the results from another study) associated with choices made by the analysts. DOT has explicit, written principles regarding how the results of its risk or safety assessments should be presented. The department’s policies emphasize the principle of transparency and encourage agency personnel to not only characterize the range and distribution of risk assessment estimates, but also to put risk estimates into a context understandable by the general public. For example, DOT’s “risk assessment principles” state that the risk assessment should: make available to the public data and analytic methodology on which the agency relied in order to permit interested entities to replicate and comment on the agency’s assessment; state explicitly the scientific basis for the significant assumptions, models, and inferences underlying the risk assessment, and explain the rationale for these judgments and their influence on the risk assessment; provide the range and distribution of risks for both the full population at risk and for highly exposed or sensitive subpopulations, and encompass all appropriate risks, such as acute and chronic risks, and cancer and noncancer risks, to health, safety, and the environment; place the nature and magnitude of risks being analyzed in context, including appropriate comparisons with other risks that are regulated by the agency as well as risks that are familiar to, and routinely encountered by, the general public, taking into account, for example, public attitudes with respect to voluntary versus involuntary risks, well- understood versus newly discovered risks, and reversible versus irreversible risks; and use peer review where there are issues with respect to which there is significant scientific dispute to ensure that the highest professional standards are maintained. The DOT risk assessment guidelines also state that every risk analysis should present information on (1) quantitative estimates of risk (over the entire range of plausible values of the developed variables, and with a “base case” loss to provide a point of reference); (2) insights gained from performing the analysis into the factors that most affect risk assessment results; and (3) assumptions, conditions, and limitations of the analysis. With regard to the third item, the guidelines specifically state that reasons why the assumptions were made, and why the limitations of the analysis do not significantly impact the risk estimate, should be provided. The guidelines also suggest two methods for treating uncertainty in a risk analysis: sensitivity analysis (DOT’s preferred method for treating and reporting the impact of uncertainty), which should be conducted for each scenario in a risk analysis; and bounding analysis involving error propagation (requiring that each model parameter be expressed as a distribution, or at least a variance, to trace the implication of uncertainty for the risk estimate). The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. 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. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 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. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: [email protected] 1-800-424-5454 (automated answering system) | As used in public health and environmental regulations, risk assessment is the systematic, scientific description of potential harmful effects of exposures to hazardous substances or situations. It is a complex but valuable set of tools for federal regulatory agencies to identify issues of potential concern, select regulatory options, and estimate the range of a forthcoming regulation's benefits. However, given the significant yet controversial nature of risk assessments, it is important that policymakers understand how they are conducted, the extent to which risk estimates produced by different agencies and programs are comparable, and the reasons for differences in agencies' risk assessment approaches and results. GAO studied the human health and safety risk assessment procedures of the Environmental Protection Agency, the Food and Drug Administration, the Occupational Safety and Health Administration, and the Department of Transportation's Research and Special Programs Administration. This report describes (1) the agencies' chemical risk assessment activities, (2) the agencies primary procedures for conducting risk assessments, (3) major assumptions or methodological choices in their risk assessment procedures, and (4) the agencies' procedures or policies for characterizing the results of risk assessments. |
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Multiyear contracting is a special authority for acquiring more than one year’s requirements —including weapon systems— under a single contract award without having to exercise an option for each program year after the first. It is an exception to the full-funding policy that requires the entire procurement cost of a weapon or piece of equipment to be funded in the year in which the item is procured. Under a multiyear procurement, DOD can contract for up to 5 years of quantities, although funding is still appropriated on an annual basis. Multiyear procurement can potentially save money and improve the defense industrial base by permitting the more efficient use of a contractor’s resources. Multiyear contracts are expected to achieve lower unit costs compared to annual contracts through one or more of the following sources: (1) purchase of parts and materials in economic order quantities (EOQ), (2) improved production processes and efficiencies, (3) better utilized industrial facilities, (4) limited engineering changes due to design stability during the multiyear period, and (5) cost avoidance by reducing the burden of placing and administering annual contracts. Multiyear procurement also offers opportunities to enhance the industrial base by providing defense contractors a longer and more stable time horizon for planning and investing in production and by attracting subcontractors, vendors, and suppliers. However, multiyear procurement also entails certain risks that must be balanced against potential benefits, such as the increased costs to the government should the multiyear contract be changed or canceled and decreased annual budget flexibility for the program and across DOD’s portfolio of weapon systems. Additionally, multiyear contracts often require greater budgetary authority in the earlier years of the procurement to economically buy parts and materials for multiple years of production than under a series of annual buys. Although DOD had been entering into multiyear contracts on a limited basis prior to the 1980s, the Department of Defense Authorization Act, 1982, codified the authority for DOD to procure on a multiyear basis major weapon systems that meet certain criteria. Since that time, DOD has annually submitted various weapon systems as multiyear procurement candidates for congressional authorization. Over the past 25 years, Congress has authorized the use of multiyear procurement for approximately 140 acquisition programs, including some systems approved more than once. Section 2306b of title 10, United States Code, governs the use of multiyear contracting authority for the procurement of property by DOD. It specifies six statutory requirements, or criteria, that an acquisition program is expected to meet in order to be considered for multiyear contracting. These criteria are listed in table 1 below. Expected costs to be avoided should be sufficient to offset the added risk the government assumes with a multiyear contract in the form of a cancellation liability, decreased flexibility in future funding decisions and any erroneous assumptions in the estimates. Immature, volatile programs and those at risk of future changes should not be proposed as MYP candidates because such instability puts the savings attributed to efficiencies of production and EOQ buying at risk. The multiyear approach should be reserved for established production operations and low risk technology. In submitting candidates for multiyear authorization by the Congress, the heads of the respective military departments vouch that each program complies with the criteria in table 1. Additionally, the Secretary of Defense is required to certify to Congress that the current future years defense program fully funds the support costs associated with the multiyear contract and that planned production will not be less than the minimum economic rates given the existing tooling and facilities. Multiyear contracts historically account for a substantial share of the defense procurement dollar. Figure 1 shows that DOD has budgeted about $10 million annually for multiyear contracts since fiscal year 2000, accounting for more than 13 percent of DOD’s total budget for procurement over this time frame. Over the period, the general trend shows an increase in total defense procurement, but multiyear obligations holding fairly steady, resulting in a downward trend of the percentage obligated on multiyear contracts. For 2007, the large increase in total defense procurement caused a drop below 12 percent obligated on multiyear. The statutory criteria for a multiyear procurement require that a candidate program make realistic cost estimates, expect to achieve substantial savings, and provide adequate evidence that the program is stable in terms of funding, requirements, and design. Some recent programs of questionable stability and savings submitted to the Congress for multiyear authorization raise concerns about DOD’s management and controls for justifying multiyear candidates. We found that DOD does not provide sufficient guidance and direction to ensure a rigorous, disciplined process supported by adequate empirical data for preparing and reviewing multiyear candidates. This increases the risk of poor outcomes and inappropriate, unstable programs approved for multiyear procurement. We reviewed DOD’s multiyear justification data submitted in recent defense budgets and, in particular, examined two newly approved programs—the Air Force’s F-22A fighter and the joint V-22 tilt rotor aircraft. The F-22A acquisition has had a turbulent history with a lengthy development period, major cost increases and quantity decreases, changes in mission, and disagreements within DOD about the total number required. The Air Force’s submission of the F-22A for multiyear procurement generated considerable debate over its merits and whether it met the legal and business conditions conducive to success. We also examined the V-22 tilt rotor aircraft multiyear proposal, another acquisition program with a turbulent history and continuing challenges. The latest restructure of the F-22A acquisition occurred in December 2005. DOD extended production 2 years, added four aircraft and $1 billion in procurement funds, and proposed to buy the final 60 aircraft under two separate 3-year multiyear contracts for the airframes and engines. Multiyear costs and savings estimates were not completed in time for submission with the fiscal year 2007 defense budget. The Air Force later submitted the completed MYP justification package with estimated total multiyear costs of $8.7 billion and projected savings of $235 million, or 2.6 percent, compared to estimated annual contracts. Multiyear proponents cited the projected total dollar savings as substantial and believed there was little risk that the remaining 60 aircraft would not be procured. On the other hand, multiyear critics argued that the low percent of savings predicted, the short time frame for accruing savings, and the program’s relatively unstable past made it an inappropriate multiyear candidate. In prior work, we determined that the restructured F-22A program was underfunded and questioned whether the proposed multiyear strategy met statutory criteria. We identified concerns about savings, funding, requirements, and design stability that we believed needed to be addressed before the multiyear plan could be justified. For example, the Air Force did not fully fund the multiyear proposal and asked for incremental funding. Also, a major development program to add new capabilities and improve reliability of the F-22A has begun; these efforts could result in future design modifications which may require retrofit onto aircraft purchased under the multiyear contract. We also noted that having only a 3-year period of performance at the end of production limited the ability to achieve savings normally expected under multiyear authority such as EOQ buys and cost reduction initiatives to improve manufacturing efficiency. To provide for EOQ buys, Congress subsequently added $210 million to the F-22A advance procurement budget. In authorizing a multiyear contract for the F-22A, Congress specified certain conditions to be met and prohibited the use of incremental funding. The Secretary of Defense was required to certify that all statutory requirements have been met, including the determination that the contract will result in substantial savings of the total anticipated costs of carrying out the program through annual contracts. DOD submitted its certifications to the Congress in June 2007 and subsequently awarded the F-22A multiyear contract in August 2007. For the fiscal year 2009 budget cycle, the Air Force continues to propose buying more aircraft than the 183 in the current defense plan. DOD submitted the V-22 Osprey for multiyear procurement authorization in the fiscal year 2007 President’s Budget. Officials proposed a 5-year multiyear contract to acquire 185 aircraft for about $10.1 billion. Multiyear savings were projected at $435 million, or 4.2 percent, compared to the estimated costs for annual contracts. Ongoing changes in quantity, funding, design, and concerns about production raise questions about the stability of this program and its appropriateness for multiyear contracting. Subsequent to congressional authorization for multiyear contracting, DOD reduced its planned procurements quantity from 185 to 167 due to service funding limitations with DOD cutting the proposed procurement request for fiscal year 2009 by $234 million. Development and test efforts continue with a number of design changes under review to address serious safety, reliability, and performance problems. The program office has aggressively prioritized these issues and is making improvements to the V-22 platform by funding engineering design changes for the correction of deficiencies. One such deficiency is leaking hydraulic fluid causing engine compartment fires. Design changes to fix this deficiency are being studied and implemented. In comments on a draft of this report the program office stated it is confident that these engineering design changes will address the hydraulic leak problems. To date, DOD has procured 111 aircraft in 11 years. Production aircraft continue to be conditionally accepted with deviations and waivers. Engineering investigations to fix these issues are not complete as the program continues to work to minimize these deviations and waivers. Even so, the planned production rate for the multiyear period is twice the current fiscal year 2007 production rate of 17 V-22s. This increase, coupled with design and production problems, raises concerns over the contractor’s ability to meet such a demand. DOD reviews and assessments of the V-22 production ramp up have endorsed the increase with known risks that require continued management. Officials told us that the supplier base should be able to meet the elevated production rate, but expressed concerns about the availability of spare parts and the challenges in managing manufacturing and installation at three different and dispersed facilities. The statutory criteria in section 2306b of title 10, United States Code, establish a framework for limiting multiyear contracts to very stable programs that appropriately balance risks with anticipated savings. DOD’s process and practices for justifying multiyear candidates, however, provide little specific guidance on the meaning and application of the criteria, a process that allows for subjective interpretations about how well a particular program meets the criteria. Cost and savings estimating techniques and data also vary considerably and inadequate records are kept to document decisions and supporting reasons. As a result, costs, savings, and evidence supporting stability is not consistently prepared, reviewed, and documented. The statutory criteria are general in tone and qualitative by nature to provide application over a wide range of programs. The regulations DOD uses to implement the criteria provide contract policies and establish a process for developing and justifying multiyear candidates. Each candidate program prepares a budget justification package, normally for inclusion with the annual defense budget submission that provides funding requirements and estimated cost savings expected under a multiyear contract compared to the estimated costs for a series of annual contracts. The justification package also includes short statements about how programs are believed to meet each of the six statutory criteria. Weapon system acquisition program officials prepare the package for subsequent reviews by military service acquisition commands, service headquarters offices, and OSD offices responsible for program policy and budget oversight. Approved candidates are submitted to the Congress for authorization. We discussed DOD’s justification process, multiyear contracting policies, and management practices with OSD and military service officials at each organizational level. We collected historical and budget data on approved multiyear programs since fiscal year 1982 and tracked more recent multiyear candidates through the budget process. We specifically examined nine major programs representing each military department: three had completed multiyear contracts, two were beginning multiyear contracts, and four programs were just recently authorized by the Congress. Several programs have been approved for more than one multiyear contract and, collectively, these programs accounted for 17 of the 59 approvals granted since 1996. We found that DOD provides little in the way of supplemental guidance to operationalize the statutory criteria by amplifying terms such as “reasonable,” “substantial,” and “stable” and quantifying where possible to provide more objectivity and rigor to the multiyear review process. Guidance for the most part restates the statutory criteria and establishes formats for submitting budget justification materials, but does not provide much elucidation for interpreting and applying the criteria and establishing internal evidence standards for demonstrating criteria are met. From our review of justification packages and our discussions with DOD officials responsible for generating and reviewing multiyear justification packages, we determined that reviewers interpret and apply criteria differently and that the methods and data used to compute contract costs and savings and providing evidence to document program stability vary in quality and sophistication. For example, officials we talked to at all levels of the review process had different ideas and perspectives on what constituted substantial savings when applying the criterion. An official in the Navy, for example, expected programs to project at least 10 percent savings, but would consider candidates under that level. Some Army officials wanted to see 10 percent savings or hundreds of millions of dollars. An OSD official applied a “rule of thumb” of 4 to 5 percent. He said that programs under that amount would typically be more closely evaluated to ensure they were viable, but that programs over that amount would generally receive a less detailed check of reasonableness and to ensure paperwork requirements were met. An Air Force official told us that a 5 percent savings level should be considered the floor for a genuinely viable candidate for multiyear and a 10 percent savings level achievable, although he cautioned that recent statutory changes to eligible cancellation ceiling costs will likely have a negative impact on future multiyear savings. Further, review of the justification packages for the F-22A and the V-22, both submitted in the same fiscal year for approval, indicated differences in how the design stability criterion was applied. Initial operational capability, an important milestone for stability, had been declared 2 years prior to requesting multiyear authority on the F-22A, while initial operational capabilities for both variants of the V-22 are not scheduled to be achieved until after multiyear approval was granted, at least 2 years later for the Navy’s variant. Comparing multiyear savings and judging reasonableness of the estimates is complicated because the techniques and data used to estimate cost savings can vary substantially in form, sophistication, and detail. For example, for its first multiyear contract proposal on the C-17A, the Air Force simply used the prime contractor’s offer to save 5.5 percent, a figure that was considered a “management challenge” the contractor believed it could meet. We found other instances where it was unclear what data was used in formulating the savings estimates. For example, the Army’s budget justifications for the Bradley Fighting Vehicle and Abrams Tank estimated savings at 5 percent and 10 percent, respectively, and provided very sketchy details to document how the savings estimates were derived and compliance with the stability criteria. On the other hand, some analyses can be very involved, provide a range of estimated savings, and use independent third parties to validate data. For example, the Navy’s F-18E/F cost estimates and methodologies were independently verified by OSD’s Cost Analysis Improvement Group. For the F-22A multiyear proposal, two defense research centers developed contract costs and savings estimates. Several very different methodologies were employed, including cost improvement curves based on historical actual production costs, production cost estimate models for single year contracts less reductions for expected savings, and summation of savings initiatives from the prime and subcontractors. These studies produced a wide range of potential savings, from $235 million to $643 million. Also, cost and savings estimates in general may be subject to biases and other factors that impact their fidelity and reliability. Our extensive past body of work on DOD’s major acquisitions suggests that to gain approval and continued funding for a weapon system, the acquisition environment encourages programs to submit overoptimistic estimates about a weapon system’s readiness for production and to underestimate its costs. Systems therefore appear more affordable from an investment perspective and can fit within forecasts of available funds. These circumstances invariably lead to acquisition programs costing substantially more than originally estimated. Furthermore, prior reports have discussed the importance of using present value analysis to account for the time value of money when evaluating and comparing costs of alternative annual and multiyear contracts. The timing of government expenditures is expected to differ with a multiyear contract expected to have relatively more up-front costs (to fund EOQ for example) and lower costs in the outyears compared to a series of annual contracts. Although the justification packages are required to have a present value analysis of the savings estimates, according to an OSD official and a defense research study, the cost savings estimates in then-year dollars are the primary estimates used in making cost decisions. Our review of the justification packages appear to confirm this because the section of the multiyear exhibit highlighting the benefit to the government contained only the then-year dollar estimate rather than the present value estimate. Through our discussions with officials and inspection of records, we determined that DOD’s review process for the multiyear justification budget packages does not adequately capture important information and events to document decisions and help ensure that consistent and reliable determinations are made regarding multiyear criteria. Once approved, OSD officials stated few records are kept on multiyear programs regarding how they determined whether multiyear candidates met the six statutory criteria. According to OSD and service officials, much of the discussion on a program proposed for multiyear should have already taken place during regular executive-level reviews of major weapon systems and been agreed upon before the multiyear justification package is reviewed for submission in the budget request. Review of the justification package then essentially becomes a paperwork formality rarely involving any surprises. Also, we found programs can be proposed “out of cycle” with the President’s Budget submission—as in the case of the F-22A, and may not be included in the budget details that could affect the review path the multiyear candidate takes to obtain approval. Without maintaining records that document decisions and the data supporting them, it is difficult to ensure the quality and comprehensiveness of stakeholder reviews based on the criteria, fidelity of the data used, and supporting rationales for decisions. Finally, officials at every level of the multiyear justification process—from program offices, through higher headquarters, and on to primary OSD action offices—indicated that they recently were appointed to their current positions or the person responsible during the multiyear justification process was no longer in that position. We believe this contributed to “knowledge gaps,” historical record-keeping deficiencies, and differences in interpretation and application of multiyear decision criteria. Turnover implies loss of experience and corporate knowledge; in this environment, improved and more definitive guidance and retention of comprehensive historical records is even more important. Implementing the statutory criteria requires realistic estimates of multiyear and annual contract costs. This requirement provides fidelity to savings projections and allows for accurate estimates of funding requirements over the life of the multiyear contract. We reviewed cost performance and results on completed multiyear contracts for the Air Force’s C-17A Globemaster transport, the Navy’s F/A-18E/F Super Hornet fighter, and the Army’s Apache Longbow helicopter. Although the precise impact of multiyear contracting is difficult to determine, our analysis shows that these programs—presumably approved based on their demonstrated stability—experienced substantial changes during contract execution. These changes significantly increased unit costs and drove up total funding requirements much beyond the estimates submitted to Congress in the budget justification materials. Each was also impacted by contract provisions and changes in business conditions. We found that unit cost growth on these programs ranged from 10 to 30 percent more than projected by the budget justification data. Table 2 shows the growth in unit and total contract costs. We also found that, for two of the three programs, actual multiyear contract costs exceeded the original estimates for annual contract costs. The third program, the F/A- 18E/F, came in below annual estimates, but also bought fewer systems than planned. This reduction in quantity would have also likely decreased annual costs had that alternative been selected. Substantial cost increases for completed multiyear contracts on the three programs meant that Congress had to eventually provide considerably more funding than originally budgeted. We do not know how cost growth affected the level of savings achieved, if any, because we do not know how an alternative series of annual contracts would have fared. In comments on a draft of this report, DOD officials stressed that cost growth due to labor and material price escalation under a multiyear contract would likely have also occurred under an alternative series of annual contracts. The final MYP contract values in table 3 also include price increases resulting from engineering design changes made to the baseline weapon system. Although these factors may limit the ability to make inferences about the level of savings achieved, a case could be made that multiyear savings and costs did not materialize as presented in the multiyear justification materials. As discussed earlier, our past body work suggests that defense acquisition programs are prone to underestimating costs and overstating readiness. While this tendency would apply to annual as well as multiyear contracts, it is arguably more problematic for multiyear contracts because of the government’s increased exposure to risk over multiple years. DOD officials agreed with us that multiyear contracting should be held to a high standard because of its special requirements, funding commitments, and risks. We also collected information on multiyear contract provisions for the three programs with completed multiyear contracts and for the recently awarded F-22A contract. Each of these programs awarded a fixed-price contract for the multiyear procurement, but they were not always firm- fixed-price contracts, which typically entail the least risk to the government. The multiyear contracts contained standard provisions that provided flexibility to increase or decrease costs based on inflation, labor rate changes, and/or material cost fluctuations. The multiyear contracts also included provisions for early cancellation, quantity variations, and/or design changes. In some cases, the government waived provisions for cost and pricing data, which according to officials decreased the government’s insight. Figure 2 below shows the frequency of the various contract provisions in our case studies. The three case studies provide insight into multiyear contracting expectations and realities and the internal and external factors that affected actual execution. Each case raises some questions about the accuracy of cost and savings estimates used to justify multiyear procurement and the degree to which requirements, design, and funding were stable. The estimated savings for the first C-17A Globemaster multiyear contract was simply a percentage amount submitted by the contractor. For the second multiyear contract, Air Force officials assumed the same percent of savings and added additional savings based on the use of a controversial funding strategy. This strategy relied on incremental funding, advanced buys of parts, and large potential cancellation liability to maintain a production schedule of 15 aircraft per year even though all of these aircraft had not been fully funded. The unfunded liability to the Air Force had the contract been canceled eventually grew to $1.5 billion. Concerned that this incremental funding strategy violated DOD’s full- funding policy and could potentially violate the Anti-Deficiency Act, Congress increased C-17A procurement funding a total of $745 million in fiscal years 2003 and 2005 to fully fund all aircraft. In annual DOD appropriations acts, Congress also has prohibited incremental funding of multiyear contracts. In addition, the costs for both C-17A multiyear contracts were affected by economic price adjustments. On the first multiyear, overhead costs were significantly increased as a result of a merger between two major defense contractors. The Air Force subsequently paid $150 million to cover cost increases resulting from the merger and another $50 million to remove the clause from the contract. By the end of the multiyear contract, unit costs had increased 15 percent. The multiyear justification materials submitted to Congress supported a plan to buy 80 aircraft at an average cost of $179 million; instead the Air Force eventually paid about $207 million per aircraft. During the second multiyear contract, the contractor made large contributions to its pension fund, which triggered the price adjustment clause and resulted in a potential cost increase of over $530 million. The Air Force is in the process of restructuring the contract to reduce this amount. The Air Force also awarded two multiyear contracts for the C-17A engine, the F117. These procurements appear to have been successful with demonstrated stability during the multiyear period and price breaks based on the multiyear contract. The F117 engine is a commercially available engine with a stable design and manufacturing process. There were no engineering or design changes; no advanced procurement or EOQ requirements; and no cancellation ceilings associated with either contract. The only potential cost risk was the economic price adjustment clause, but officials stated that the actual adjustments were not exclusively in the contractor’s favor. According to the program office, the first multiyear contract resulted in a savings of 10 percent, more than it had originally expected. Savings from the second multiyear contract are consistent with the original estimate. For its first F/A-18E/F multiyear contract, the Navy did not award a firm- fixed-price contract because the program was early in the production phase and there were still ongoing design development efforts on the airframe. During the contract period, the economic price adjustment clause resulted in the Navy paying an additional $378 million because of labor rate and material cost increases. The first multiyear contract also included a variation-in-quantity clause that permitted an upward or downward adjustment of six aircraft per year. Annual quantities and the specific mix of buys between the two models changed more than once during the multiyear period. By the end of the multiyear contract, the number of aircraft procured had dropped from 222 to 210 aircraft and the average unit costs had increased by 10 percent, compared to the budget estimates. In a May 2000 report, we had questioned whether the Navy was ready to enter into its first multiyear contract for full-rate production. Deficiencies identified during operational testing had not been corrected, and to avoid costly retrofitting and redesign, we believed that corrections should be made and tested before entering into the contract. The Navy proposed buying another 210 Super Hornets on a second multiyear contract, but later changed the requirement to procure 154 Super Hornets and 56 of the new E/A-18G Growler, an electronic attack variant still in product development. The Navy’s total requirement for the Super Hornet had been reduced, and the new Growler was needed to replace aging EA-6B aircraft in the electronic attack mission. The follow- on multiyear also included a variation-in-quantity clause, but this time it only covered upward adjustments. Multiyear costs and funding were further impacted by the economic price adjustment clauses. As in the C-17A’s case, the F/A-18E/F multiyear contract was affected by the contractor’s large pension fund contribution. The Navy estimated that it could have been obligated to pay over $1 billion, which is nearly the same as the amount of cost savings originally estimated to justify the multiyear contract award. However, the Navy renegotiated the terms of the clause and restructured the contract to bring the price adjustment down to about $152 million. The Army’s Longbow Apache helicopter experienced significant cost increases during both its multiyear procurements. Army officials stated that increases were largely because of aircraft modifications and unplanned work. These modifications included a voice data recorder and an improved rotor blade assembly that would enhance operational safety. Contract costs were also increased by additional unplanned work. Program officials explained that it is very difficult to predict the condition of fielded aircraft when they return to be upgraded or remanufactured. Along with normal wear and tear, many operational aircraft were returned with extensive corrosion and battle damage; others had been cannibalized for parts. Remanufacturing these aircraft required significantly more effort and funding than originally planned. By the end of the first multiyear contract, the Apache’s average unit cost had increased by 30 percent; at the end of the second multiyear, these costs had increased by 25 percent. While it may be difficult to predict unusual wear and tear on a system and it is common to incorporate new modifications over time, it is especially problematic to roll these costs into the multiyear contract that had been assumed stable and that had been justified based on initial cost estimates without these new add-ons. OSD cost analysts are studying this issue to determine the proper accounting for modifications under multiyear contracting. The amount and percentage of savings expected from a multiyear contract compared to a series of estimated annual contracts is the most visible and perhaps the most critical criteria in the eyes of many stakeholders. The savings requirement in definition and application has evolved over the years. A threshold level of 10 percent savings emphasized during the 1980s was eliminated and replaced with a nonquantifiable requirement for “substantial savings” since fiscal year 1991, allowing wide flexibility in its interpretation. Although a direct causal link is not demonstrated, our analysis of multiyear programs approved by Congress shows that estimated savings were on average higher before the substantial savings requirement than after. Other factors—lower quantities of modern systems being procured, stricter termination liability allowances, and contraction in the defense industrial base—may also contribute to decreased estimated savings for current and future systems by lessening the benefits from large quantity buys and efficient production rates, key attributes of multiyear contracts. When Congress codified the authority for multiyear procurement contracting in December 1981, there was no specific savings criterion in the law that candidate programs had to meet. However, the impetus behind multiyear was provided by DOD studies at the time predicting savings averaging 10 to 20 percent. The 10 percent figure became a savings benchmark for decision-makers in the early 1980s when judging the merits of candidate programs. In the late 1980s, this benchmark became a threshold requirement for many candidate programs as Congress began stipulating a 10 to 12 percent savings amount in annual defense authorization acts for selected programs. In November 1989, Congress decided to codify the 10 percent savings requirement and other conditions and limitations previously imposed on an annual basis. However, a year later, that threshold was struck from the U.S. Code, and the requirement for “substantial savings” was substituted after DOD had argued that a rigid threshold limited the potential for savings on stable, low risk programs projecting lesser savings amounts. This substantial savings requirement has remained unchanged since November 1990, with specific savings requirements stipulated in annual legislation for two candidate programs approved by Congress during this time. Figure 3 illustrates the evolution of the savings requirement. Our analysis of estimated savings for approved multiyear programs determined that the average savings level trended lower after the substantial savings criterion was adopted. Although programs have been approved during both eras over a wide range of savings below and above 10 percent, the change in the law provided decision makers the flexibility to propose and approve candidate programs since fiscal year 1991 with lower savings estimates on average compared to the 1980s. As previously discussed, an unofficial rule of thumb for savings normally expected is now down to 4 to 5 percent. Figure 4 illustrates the range of savings and general trend as the savings requirement evolved. It suggests that a shift did occur since the change to substantial savings in 1991. A larger proportion of multiyear programs with estimated savings of less than 10 percent were approved after 1991. On the other hand, candidate programs approved prior to 1991 show a larger proportion of savings of 10 percent or more. This finding is supported by a defense consultant study that calculated estimated savings averaged 13 percent for candidate programs from 1982 to 1989. In addition to the revised savings requirement, other factors may also be impacting the level of savings for current and future multiyear programs: Smaller quantities procured. The higher cost for modern weapon systems and changes in required force structure has resulted in generally smaller procurement quantities for new systems compared to predecessor systems. Smaller quantities of systems bought under multiyear contracts may not provide the same opportunity to achieve savings through such mechanisms as EOQ buys of parts and materials. Past multiyears, on the F-16 Falcon aircraft and Black Hawk helicopters, for example, procured hundreds of systems. In contrast, the more recent multiyear procurement of the F/A-18E/F Super Hornet procured less than half the F-16 quantity. Analysis of the data on MYP candidate programs that we collected and summarized in table 3 below showed that the median multiyear procurement quantity for aircraft MYP candidate programs declined over 40 percent from the 1980s to the present era with a concurrent decline in average savings. With fewer aircraft procured during the multiyear period, savings from economic buys and optimized production is typically smaller. Cancellation liability changes. If a multiyear contract is cancelled, the government is liable for reimbursing the contractor for its incurred costs up to a negotiated cancellation ceiling typically in the contract. Until recently, DOD has been able to include both recurring and nonrecurring costs. Multiyear contracts awarded during the past 25 years have included a cancellation liability, but the cancellation ceiling for the C-17A multiyear contract awarded in 2002 was considered very large with a potential liability of more than $1.5 billion. Some members of Congress were concerned by its size and concluded that this large liability inappropriately committed the government to a production schedule for which funding had not been appropriated. As a result, for the past several years Congress has limited the cancellation liability for multiyear contracts to nonrecurring costs only. Some DOD officials expect this change to limit savings on current and future multiyear contracts as contractors choose not to bear financial risks previously borne by the government. A major source of multiyear savings is the EOQ buys, and without including these kinds of recurring costs in the cancellation ceiling, fewer contractors may buy supplies and materials up front in bulk to limit their risks should the multiyear contract be cancelled early. Declining competition. Some DOD and defense research center officials believe that the consolidation and contraction of the defense industry and resulting decline in competition and contraction among vendors and suppliers, make it harder to wring savings from EOQ buys. For example, an OSD official stated that because the F-22A was originally designed well over a decade ago, it is now experiencing diminishing manufacturing sources on many components as well as parts and equipment obsolescence. Similarly, a defense research center official believes that diminishing manufacturing sources negatively impacted the multiyear savings potential for the F-22A. DOD does not perform post contract assessments of completed multiyear contracts to validate actual results and determine cost effectiveness of its investments. Some prior studies, including GAO work, provide some limited, but inconclusive insights into multiyear results and benefits. OSD and the military services do not maintain adequate, comprehensive records on historical and current multiyear contracts that could facilitate better tracking and provide perspective for future multiyear efforts. DOD does not have a formal process for assessing the cost and performance of completed multiyear contracts. According to DOD officials, once a program is approved for multiyear, they do not track subsequent performance nor validate actual results against expectations established in the budget justification submissions. Also, they do not have an official method to capture and share lessons learned with other programs considering multiyear contracts that could improve prospects for successful outcomes. However, we did find that individual program offices may make efforts to ascertain benefits and learn lessons that can be applied to future multiyear submissions, but it appears that these efforts are isolated. Based on prior multiyear experiences, F/A-18E/F Super Hornet program officials decided to require cost and pricing data to better inform cost estimates for their next multiyear application. Also, they based expected savings on cost reduction initiatives rather than EOQ buys because they believed these initiatives had a better return on investment. Similarly, the results of our case studies discussed earlier demonstrate that assessing actual results can glean valuable information about contract costs and performance that can be used to improve future multiyear outcomes. Some attempts to assess historical multiyear performance have been made, but validating actual savings is elusive. According to DOD and defense research center officials as well as the studies they conducted, calculating the actual cost savings from the use of a multiyear contract and comparing results to original expectations is very problematic for several reasons: (1) multiyear cost and other program data is unavailable; (2) lack of comparable data on costs of annual contracts; and (3) original assumptions change from the justification package, such as design modifications and variations in buy quantities, labor, and material rates. Recent studies by two defense research centers attempted to gain a historical perspective on actual multiyear savings achieved for past contracts in order to provide context as to the relative level of expected savings for the F-22A multiyear proposal. In reports, both centers noted that the government does not collect or save data needed to do a detailed analysis and that, once programs are approved and implemented, important assumptions on which original savings estimates were based often changed. In particular, since a series of annual contracts are not executed for the same procurement once a multiyear strategy has been adopted, comparisons of actual multiyear costs can only be compared to hypothetical estimates of annual contracts. Further, changes that occur in a multiyear contract environment can also occur in an annual contract environment, and the exact effect on the actual costs for the annual contracts is unknown. In reviewing the literature, one center noted that it found “very few examples of serious and methodologically credible attempts to validate claimed savings and savings percentages after the fact once programs had been completed,” and none that produced, in the center’s opinion, definitive findings. In the case of the F/A-18E/F program, researchers from one center felt they had more data available on this multiyear contract than for others, and they attempted to validate actual savings. They concluded that while the available data supported savings in the neighborhood of original estimates, a definitive answer would require a more detailed analysis of EOQ data and cost reduction initiatives. Similarly, in our 1988 report on the first F-16 multiyear procurement, we concluded that savings were likely achieved from EOQ buys in the order of magnitude expected, but we were unable to make definitive conclusions about total savings achieved. Undergirding attempts to track and assess multiyear performance is the quality and sufficiency of data. As discussed earlier in this report, we found that DOD at all organizational levels does not keep adequate records on multiyear programs to document stakeholder reviews and the empirical evidence used to justify multiyear contracts. OSD Comptroller officials told us that, while they are the final authority on approving multiyear candidates and the ultimate owner of the review process, they do not track multiyear packages through the approval process and after the final decision has been made to submit it to the Congress. DOD has no comprehensive, central information system that records the status of multiyear candidates in-process, candidates that have been approved or disapproved, detailed information on how multiyear criteria were applied, or information on specific criteria contained in the final justification package. DOD is not required to, nor does it maintain a central database of historical or ongoing multiyear contracts. In response to our inquiries, the OSD office ultimately responsible for the multiyear procurement review process was unable to provide us the justification packages for over half of the programs approved by Congress since 1992, including very recent submissions. To obtain more complete and accurate data that could be used to track performance and conduct trend analyses, information must be compiled from many different sources, including budgets, program office files, contractor studies, and contracting databases. For example, our efforts to identify and track multiyear contract information contained in two major federal databases were only partially successful. Some valuable multiyear contract information was readily available through these sources. However, the type of data stored and storage format—as well as issues pertaining to reliability, consistency, and comparability— limited their current usefulness in tracking and evaluating multiyear contracts. However, with some improvements particularly with reliability, these databases could support future studies. The statutory criteria for approving the multiyear procurement of major DOD weapon systems clearly establish requirements to limit multiyear authorization to stable, low risk programs with realistic cost estimates and reasonable expectation for savings. To move forward otherwise is to accept significant risks with little chance of reward. However, DOD does not have an adequate process with controls in place to ensure multiyear candidates meet all the criteria and are supported by sufficient empirical evidence. Inconsistent application of criteria, questionable cost and savings estimates, and inadequate documentation increase potential for approving inappropriate, unstable multiyear programs and incurring costly, poor outcomes when plans go awry and conditions change. Improving guidance, ensuring decisions are informed by knowledge, and maintaining better records are critical needs, as well as important tools for retaining corporate memory given frequent turnover of personnel at all levels of the justification review process. It is not possible to calculate accurately the cost to taxpayers that has resulted from these conditions, but the lack of a disciplined and rigorous process that demands knowledge about stability and costs provides potential for significant waste of taxpayer dollars. Furthermore, DOD does not track and evaluate actual performance on multiyear contracts for major DOD weapon systems. Once a contract is awarded for a multiyear program, little effort is made to collect data and assess actual results to compare performance against original expectations and to validate savings and other benefits achieved. Assessing results could provide valuable insights and lessons learned on prior experience and identify opportunities to improve future multiyear procurements. Not having a clear picture of actual performance further emphasizes the criticality of getting it right up front by ensuring only appropriate programs go to Congress for approval. Therefore, despite a long history and substantial funding for major DOD weapons system multiyear contracts, DOD does not know whether it has gotten a reasonable return on its investments for the extra risks incurred. Some concerns noted in this report, such as the practice of understating costs and overselling benefits, apply also to annual contracts, but the standards should be higher for multiyear contracts because of the larger up-front investments required and the government’s exposure to risk should the program fail or be substantially changed. Strengthening both the front end of the process—identifying and justifying good candidates— and the back end—assessing results and gleaning lessons learned from completed contracts—can help ensure costs and risks are adequately balanced for new multiyear programs and improve future outcomes. Underpinning both ends, it is important to capture and make available essential data on multiyear decisions and subsequent performance that can be readily accessed by stakeholders and prospective users of multiyear procurement authority. To improve the outcomes of the multiyear justification reviews of major DOD weapon systems, the Secretary of Defense should direct appropriate offices within the Under Secretary of Defense (USD) (Comptroller) and USD (Acquisition, Technology & Logistics) to: (1) improve and expand guidance provided to military services to better define multiyear decision criteria for major DOD weapon systems and to facilitate more consistent, objective, and knowledge-based evaluations of these multiyear candidates within DOD; (2) establish a process for third party validation of the costs and savings data submitted for such candidate programs; and (3) implement a central database for maintaining historical records and for effectively monitoring and tracking major DOD weapon system multiyear procurements, to include documenting the specific decisions made by stakeholders and their rationales for decisions. To provide lessons learned for informing and improving future major DOD weapon system multiyear candidate programs and to ensure DOD is earning a sufficient return on its investments in multiyear contracts for major DOD weapon systems, the Secretary of Defense should direct that the responsible military service, in conjunction with appropriate elements within OSD, conduct after-action assessments at the conclusion of all multiyear contracts used to procure major DOD weapon systems to determine their effectiveness in achieving predicted benefits while managing associated risks. These assessments should identify major deviations, if any, between the unit costs predicted in the multiyear justification package and the unit costs actually incurred. The assessments should also substantiate—to the extent practicable—savings achieved and identify reasons and causes contributing to overall performance results and attemp to isolate those issues peculiar to the multiyear contract from those that would likely have also affected annual contracts if a multiyear strategy had not been employed. Internally, DOD should use the results of these assessments to provide lessons learned to both industry and the government that can help inform and lead to better and more supportable decisions on future multiyear candidate programs. DOD provided us with written comments on a draft of this report. The comments appear in appendix II. DOD also separately provided technical comments which we reviewed and incorporated as appropriate. In written comments, DOD concurred with our two recommendations to improve guidance and to implement a central database for maintaining records and tracking multiyear programs. DOD partially concurred with the other two recommendations. DOD partially concurred with our recommendation to establish a process for third party validation of the costs and savings data submitted for candidate programs. In its comments, DOD stated that independent third party validations of cost and savings are done on selected programs and, in developing new guidance in response to our first recommendation, would consider whether the benefits of requiring validation on all programs warrant the delays and costs of validation. Our review of five new proposals and six approved multiyear contracts found only one such instance, and our discussions with service and OSD officials show that third party validations are rare. We believe that independent third party validations would result in more accurate and comprehensive cost and savings information critical to congressional and DOD decision making on multiyear candidates. Our review identified inconsistent practices in preparing and reviewing multiyear proposals and varying degrees of quality and completeness in the initial cost and savings estimates made by the weapon system program offices. An independent third party check would help ensure that appropriate multiyear candidates are submitted to the Congress for approval. DOD also partially concurred with our recommendation that after-action assessments be conducted to provide lessons learned for informing and improving future multiyear candidate programs. In its comments, DOD agreed that after-action reports may be of value for certain multiyear programs, but questioned the value for all programs because (1) the extensive time before the assessment results are known and can be applied; and (2) the difficulty in determining actual savings. The intent of the recommendation is to learn lessons that can be applied to strengthen future multiyear proposals and improve their prospects for success. This in formulation is not time-bounded as DOD has contracted for studies that drew useful lessons from programs many years earlier. Collecting and distributing data on lessons learned would provide a continuing database of knowledge for future programs. Furthermore, while we recognize difficulties and constraints in calculating actual savings, this does not preclude the department from making good faith efforts that can provide valuable, albeit imperfect information. Also, after-action assessments include more than savings calculations. As pointed out in the report, one program assessed itself and identified important contractual features and other factors that it used to improve subsequent multiyear proposals. We note that the practice of doing after-action reports is widespread in the department and used for many different kinds of activities, including military contingency operations and logistics functions, and that these efforts provide planners and decision makers with critical lessons learned for applying to and improving future actions. We are sending copies of this report to the Secretary of Defense; and the Secretaries of the Air Force, Army, and Navy; and the Director of the Office of Management and Budget. We will provide copies to others on request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. Key contributors to this report were Bruce Fairbairn, Assistant Director; Noah Bleicher; Matthew Drerup; Mary Jo Lewnard; Rae Ann Sapp; and Bob Swierczek. If you have any questions about this report or need additional information, please call me at (202) 512-4841 ([email protected]). Contact points for the offices of Congressional Relations and Public Affairs are located on the last page of this report. Our review was limited to major DOD weapon systems that have received congressional approval in annual defense authorization and/or appropriations acts to award a multiyear contract and meet the statutory requirements identified in 10 U.S.C. § 2306b. Work was performed at the Offices of the Secretary of Defense and the three military service headquarters (Navy, Army, and Air Force), in Washington, D.C.; Naval Air Systems Command, in Patuxent River, Maryland; Aviation Missile Command, in Huntsville, Alabama; Aeronautical Systems Center, at Wright-Patterson Air Force Base, Ohio; Institute of Defense Analysis (IDA), Alexandria, Virginia; and RAND National Defense Research Institute, Arlington, Virginia. To evaluate DOD’s multiyear review process, we compiled a list of the all the candidate programs approved by Congress to use a multiyear contract by examining DOD authorization and appropriations acts going back to fiscal year 1982 when the statutory language in 10 U.S.C § 2306b was first enacted. We then reviewed DOD multiyear justification packages submitted to Congress in recent defense budgets, identified statutory criteria authorizing the use of multiyear procurement, and considered regulatory policies and procedures used within the Services and at OSD to prepare and evaluate multiyear justification packages. We discussed with officials at acquisition program offices and at higher command review levels how they interpreted and applied the statutory criteria and guidance to evaluate the appropriateness and feasibility of multiyear candidates. We reviewed DOD and congressional actions on recent multiyear candidates and examined specifically two major programs recently approved for multiyear contracting—the F-22 Raptor and V-22 Osprey—to illustrate how this process works and address some questions raised about the appropriateness of these candidates and data used in the justification packages. For these systems, we extensively drew upon GAO’s work in prior and ongoing engagements. We conducted limited case studies for selected multiyear aircraft contracts to assess outcomes and the internal and external events affecting performance. Because our sample of DOD aircraft multiyear contracts was not randomly selected, we cannot project our findings to other programs. These case studies included three major DOD weapon systems—C-17A Globemaster, F/A-18E/F Super Hornet, and the Apache Longbow Helicopter. These aircraft programs have fully executed at least one multiyear contract in the recent past and also have ongoing follow-on multiyear contracts. We reviewed the multiyear proposal packages submitted to Congress, annual budget information, Selected Acquisition Reports, contract file documentation, and information in DOD contract databases for multiyear contracts awarded by these programs. We calculated unit cost changes and identified key programmatic and environmental changes impacting the execution of the multiyear programs and compared these to the original projections in their multiyear justification packages. To identify the characteristics of multiyear contracts and how they affect the costs, risks, and savings for selected multiyear aircraft contracts, we reviewed contract file documentation and information on the DOD DD 350 Individual Contract Action Report (ICAR) database and the Federal Procurement Data System-Next Generation (FPDS-NG). As part of the case study approach, we reviewed the types of contracts, contract clauses, and other contract modifications to determine how they affected the unit costs under a multiyear contract. Further, we discussed the multiyear contracts included in our limited case study approach and the F-22A program’s August 2007 multiyear contract award with program officials to help us assess the effects that specific contract provisions have on unit costs during contract execution. To research the legislative history underlying the adoption and subsequent repeal of the 10-percent savings requirement and the current requirement that defense multiyear procurement contracts achieve “substantial savings,” we reviewed the evolution of multiyear savings criteria in early defense initiatives, the fiscal year 1982 codification, subsequent amendments, and the savings criteria contained in annual authorization and appropriations acts subsequent to the granting of multiyear authority. To make comparisons in average and median levels of estimated savings on multiyear candidate programs as the criteria for awarding a multiyear contract changed, we reviewed savings estimates in the budget justification packages for multiyear candidates submitted to Congress since 1982 and past GAO reviews of multiyear candidates conducted in the 1980s. We were able to obtain savings estimates for approximately 94 of the 141 approvals granted by Congress to award a multiyear contract. To determine the extent to which DOD tracks performance and validates savings and other benefits actually achieved by multiyear contracts, we evaluated the kind and extent of cost data and program information maintained at the services and OSD, and how they use these data to determine whether predicted savings and other benefits were actually achieved by multiyear contracting. We also reviewed DOD policies and guidance for estimating and validating multiyear savings, and discussed with DOD officials practices used to estimate and monitor multiyear savings. We discussed with DOD officials record-keeping and management oversight requirements and reasons why they do not have a formal process for assessing multiyear results. We reviewed two recent major studies done by defense research firms that summarized estimated savings on historical programs and performed case studies on selected programs to identify key events and practices that affected ultimate performance. We discussed with IDA and RAND officials their cost estimating techniques and assumptions used in their F-22A multiyear studies that supported the planned multiyear contract. We reviewed and summarized their attempts to validate savings and other benefits from prior multiyear programs. We also reviewed prior GAO work on selected weapon systems and the results of our work during the 1980s when Congress regularly asked us to review DOD’s multiyear candidates. We conducted this performance audit from June 2007 to February 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. | DOD spends $10 billion annually on multiyear procurement (MYP) contracts for weapons systems. MYPs may save money through more efficient relationships with suppliers and producers, but may also suffer losses if cancelled and can limit future budget flexibility. Recently, Congress has been concerned about DOD's management of the process and savings realized by MYPs. GAO was asked to evaluate DOD's review process for MYP candidates; examine MYP program outcomes; identify the impact of changes to MYP savings threshold guidance, and determine how much DOD validates MYP performance. To do this, GAO reviewed statutes and other guidance, held discussions with relevant officials, examined DOD budget justifications and contracts, and conducted limited case studies. DOD's process for justifying multiyear programs leaves questions about the appropriateness of some approved MYPs and the cost effectiveness of investments made for the risks assumed, as indicated by recent submissions for the F-22A and V-22. Although the law has clear requirements for stable, low risk programs with realistic cost and savings estimates, lack of guidance and a rigorous process is not achieving this. It is difficult to precisely determine the impact of multiyear contracting on procurement costs. GAO studies of three recent MYPs identified unit cost growth ranging from 10 to 30 percent compared to original estimates, due to changes in labor and material costs, requirements and funding, and other factors. In some cases, actual MYP costs were higher than estimates for annual contracts. Although annual contracts also have unit cost growth, it is arguably more problematic for MYP's because of the up-front investments and the government's exposure to risk over multiple years. MYP savings were on average higher before changes in law called for "substantial savings" rather than a specific quantitative standard. Other factors--lower quantities of modern systems procured, stricter cancellation liability allowances, and contraction in the defense industrial base--may have also impacted savings by lessening opportunities for more efficient purchases, a key attribute of MYPs. DOD does not track multiyear results against original expectations and makes little effort to validate if actual savings were achieved. GAO's case studies indicate that evaluating actual MYP results provides valuable information on the veracity of original estimates in the justification packages, the impacts on costs and risks from internal and external events, and lessons learned that can be used to improve future multiyear candidates and savings opportunities. |
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One of the functions of the Reserve Banks is to fulfill the coin demand of the nation’s depository institutions—which include commercial banks, savings and loan associations, and credit unions—by distributing coin inventories stored in the Reserve Banks’ vaults and at coin terminals, including circulated coins and new coins ordered from the U.S. Mint. The Reserve Banks have 30 offices that provide coins to depository institutions and are responsible for an area within 1 of the Federal Reserve’s 12 districts. Figure 1 shows a map of the Reserve Bank districts (districts) and the locations of the offices that provide coin services. As figure 2 shows, the Reserve Banks hold and distribute coins from their vaults and contract with armored carrier companies to hold the rest of the Reserve Banks’ inventory. As of December 31, 2007, 179 coin terminals held about 61 percent of the Reserve Banks’ total coin inventory, in terms of volume. According to Reserve Bank officials, the arrangement between the Reserve Banks and the armored carrier companies that operate these coin terminals began because both parties agreed that having more distribution points would be more cost-efficient from a societal perspective. Federal Reserve officials and coin terminal operators said that, historically, this has been a “win- win” arrangement because it has eliminated the need for armored carriers to haul coins to and from the Reserve Banks before distributing them to the depository institutions. The armored carrier companies store Reserve Banks’ coin inventory in their coin terminals at no charge. The agreement between the two entities (1) defines a limit on the value of inventory that a particular coin operator can hold for a Reserve Bank at a particular terminal and (2) requires the coin terminal operator to maintain liability insurance for loss of or damage to the Reserve Bank’s coin inventory. The coin terminal agreements can be canceled with prior notice and without cause at any time by either party. The armored carrier companies also maintain depository institutions’ coin inventories in the coin terminals at no charge; however, the companies earn revenue from the coin processing, wrapping, and transportation services that they provide to the depository institutions. In addition to the coins held in their inventory, the Reserve Banks purchase new coins at face value from the U.S. Mint to fulfill depository institutions’ demand. To develop an annual production schedule and fulfill the Reserve Banks’ coin orders, the U.S. Mint uses national coin demand forecasting models to determine how many new coins to produce. U.S. Mint facilities in Philadelphia and Denver then produce the new coins, and the Mint ships the new coins to the Reserve Bank offices or coin terminals. Appendix II shows trends in the U.S. Mint’s coin production data for fiscal years 2002 through 2007. The U.S. Mint also may transfer circulated coins between Reserve Bank offices. We discuss this matter in more detail later in the report. Depository institutions order coins from the Reserve Banks to meet retailers’ and the public’s demand. These orders include requests for new commemorative circulating coins from congressionally enacted programs, such as the 50 State Quarters and the Presidential $1 Coins Programs, as well as for other coins for day-to-day transactional use. Reserve Bank offices fill these orders with new and circulated coins held in the offices’ vaults and at the coin terminals. Depository institutions contract with armored carriers to process and deliver the coins to them; then depository institutions provide coins to retailers and the general public. Depository institutions also return coins to the Reserve Banks when they have more coins in their inventory than they want to hold to meet demand. For example, when the public’s demand for coins falls after the holiday season and the depository institutions have accumulated more coins than they want to hold for day-to-day transactions, the depository institutions deposit the extra coins with the Reserve Banks. According to two nationwide banking associations, the depository institutions have an incentive to limit the number of coins they hold in inventory because the institutions do not earn interest on coins held in their own vaults. The Reserve Banks’ process for ordering and distributing coins uses orders of new coins from the U.S. Mint, the Reserve Bank offices’ coin inventories, and transfers of circulated coins between Reserve Bank offices to meet estimates of depository institutions’ demand. These estimates are based on coin demand forecasts generated by a forecasting tool. The offices prepare requests for coins on the basis of these estimates and on their own assessments of demand and send the requests to CPO for review. CPO then looks for opportunities to transfer circulated coins between Reserve Bank offices to help fulfill the offices’ requests. CPO reduces the offices’ requests for coins by the amounts of the transfers, consolidates the adjusted requests, and monthly sends a final consolidated order for new coins to the U.S. Mint. According to Federal Reserve officials, forecasting coin demand is not an exact science and requires judgment. Therefore, the Reserve Bank offices use both a data-driven process and professional judgment to develop coin orders. Specifically, the offices use an econometric inventory management and forecasting (IMF) tool that the Federal Reserve developed in consultation with the U.S. Mint to forecast coin demand at the Reserve Bank office level and to recommend coin orders for each office. The IMF tool analyzes historical data on coin payments to and receipts from depository institutions and is maintained by the Economic Research Group at the Federal Reserve Bank of San Francisco. According to documentation for the IMF tool, the tool is able to predict the seasonal fluctuations in coin demand fairly accurately because these fluctuations tend to be fairly regular. For example, the demand for coin rises in November in response to the public’s demand for coins over the holidays and then decreases in January. While the timing of these fluctuations is fairly regular, their magnitude is more difficult to project, according to Federal Reserve officials. In addition, the IMF tool was developed about the same time that the commemorative circulating coin programs were beginning. Therefore, according to Reserve Bank officials, the tool projects coin demand for economic transactions, but the tool does not estimate demand for collecting commemorative circulating coins. Hence, judgment is involved in estimating both the magnitude of seasonal fluctuations in coin demand and the demand for collecting commemorative circulating coins. As shown in figure 3, currently, the 30 Reserve Bank offices receive data from the IMF tool each month as a starting point for preparing their coin orders. Most Reserve Bank officials told us that they start the monthly coin ordering process by examining the orders recommended by the IMF tool or their current inventory levels for each denomination. Reserve Bank officials emphasized that although the IMF tool’s analysis is a helpful starting point for the coin ordering process, assessments of local market factors are important because the tool’s analysis is based on historical payments and receipts data and may not consider unique factors affecting future coin demand. Coin demand is affected by factors specific to particular districts. For example, five districts noted that local casinos were moving to coinless slot machines, which would reduce coin demand in and coin orders for these districts. Conversely, several districts increase their coin orders to account for collectors’ demand when new coins are released for commemorative circulating coin programs, such as the 50 State Quarters Program. Reserve Bank officials noted that changes in the U.S. Postal Service’s and local transit authorities’ use of coins also affect coin demand. For example, in one district, the local transit authority retrofitted its ticket machines to dispense dollar coins, which resulted in greater demand for dollar coins in that district. Most of the districts cited coin recycling companies, such as Coinstar, as a factor affecting the number of coins returned by the depository institutions and the number of new coins to be ordered from the U.S. Mint. Coin recycling machines found in grocery stores, retail stores, and some depository institutions have made it easier now than it was in the past for the public to trade in coins for currency or some form of credit, such as a gift card. In some districts, coin recycling has returned large volumes of coins to circulation and to the Reserve Banks. Reserve Bank officials said that when more coins are returned than are ordered by the depository institutions, they reduce their orders of new coins from the U.S. Mint. According to data from one major coin recycling company, the value of coins returned to circulation through recycling grew from approximately $1 billion in 2000 to $2.6 billion in 2006. To obtain information on local market factors, officials at the Reserve Bank offices talk with coin terminal operators and sometimes with officials at depository institutions in their districts. The coin terminal operators provide the Reserve Bank offices with daily inventory data on the Reserve Bank coins held by the terminals. The coin terminal operators hold inventory for both the depository institutions and the Reserve Banks and may provide the Reserve Banks with insight into changes in the depository institutions’ coin demand. Some Reserve Bank officials also obtain information on coin demand through conversations with depository institution officials, usually in the course of discussing currency issues. During these conversations, the depository institutions can provide advance notice of any circumstances that may change coin demand, such as upcoming festivals or state fairs, which typically would increase their demand for coins. The conversations with coin terminal operators and depository institutions are important because officials at the Reserve Bank offices can obtain information on potential coin requests or deposits back with the Reserve Banks, which could affect the Reserve Banks’ inventory levels or orders for new coins. According to the Reserve Bank officials with whom we spoke, before the offices finalize and send their orders to CPO, they look for opportunities to transfer coins within their district to meet projected demand. For example, one Reserve Bank office may want additional coins, while another office may have more coins than it wants to hold to meet short-term demand. The Reserve Bank office works with the coin terminal operators to move the coins as needed. According to Reserve Bank and coin terminal officials, as part of their normal business, the coin terminal operators transport coins to and from the Reserve Banks and are able to absorb the costs of the transfers by combining them with previously scheduled pickups and deliveries for their depository institution customers. In 2001, CPO began coordinating coin distribution from a national perspective on behalf of the Reserve Banks to enhance coordination with the U.S. Mint and look for opportunities to redistribute coin inventories. Historically, the Reserve Banks individually developed and submitted their own coin orders to the U.S. Mint without any insight into coin inventories in other districts or consideration of whether coins could be transferred from other districts to meet demand, rather than ordering new coins. In 1999, shortages of pennies occurred in some regions of the country because some depository institutions were hoarding pennies and the U.S. Mint could not fulfill the Reserve Banks’ increased orders for pennies. During this time, the Reserve Banks moved coins from one district to another to satisfy demand but did not have a centralized coordination process in place to facilitate these transfers, according to Federal Reserve officials. Following this experience, the Reserve Bank of San Francisco assumed responsibility for coordinating coin operations at Reserve Banks through its CPO. CPO is now the Reserve Banks’ primary liaison with the U.S. Mint and is responsible for finalizing and submitting a monthly consolidated coin order for the Reserve Banks. According to Federal Reserve officials, CPO has focused on achieving system efficiencies by implementing more centralized coin management strategies, including enhancing coordination with the U.S. Mint; improving distribution channels by increasing the number of Reserve Bank coin terminals; and redistributing national inventories of coins, as appropriate, to meet demand, thereby reducing the need for new coins from the Mint. With the exception of new releases of commemorative circulating coins, CPO determines whether the Reserve Banks’ requests for coins can be filled with circulated coins in Reserve Banks’ inventories or whether new coins need to be ordered from the U.S. Mint. CPO compares the Reserve Bank offices’ requests for coins with the IMF tool’s recommended orders and the offices’ current inventory levels. According to CPO officials, if an office’s request differs significantly from the order recommended by the IMF tool, CPO contacts the Reserve Bank office to discuss the reasons for the difference. CPO also compares current inventory levels with historic inventory data to determine whether the Reserve Banks have enough coins to meet seasonal changes in demand. While the Reserve Bank offices make the final decision on how many coins they request, a recent agreement will allow CPO, with input from the Reserve Bank offices, to make the final decision. We discuss this agreement in more detail later in the report. CPO looks for opportunities to reduce the new coin order to the U.S. Mint by transferring coins from one district to another. CPO officials noted that using circulated inventory rather than purchasing new coins reduces the number of new coins that the U.S. Mint produces and the Mint’s costs of production. Yet according to a U.S. Mint official, continuing demand for new coins means that using circulating inventory does not avoid the production of coins, but merely delays it. To determine whether coins can be transferred, CPO considers such things as constraints on storage space, the distance between the office or terminal that requests additional coins and the one that has available inventory, and insurance limits at the coin terminals. CPO then works with the U.S. Mint to transfer circulated coins between Federal Reserve offices that are more than 100 miles apart. The U.S. Mint paid about $1.3 million for 638 coin transfers in fiscal year 2006 and about $915,000 for 404 coin transfers in fiscal year 2007. According to U.S. Mint officials, the Mint contracts and pays for these coin transfers because balancing inventories among the Reserve Banks helps to lower the volatility of production for the Mint and the Mint has ongoing contracts for shipping large quantities of coins. However, according to a U.S. Mint official, the U.S. Mint is looking to phase out the practice of paying for transfers. The official recognizes that coin inventories may occasionally expand in some areas or regions, but believes that such conditions are temporary. Therefore, transferring coins from existing inventories may only temporarily delay the production of additional coins to meet the demands of commerce. See appendix V for data on the number of transfers and the corresponding budget for fiscal years 2002 through 2007. Our analysis of Reserve Banks’ order data shows that CPO reduced orders by about 10 percent in fiscal years 2006 and 2007 by fulfilling Reserve Bank offices’ coin requests with circulated inventory. Specifically, the Reserve Banks submitted requests to CPO for approximately 18 billion coins in fiscal year 2006 and for approximately 16 billion coins in fiscal year 2007, and CPO was able to reduce these requests through transfers by over 2.2 billion coins in fiscal year 2006 and by over 1.5 billion coins in fiscal year 2007. Once CPO makes adjustments and consolidates the Reserve Bank offices’ orders, CPO submits a final new coin order to the U.S. Mint 1 month before the coins are scheduled to be delivered. The order includes a shipping schedule outlining when and where the coins should be shipped as well as a 5-month coin order forecast. Upon receiving the order from CPO, the U.S. Mint ensures that it will have the coins to fulfill the order and then distributes coins to the Reserve Banks and coin terminals from its production facilities in Philadelphia and Denver. Both U.S. Mint and Federal Reserve officials said that they continually communicate throughout the month on the coin order, and that the Reserve Banks have the flexibility to adjust the coin order and delivery destination. CPO has several working groups of coin stakeholders, including depository institutions, vending machine operators, and armored carriers, to help address any potential or current coin distribution issues. For example, CPO interacts with depository institutions through its Customer Advisory Council, which currently consists of the 16 largest depository institutions in the country in terms of cash volume. Coins are typically not the primary focus of the council’s meetings, but the meetings give the depository institutions an opportunity to discuss any concerns about coins, such as the distribution of newly released commemorative circulating coins. As mandated by law, the Secretary of the Treasury and the Federal Reserve’s Board of Governors are taking steps to ensure that an adequate supply of dollar coins is available for commerce and collectors. The U.S. Mint and the Federal Reserve are consulting with coin users and holding forums to identify stakeholders’ ideas for the efficient distribution and circulation of dollar coins as well as other circulating coins. The Reserve Banks’ process for ordering and distributing coins has fulfilled depository institutions’ demand for the coins, but does not define optimal ranges for the Reserve Banks to hold in inventory to meet demand. Our analysis of Reserve Bank data showed that the Reserve Banks maintained enough inventory to meet demand, even when demand was greater than anticipated. Coin stakeholders confirmed that the Reserve Banks’ process has fulfilled depository institutions’ demand for coins in recent years. However, the Reserve Banks have taken a decentralized approach to inventory management that allows the Reserve Bank offices to use their own judgment to set inventory levels that they think are appropriate to meet future demand and avoid the risk of shortages. Reserve Bank officials expressed no concern about holding too many coins and told us that excess inventory is an issue only when coin inventories approach storage capacity limits. However, with rare exceptions, the Reserve Banks have more storage capacity than they need to maintain their current inventories, and, therefore, storage capacity does not serve as an incentive for the banks to evaluate and manage to optimal coin inventory ranges. To increase the efficiency of the distribution process, CPO has received approval from the Reserve Banks to centralize the development and placement of coin orders, and CPO will be responsible for ensuring that the offices maintain appropriate inventory levels. The Reserve Banks’ process has ensured that enough coins are available through orders of new coins and the Reserve Banks’ inventories of circulated coins to meet the depository institutions’ demand for coins. In each year since 1993, the number of coins demanded by the depository institutions has generally exceeded the number of coins deposited back to the Reserve Banks for all denominations, except the half-dollar. For example, as figure 4 shows, in fiscal year 2007, the Reserve Banks paid out 76 billion coins to the depository institutions (payments) and received 62 billion coins back from the depository institutions (receipts). This difference between payments and receipts is called “net pay.” For example, net pay for fiscal year 2007 was about 14 billion coins. See appendix III for payments and receipts data, by denomination, for fiscal years 1993 through 2007. Since the number of coins received by the Reserve Banks is less than the number of coins sent to the depository institutions to meet their demand, the Reserve Banks have to order new coins or use circulated inventory to meet demand. When depository institutions demand more coins than they return over a month or a year, net pay is positive for that period and additional coins have to be ordered or coin inventory has to be used to meet the demand. When depository institutions return more coins to the Reserve Banks than they order over a month or a year, net pay is negative for that period and the Reserve Banks’ inventory of coins can grow. Net pay fluctuates throughout the year, depending on the public’s spending patterns. Specifically, Reserve Bank data show that net pay was generally positive for all denominations, except the half-dollar, throughout the year, except in January when the demand for coins declines. Net pay for the half-dollar has been negative since fiscal year 2004 because the Reserve Banks received more half-dollars back than they paid out. Understanding and predicting net pay is critical to the Reserve Banks’ ability to meet coin demand. According to Federal Reserve officials, net pay is positive for many reasons. For example, the public stores coins that it receives in jars and dresser drawers and sometimes discards coins. Collectors’ demand for coins can also increase the Reserve Banks’ payments for commemorative circulating coins, while limiting the Reserve Banks’ receipts because the coins are kept out of circulation. When coins leave “active” circulation— that is, the coins are stored and not deposited or used for commerce—they are not available to meet depository institutions’ demand. During fiscal years 1993 through 2007, the Reserve Banks’ aggregate orders for new coins tracked together with net pay fairly closely. For example, in fiscal year 2002, total orders for new coins—14.72 billion coins—were a little lower than the total net pay for all coins—15.11 billion coins—and resulted in a decrease in inventory for some denominations. In fiscal year 2007, total orders for new coins—14.63 billion coins—were a little higher than the total net pay for all coins—14.02 billion coins, suggesting the Reserve Banks ordered enough coins to fulfill net pay for the year and increased total inventory. Federal Reserve officials suggest that this aggregate annual increase of nearly 600 million coins can, in part, be explained by the introduction of the Presidential $1 Coin Program. After the first year of the program, the Reserve Banks report inventories of at least 300 million Presidential dollar coins. Orders for the penny constituted over half of the total orders for new coins. In fiscal year 2007, orders for the penny were 7.76 billion coins, while net pay was 7.79 billion coins. According to Reserve Bank officials, the difference between orders for new pennies and net pay resulted in an aggregate decline of about 30 million pennies in Reserve Banks’ inventories. The Reserve Banks strive to maintain sufficient inventories of coins to fulfill demand, despite seasonal and unanticipated changes and potential interruptions in the supply of new coins. First, inventory is important in handling the seasonal fluctuations in demand for coins. According to documentation on the IMF tool and Reserve Bank officials, this fluctuating demand can be met by either (1) adjusting the number of coins ordered to keep pace with known seasonal changes in demand or (2) keeping orders constant and allowing inventory to fluctuate in response to these changes in demand. The Reserve Banks place orders to keep the U.S. Mint’s production schedule fairly consistent and allow inventories to fluctuate with the seasonality of coin demand. For example, Reserve Bank officials said they ensure that they have enough coins on hand to meet the high coin demand leading into the summer and holiday months. According to Federal Reserve officials, a Reserve Bank office may not transfer coins out of its area if the office knows that those coins will be needed in the next week or month. Federal Reserve officials also noted that although the Reserve Banks can predict the timing of seasonal changes in demand for coins, it is more difficult for them to predict the magnitude of the changes from one year to the next. Predicting demand is important because the U.S. Mint may not be able to produce enough coins within a short time frame to keep up with heavy demand. Second, since there is some uncertainty in the actual demand for coins in any given month, the Reserve Banks’ coin inventory provides a buffer against any changes in demand that may occur between the times the coins are ordered and received. Third, the Reserve Banks want to hold enough inventory to handle disruptions in supply from the U.S. Mint. For example, when the U.S. Mint’s production facilities in Philadelphia shut down, starting in March 2002, for 7 weeks to correct safety concerns, the Mint worked with the Reserve Banks to ensure that coins were available to fulfill demand. Figure 5 shows that when compared with expected demand, expressed as days of payable inventory, the Reserve Banks’ overall inventory for the penny, nickel, dime, and quarter has generally decreased since fiscal year 2001. For example, the penny inventory declined from an average of 32 days of payable inventory, or 3.0 billion coins, in fiscal year 2001 to an average of 16 days of payable inventory, or 2.2 billion coins, in fiscal year 2007. The nickel inventory declined from 37 days of payable inventory in fiscal year 2001 to 25 days of payable inventory in fiscal year 2007. Inventory levels throughout the year vary around these averages because of fluctuations in the public’s spending patterns. Figure 6 shows that the days of payable inventory for the half-dollar and dollar coins greatly exceed the levels for the other denominations and have generally increased in recent years. According to Federal Reserve officials, there is little demand for these denominations. Federal Reserve officials said that dollar coin inventories have also grown as a result of the Presidential $1 Coin Program, which requires the Federal Reserve to ensure that, during an introductory period, an adequate supply of each newly minted design (there are four new coins each year) is made available for commerce and collectors. Several factors affected trends in the Reserve Banks’ inventory levels during fiscal years 1993 through 2007. For example, inventory levels for all denominations dropped from fiscal years 1997 to 1999. Reserve Bank officials said that the demand for all coin denominations grew in 1999 in anticipation of the new millennium (Y2K). In fiscal year 2001, inventory levels for all denominations increased. According to the U.S. Mint’s 2001 annual report, the economy, which is directly related to the demand for coins, took a downturn in the middle of fiscal year 2000, resulting in a decrease in coin demand and a buildup of coin inventories. According to Reserve Bank officials, the inventory trends for the quarter and dollar coin reflect the challenges posed by the commemorative circulating programs associated with these coins. The officials noted that commemorative circulating coin programs, such as the Presidential $1 Coin Program, create uncertainty about the demand for those denominations. These programs involve the distribution of multiple coin designs and require the Reserve Banks to order enough commemorative circulating coins to meet the normal demand for coins for commercial transactions as well as the potential demand from collectors when the coins are first introduced. According to Reserve Bank officials, the Reserve Banks did not initially have experience in working with commemorative circulating coins and placed large orders for state quarters to ensure that they would have enough on hand to meet both normal transactional demand and potential collector demand. As a result, more quarters flowed back to the Reserve Banks than Reserve Bank officials expected for the first several releases. Reserve Bank officials noted that their forecasts of demand for state quarters have improved, and that their inventory of quarters has declined. The officials also noted that even with more experience, however, programs, such as the Presidential $1 Coin Program, require the Reserve Banks to order more coins than they would otherwise use for transactional purposes, thereby increasing Reserve Banks’ coin inventory levels beyond the levels they would ordinarily hold. The coin terminal operators, banking associations, and Reserve Bank officials with whom we spoke confirmed that the Reserve Banks’ process has fulfilled the depository institutions’ demand for coins in recent years. Reserve Bank and CPO officials told us that they have been able to fill all depository institutions’ requests for coin. The four coin terminal operators that we spoke with also noted that the Reserve Banks have been able to meet the demand of the depository institutions in their terminals. Finally, representatives from two banking associations said that constituent banks across the country have voiced no concern about the Reserve Banks’ ability to distribute coins to the depository institutions. The Reserve Banks have taken a decentralized approach to managing coin inventory, under which the Reserve Bank offices have decided what inventory levels are appropriate to keep on hand to meet forecasted demand and avoid the risk of coin shortages. Each Reserve Bank office has defined its own inventory levels on the basis of professional judgment and historical data, to meet demand and avoid running out of coins, and has used the capacity of its storage facilities as the key determinant of its maximum inventory levels. According to Reserve Bank officials, insurance limits at the coin terminals also help to define maximum inventory levels, but they can be adjusted, if necessary. Reserve Banks we spoke with had no specific levels for maximum inventory other than storage capacity and coin terminal insurance limits. Because each Reserve Bank sets its own inventory levels, the districts manage to different inventory levels and hold varying levels of inventory relative to demand. For example, according to Reserve Bank officials, 3 of the 12 Reserve Banks generally try to hold at least 10 days of payable inventory for all denominations, while 6 of the 12 districts generally try to hold at least 20 or more days of payable inventory. Table 1 shows that for fiscal year 2007, the districts held varying levels of inventory relative to demand for the different denominations. For example, the penny inventories ranged from an average of 8 days in the Boston district to 26 days in the San Francisco district, while the quarter inventories ranged from 17 days in the St. Louis district to 40 days in the Philadelphia district. Table 2 shows how the inventories for the penny, nickel, dime, and quarter have varied across Reserve Banks from fiscal years 1996 through 2007. According to Federal Reserve officials and documentation of the Reserve Banks’ IMF tool, the districts hold varying levels of inventory relative to demand because of the differences in the variability in coin demand and because some offices have more storage capacity. To be able to respond to the variability in demand, some Reserve Bank offices need to hold more coins than other offices relative to demand to ensure that they have enough coins to meet demand at all times. See appendix IV for the inventory levels relative to demand, by district and denomination, for fiscal years 2005 through 2007. Most Reserve Bank officials said that they were generally comfortable with their current inventory levels and expressed no concerns about having too many coins. Several Reserve Bank officials told us that they ordered conservatively—that is, they erred, if at all, on the side of ordering too many coins—because they were more concerned about not having enough coins to meet depository institutions’ demand during high demand periods than about having too many coins at other times. CPO officials said it would be easier to deplete coin inventories than to build them up. Furthermore, most Reserve Bank officials were not concerned about having too many coins because they said they have ample on-site and off- site storage capacity and insurance levels at the coin terminals to store their coin inventory. For example, two districts have new, on-site coin vaults that were built within the last 10 years and were designed to accommodate the entire coin inventory for the district, even without coin terminals. Reserve Bank officials said that if the coin inventory level at a particular location approaches the storage limits, they work to move coins to another Reserve Bank or terminal. CPO and Reserve Bank officials noted that the risk of not meeting depository institutions’ demand for coins far exceeds the risk of having too many coins in inventory, as long as storage capacity exists. For example, Federal Reserve officials told us that in 1999, they had problems fulfilling the depository institutions’ demand for pennies. During this time, the U.S. Mint could not produce enough pennies to fill Reserve Banks’ orders. In addition, the Reserve Banks were not yet coordinating coin distribution nationally and, therefore, could not easily identify sources of inventory available for redistribution. According to Federal Reserve officials and coin terminal operators, some depository institutions became concerned that coins would not be available to meet their demand and began hoarding coins, which further exacerbated the problem. Federal Reserve officials noted that since 2001, CPO has coordinated Reserve Bank coin distribution from a national perspective to help ensure confidence in the availability of coins, and, since that time, the Reserve Banks have experienced no shortages. Although we only heard about storage capacity concerns from Reserve Bank officials in one district, some coin terminal operators expressed concerns about coin inventory levels in their terminals. Officials from one Reserve Bank told us that, on rare occasions, they have had to negotiate with depository institutions on when the Reserve Bank could accept coin deposits because storage space was not immediately available. Reserve Bank officials also said that every effort is made to redistribute coins before insurance levels are reached at the coin terminals, and that the Reserve Bank offices work with the coin terminal operators to stay under the insurance limits. However, two of the four coin terminal operators with whom we spoke said that the Reserve Banks maintain higher inventory levels than the operators consider sufficient to respond to changes in demand. CPO and Reserve Bank officials said that they were sensitive to the numbers of coins being held at the coin terminals, but the officials noted that the Reserve Banks work to stay within the limits established in their agreements with the operators. One coin terminal operator noted that it did not have concerns about the Reserve Banks’ coin inventory levels or the distribution process. However, this operator noted that high volumes of coin recycling activity posed a challenge in some of its terminals. This operator also said that CPO was helping to move some of the coins out of the terminals, but that the high volumes would continue to be a problem until coin stakeholders—coin terminal operators, depository institutions, and CPO—find a solution to equitably redistribute the recycled coins. Although we recognize the importance of minimizing the risk of not having sufficient coins to meet demand at all times, the Reserve Banks’ current approach to inventory management does not define an optimal range of inventory for the offices to meet demand. Inventory levels that greatly exceed likely future demand could result in the overproduction of new coins and in potential storage concerns for the coin terminal operators. Data show that the Reserve Banks’ overall inventory levels relative to demand for all denominations, except the half-dollar and the dollar coins, have generally decreased since 2001. However, the Reserve Banks and coin terminals have sufficient capacity for the Reserve Banks to hold higher levels of inventory for some denominations than are likely to be used to meet demand. Moreover, the storage capacity at the coin terminals is provided to the Reserve Banks at no charge. As a result, the Reserve Banks lack an incentive to evaluate and manage to optimal coin inventory ranges. In addition, the current approach to inventory management could lead to the overproduction of new coins in the short term or to the retention in some districts of coin inventory that could be redistributed to meet demand in another district. Thus, a Reserve Bank may incur few or no charges for storing high inventory levels, but the U.S. Mint may incur costs for producing new coins when circulated coins may be available to fulfill demand. Producing new pennies and nickels when circulated coins could be used instead is particularly inefficient, since these denominations cost more to produce than they are worth. According to Federal Reserve officials, to mitigate this risk, CPO has been working with the Reserve Banks to manage inventories from a national perspective by transferring, where appropriate, inventories from one Reserve Bank to another one. According to a U.S. Mint official, a continuing demand for new coins means that producing coins when there is production capacity is not a concern because these coins will eventually be needed. In fact, he indicated that delaying production when there is production capacity may actually increase costs in the long run because production costs, like other costs, tend to increase over time. CPO has recognized the importance of further centralizing and increasing the efficiency of the Reserve Banks’ approach to coin inventory management and has identified opportunities for doing so. In 2006, the Reserve Banks and the U.S. Mint co-chartered a 6-month pilot of a new inventory management approach in one district. During the pilot, CPO (1) managed the inventory using vendor software that forecasts coin demand at the Reserve Bank office or terminal level to provide consistent upper and lower bounds for inventory levels at each terminal site in the district and (2) used this information to maintain inventory levels to meet demand in the district. The Reserve Bank office was then responsible for moving coins among the coin terminals to meet demand. The Reserve Banks and the U.S. Mint assessed the results of the pilot and found that the new approach reduced the risk of shortages, transportation expenses, and inefficiencies associated with the U.S. Mint’ s production volatility as well as increased stakeholders’ confidence in the coin distribution system. According to CPO officials, the pilot also demonstrated that the district’s inventory levels could be reduced. As a result of the pilot, CPO received approval from the Reserve Banks in October 2007 to implement a more centralized approach to managing coin orders and inventories. According to CPO officials, they are expecting to phase in this new approach, beginning with three districts in the second quarter of 2008. When the new approach is implemented, CPO will have the final authority to determine orders on behalf of the Reserve Bank offices and will be responsible for managing inventory levels that are maintained at the office level. According to CPO officials, CPO will continue to provide the Reserve Bank offices with a recommended monthly order. The Reserve Bank offices will be able to review this order and suggest revisions, but ultimately CPO will decide on the final order for each office. Although Reserve Bank officials told us that under the current approach, their adjustments to the IMF tool’s recommended coin orders were minimal, over the past 3 years the combined impact of these adjustments was sometimes substantial. For example, the IMF tool recommended a total order of $52 million in pennies for all of the Reserve Bank offices in fiscal year 2007. Following the offices’ assessment of local market factors and the availability of transfers of circulated coins to fulfill the offices’ requests, CPO submitted a total order of $77.6 million for new pennies to the U.S. Mint. CPO’s ability to now decide on the number of coins each district will receive monthly could potentially result in decreased orders for new coins from the U.S. Mint. CPO is considering establishing inventory ranges for the Reserve Bank offices on the basis of factors such as historical trends in coin payments and receipts, the amount of time taken to transport coins to a Reserve Bank office, and storage capacity limits to better define the level of inventory to be held to meet demand. We believe that the establishment of inventory ranges could help CPO and the Reserve Banks evaluate and report on the effectiveness of CPO’s inventory management approach. CPO officials believe that these changes will improve the Reserve Banks’ inventory management because CPO can provide a national perspective on where inventory can be used to meet demand, including where coins can be moved when necessary to meet demand in one district, while freeing space for coin deposits in storage facilities that are approaching capacity in another district. U.S. Mint officials said that the new approach could allow the U.S. Mint to further smooth its production schedule, thereby lowering costs associated with unpredictable changes in production. We provided a draft of this report to the Board of Governors of the Federal Reserve System and to the Department of the Treasury for their review and comment. The Director of the Division of Reserve Bank Operations and Payment Systems provided written comments, which are reproduced in appendix VI. Overall, the Federal Reserve agrees with the findings in our report and believes that the data in the report reflect the Reserve Banks’ efficient and effective management of coin inventories. The Federal Reserve also provided technical comments, which we have addressed in this report as appropriate. The Acting Deputy Director of the U.S. Mint provided oral comments stating that the agency agrees with the information in this report as it pertains to the U.S. Mint and provided technical comments, which we have also incorporated as appropriate. We are sending copies of this report to interested congressional committees, the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of the Treasury, and the Director of the U.S. Mint. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII. The objectives of this report were to examine (1) the Reserve Banks’ process for ordering and distributing coins and (2) the extent to which this process meets the depository institutions’ demand for coins. To describe the Reserve Banks’ process for supplying coins throughout the country, we obtained and reviewed relevant articles, reports, economic studies, and technical documentation on how the Reserve Banks and the U.S. Mint determine the number of coins to be produced and distributed. We also interviewed Federal Reserve and U.S. Mint economists who were involved in the development of economic models used to predict coin demand. During these interviews, we reviewed how the national coin forecast models are used by both the Reserve Banks and the U.S. Mint and discussed the accuracy of these models in predicting net pay at the national level. We interviewed officials from the Federal Reserve’s Board of Governors (Board), each of the 12 Reserve Bank districts, and the national Cash Product Office (CPO) to determine how coin orders are developed and submitted to the U.S. Mint. In addition, we reviewed statutes related to the Federal Reserve and U.S. Mint. We also interviewed key stakeholders, including officials from the U.S. Mint, operators of coin terminals with agreements to store Reserve Bank coin inventory, and representatives of banking associations, to determine how the Reserve Banks work in collaboration with others to identify and fulfill the depository institutions’ requests for coins. We obtained and analyzed information on the costs paid by the U.S. Mint to transport existing coins and analyzed the number of transfers between Reserve Bank districts since fiscal year 2002. To determine how CPO was able to reduce orders for new coins through transfers of existing coin inventory, we reviewed Reserve Bank data documenting actual coin demand and compared these data with the Reserve Banks’ actual order to the U.S. Mint for new coins and the number of circulated coin transfers processed by CPO. To determine the extent to which the Reserve Banks’ coin distribution process meets the depository institutions’ demand for coins throughout the country, we obtained data on the Reserve Banks coin payments to depository institutions, receipts for coins deposited by the depository institutions, orders for new coins, and inventory levels for fiscal years 1993 through 2007 for each coin denomination and for each Reserve Bank. We analyzed these data using Excel and SAS statistical analysis software. To calculate Reserve Banks’ number of coins paid to the depository institutions and Reserve Banks’ number of coins received from the depository institutions at the national and district level for all coin denominations, we converted the data from value of coins to volume of coins and then calculated fiscal year totals for each denomination at the national and district level. We created line charts to compare the total number of coins that Reserve Bank paid to depository institutions with the total number of coins that the Reserve Bank received from the depository institutions. To calculate net pay and the Reserve Banks’ coin order to the U.S. Mint, we converted the data from value of coins to volume of coins and calculated fiscal year totals at the national and district level. We created line charts to compare the net pay data with the Reserve Banks’ coin order data. To calculate the Reserve Banks’ days of payable inventory, we consulted with officials at the Board and CPO to determine an appropriate methodology. CPO and Reserve Banks calculate payable inventory information several different ways, depending upon what they are assessing. For the purposes of our review, we determined that a comparison of inventory relative to a 3-month daily average of payments for 3 years was the most appropriate calculation to determine the Reserve Banks’ inventory position, because it compares inventory relative to what the Reserve Banks could reasonably have expected coin payments to be in the future. This methodology captures coin inventory levels relative to what Reserve Banks expected to need to meet future payments to depository institutions. For the numerator, we used end-of-month inventory levels for a given month. For the denominator, for the 3 previous years, we used the quarter following the inventory month used in the numerator to assess inventory levels relative to demand in the following quarter. For example, when we calculated days of payable inventory for December 2006, we used data for January, February, and March, 2004; January, February, and March, 2005; and January, February, and March, 2006, in the denominator. To calculate the average daily payment rate, we took the monthly payments data from each month of the quarter from the previous 3 years and divided by 21 business days to obtain an average daily payment rate for each month. We then totaled the daily payment rates for the 9 months and divided by 9 to obtain an average payment rate of the 3 quarters for the 3 years. To calculate the annual average days of payable inventory, by denomination, for each Reserve Bank, we averaged the monthly figures on days of payable inventory that we computed as we have previously described. Because of the methodology we used to calculate days of payable inventory, 1996 is the earliest year for which we can present the data. We used statistical analysis software to complete this analysis for each coin denomination at the national and Reserve Bank level. We also interviewed officials at the Board and Reserve Banks to discuss factors affecting trends in the data, the level of inventory that each district tries to hold, and the Reserve Banks’ approach to coin inventory management. To describe the Reserve Banks’ new centralized approach to coin inventory management and how it might address concerns about inventory management, we interviewed officials at CPO and the Board about a 2006 pilot to test a new inventory management approach at the Reserve Bank of Cleveland. To assess the reliability of the coin data we received from the Reserve Banks and U.S. Mint, we talked with agency officials about data quality control procedures and reviewed relevant documentation. For example, we reviewed audit reports for fiscal years 2006 and 2007 prepared by the Department of the Treasury’s Office of Inspector General, which reported that the U.S. Mint’s data were accurately presented and in conformity with generally accepted accounting principles. The U.S. Mint has received approximately 15 consecutive unqualified opinions. These internal control audits found no material weaknesses and found that the U.S. Mint is in compliance with the Federal Manager’s Financial Integrity Act. For the Federal Reserve data, we reviewed an independent auditor’s reports on the Federal Reserve’s financial statements for fiscal years 1995 through 2006, and found that the Federal Reserve’s data were accurately presented and in conformity with generally accepted accounting principles. We also performed advanced electronic testing to assess the reliability of the computer-processed data, and determined that these data were accurate, complete, and consistent and, therefore, sufficiently reliable for the purposes of this report. We conducted this performance audit from April 2007 through March 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Figures 7 through 13 show trends in the U.S. Mint’s coin production data for fiscal years 2002 through 2007. These data represent all of the “circulating” coins produced by the U.S. Mint; they do not include the “proof” or “uncirculated” quality coins produced by the Mint. The Reserve Banks make coin payments to depository institutions and accept coin deposits from depository institutions on a daily basis. Figures 14 through 19 show total payments and receipts for each coin denomination for all 12 Reserve Banks for fiscal years 1993 through 2007. The Reserve Banks strive to maintain sufficient inventories of coins to fulfill demand, despite seasonal and unanticipated changes in demand for coins and potential interruptions in the supply of new coins. Tables 3 through 14 show the days of payable inventory maintained at each of the 12 Reserve Banks from fiscal years 2005 through 2007. Payable inventory represents the amount of inventory needed to meet expected demand for coins and is calculated by comparing inventories with average payment data over a 3-month period for the preceding 3 years. CPO looks for opportunities to reduce orders for new coins to the U.S. Mint by transferring circulating coins from one Reserve Bank district to another. The U.S. Mint pays for the cost for transfers over 100 miles. Table 15 shows the number and cost of transfers paid by the U.S. Mint from fiscal years 2002 through 2007. In addition to the contact named above, Jonathan Carver, Jay Cherlow, Maria Edelstein (Assistant Director), Elizabeth Eisenstadt, Brandon Haller, Heather Krause, Josh Ormond, Jena Sinkfield, Susan Michal-Smith, and Jerry Sandau made key contributions to this report. | Federal Reserve Banks fulfill the coin demand of the nation's depository institutions--which include commercial banks, savings and loan associations, and credit unions--by ordering new coins from the U.S. Mint and managing coins held in inventory at the Reserve Banks and in coin terminals. Reliably estimating the demand for coins and efficiently managing the inventory of circulated coins is important to ensure that depository institutions have enough coins to meet the public's demand and to avoid unnecessary coin production costs. Since late 2006, rising metal prices have driven the costs of producing pennies and nickels above the face values of the coins. This report addresses (1) the Reserve Banks' process for ordering and distributing coins to the nation's depository institutions and (2) the extent to which this process meets depository institutions' demand for coins. GAO interviewed officials responsible for coin distribution at each of the 12 Reserve Banks and met with representatives of 4 large operators of Federal Reserve coin terminals, 2 banking associations, the U.S. Mint, and the nation's largest coin recycling company. GAO also analyzed Reserve Bank data for fiscal years 1993 through 2007. Federal Reserve and U.S. Mint officials generally agreed with GAO's findings in the report and provided technical comments, which were incorporated as appropriate. The Reserve Banks' process for ordering and distributing coins uses new coins ordered from the U.S. Mint, circulated coins in inventory, and transfers of circulated coins to meet depository institutions' demand for coins. New coin orders begin each month with a recommendation generated by a forecasting tool. Each Reserve Bank office then refines this recommendation in light of its current inventory holdings and its knowledge of local factors that may affect demand, such as changes in a transit authority's use of coins. Each office next submits a request for coins to the Reserve Banks' national Cash Product Office (CPO). CPO seeks to fill the request with transfers of circulated coins from other offices before it consolidates the requests and submits a monthly order for new coins to the U.S. Mint. In fiscal years 2006 and 2007, CPO used transfers to reduce its new coin orders by approximately 10 percent. The Reserve Banks' process for ordering and distributing coins has met depository institutions' demand since fiscal year 2000, but the process does not define optimal coin inventory ranges. Currently, each Reserve Bank office sets and manages its own inventory levels, resulting in varying levels of inventory held relative to demand. Overall, inventory levels for most denominations have generally been decreasing since fiscal year 2001, yet inventory levels are more likely to be high than low relative to demand, because, for the Reserve Banks, the risk of not meeting depository institutions' demand for coins far exceeds the risk of holding too many coins in inventory. However, holding coins in inventory that could be used to fulfill demand elsewhere can be inefficient, resulting in new coin production costs that could have been avoided if coins held in inventory had been used instead. To increase the efficiency of the Reserve Banks' process, CPO plans this year to begin implementing a new approach to inventory management that it piloted in 2006 and found effective. Under this approach, CPO will determine the number of circulated and new coins each district will receive monthly and will be responsible for ensuring that the Reserve Bank offices maintain appropriate inventory levels. |
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DOE’s budget authority for renewable, fossil, and nuclear energy R&D dropped by 92 percent from $6 billion in fiscal year 1978 to $505 million in fiscal year 1998 (in inflation-adjusted terms) before bouncing back to $1.4 billion in fiscal year 2008. As shown in figure 2, R&D budget authority in renewable, fossil, and nuclear energy peaked in the late 1970s and fell sharply in the 1980s. Since fiscal year 1998, R&D budget authority for renewable and nuclear energy R&D have grown, while fossil energy R&D funding has fluctuated in response to coal program initiatives. Nuclear energy R&D, which received no funding in fiscal year 1998, experienced the largest increase, rising to $438 million in fiscal year 2008. During this period, budget authority for renewable energy increased by 89 percent and fossil energy increased by 116 percent. A comparison of DOE’s fiscal year 2009 budget request with the fiscal year 2008 appropriation shows that renewable energy R&D would decline slightly, while fossil energy R&D and nuclear energy R&D would increase by 34 percent and 44 percent, respectively (see app. I). As shown in figure 3, budget authority for the Office of Science increased by 16 percent from $3.4 billion in fiscal year 2000 to $4 billion in fiscal year 2008. The budget request for the Office of Science for fiscal year 2009 is $4.7 billion, a 19-percent increase over the fiscal year 2008 appropriation. Because the Office of Science funds basic research in materials sciences, for example, many of its R&D programs may have useful applications for energy R&D. In fiscal year 2009, the Office of Science has requested $69.1 million for research related to the solar energy R&D program, $42.9 million related to biomass R&D, and $60.4 million for the Hydrogen Fuel Initiative. The Office of Science also funds fundamental research in such areas as high energy physics, nuclear physics, and fusion energy. There are key technical, cost, and environmental challenges in developing advanced renewable, fossil, and nuclear energy technologies to address future energy challenges. DOE’s recent R&D focus in renewable energy has been in (1) biomass- derived ethanol, (2) hydrogen-powered fuel cells, (3) wind technologies, and (4) solar technologies. The primary focus of ethanol and hydrogen R&D is to displace oil in the transportation sector. The primary focus of wind and solar technologies is to generate electricity. DOE also conducts R&D on geothermal and hydropower to generate electricity, but they have reflected a small proportion of the R&D budget in prior years and are not discussed here. Biomass-derived ethanol. DOE’s short-term R&D goal is to help meet the administration’s “20 in 10” goal of substituting 20 percent of gasoline consumption in 10 years with alternative fuels, primarily biomass-derived ethanol. DOE’s longer-term R&D goal is to develop new technologies to allow the ethanol industry to expand enough to displace 30 percent of gasoline requirements—about 60 billion gallons—by 2030. In 2007, industry produced over 7 billion gallons of ethanol, displacing about 3 percent of the nation’s oil consumption. Ethanol, however, faces high production and infrastructure costs, creating challenges in competing with gasoline nationally. Ethanol refiners in the United States rely mostly on corn as a feedstock, the use of which has contributed to price increases for some food products, and ethanol’s corrosive properties create challenges in developing an infrastructure for delivering and dispensing it. DOE’s R&D focuses on (1) developing a more sustainable and competitive feedstock than corn, primarily by exploring technologies to use cellulosic biomass from, for example, agricultural residues or fast-growing grasses and trees; (2) reducing the cost of producing cellulosic ethanol to $1.33 per gallon by 2012 and $1.20 per gallon by 2017; (3) converting biomass to biofuels through both biochemical and thermochemical processes to help the industry expand; (4) contributing to a strategy to develop a national biofuels infrastructure, including demonstration projects for integrated biorefineries to develop multiple biomass-related products; and (5) promoting market-oriented activities to accelerate the deployment of biomass technologies. Although DOE has made progress in reducing ethanol production costs, cellulosic ethanol in 2007—based on current corn prices—still cost about 50 percent more to produce than corn ethanol. Hydrogen-powered fuel cells. The long-term R&D goal of DOE’s Hydrogen Fuel Initiative is to provide hydrogen fuel cell technologies to industry by 2015 to enable industry to commercialize them by 2020. To be commercialized, hydrogen fuel cell technologies must be competitive with gasoline vehicles in terms of price, convenience, safety, and durability. Hydrogen is the preferred fuel for vehicle fuel cells because of the ease with which it can be converted to electricity and its ability to combine with oxygen to emit only water and heat as byproducts. Let me clarify, however, that hydrogen is not an energy source, but, like electricity, is an energy carrier. Furthermore, because hydrogen is lighter than air, it does not exist on earth and must be extracted from common compounds. Producing hydrogen through the extraction process requires energy from renewable, fossil, or nuclear sources, adding to the challenge of developing hydrogen technologies. Our January 2008 report concluded that DOE has made important progress in developing hydrogen fuel cells, but the program has set very ambitious targets and some of the most difficult technical challenges––those that require significant scientific advances––lie ahead. Specifically, R&D for vehicles includes reducing the cost of commercial-scale manufacturing of fuel cells by nearly fourfold, storing enough hydrogen on board a fuel-cell vehicle to enable a 300-mile driving range, and increasing the durability of fuel cells by more than threefold to match the 150,000 mile life-span of gasoline vehicles. DOE also conducts R&D on stationary and portable fuel cells which could be used, for example, to replace batteries on fork lifts and diesel generators used for back-up power. We recommended that DOE update its overarching R&D plan to reflect the technologies it reasonably expects to provide to industry by 2015 to accurately reflect progress made by the Hydrogen Fuel Initiative, the challenges it faces, and its anticipated R&D funding needs. I would also note that developing the supporting infrastructure to deploy the technologies nationally will likely take decades, tens of billions of dollars in investments, and continued R&D well beyond the 2015 target date. DOE’s fiscal year 2009 budget request would reduce funding for the Hydrogen Fuel Initiative by 17 percent from $283.5 million in fiscal year 2008 to $236 million in fiscal year 2009. The budget also proposes to increase the proportion of longer-term R&D by increasing the funding for basic research. Although the Hydrogen Program Manager told us that funding is sufficient to meet target dates for critical technologies, other target dates for supporting technologies—such as hydrogen production from renewable sources—would be pushed back. Wind technologies. DOE is assessing its long-term vision of generating 20 percent of the nation’s electricity using wind energy by 2030. Its current R&D efforts, however, are focused on more immediate expansion of the wind industry, particularly on utility-scale wind turbines. More specifically, DOE has focused its R&D efforts on improving the cost, performance, and reliability of large scale, land-based wind turbines, including both high- and low-wind technologies; developing small and mid- size turbines for distributed energy applications, such as for residential or remote agricultural uses; and gathering information on more efficient uses of the electricity grid and on barriers to deploying wind technology and providing that information to key national, state, and local decision- makers to assist with market expansion of wind technologies. For example, one of DOE’s targets is to increase the number of distributed wind turbines deployed in the United States from 2,400 in 2007 to 12,000 in 2015. Although wind energy has grown in recent years, from about 1,800 megawatts in 1996 to over 16,800 megawatts in 2007, the wind industry still faces investors’ concerns about high up-front capital costs, including connecting the wind farms to the power transmission grid. Solar technologies. DOE’s R&D goal is for solar power to be unsubsidized and cost competitive with conventional technologies by 2015 by, for example, developing new thin-film photovoltaic technologies using less expensive semiconductor material than crystalline-silicon to reduce the manufacturing cost of solar cells. Specifically, DOE is working to reduce the costs of photovoltaic systems from about 18-23 cents per kilowatt hour in 2005 to about 5-10 cents per kilowatt hour in 2015. DOE is also conducting R&D to reduce the cost and improve the reliability of concentrating solar power technologies, which use various mirror configurations to convert the sun’s energy to heat to generate electricity. In addition, DOE has expanded R&D to address low-cost thermal storage to allow solar thermal systems to be more valuable to utility grid power markets. Along these lines, both the photovoltaic and concentrated solar power activities have ramped up efforts in the areas of grid integration and reliability to facilitate the transition to larger scale, centralized solar electric power plants. Investors’ concerns about high up-front capital costs are among the most significant challenges in deploying photovoltaic or concentrating solar energy technologies. This requires both technologies to have lower costs for installation and operations and maintenance, better efficiency of converting solar power to electricity, and longer-term (20 to 30 years) durability. Since fiscal year 2006, DOE has proposed eliminating its R&D in oil and natural gas and, in January 2008, announced a restructuring of its coal R&D program. Increased oil production. Since fiscal year 2006, DOE has proposed to terminate its oil R&D. In November 2007, we reported that DOE has focused its R&D on increasing domestic production primarily by improving exploration technologies, extending the life of current oil reservoirs, developing drilling technology to tap into deep oil deposits, and addressing environmental protection. DOE officials stated that if the oil R&D program continues, it would focus on such areas as enhanced oil recovery technologies and expanding production from independent producers. Independent producers account for about 68 percent of domestic oil production. Natural gas technologies. Since fiscal year 2006, DOE has proposed to terminate its natural gas R&D. Our November 2007 report noted that DOE’s R&D focuses on improving exploration technologies, reducing the environmental impact of natural gas operations, developing drilling technology to tap into deep gas reservoirs, and developing the technology for tapping into natural gas in naturally occurring methane hydrate found in permafrost regions on land and beneath the ocean floor. Clean coal technologies. DOE’s R&D goal is to reduce harmful power plant emissions to “near-zero” levels by 2020. For new power plant applications, DOE is developing and demonstrating advanced integrated gasification combined cycle (IGCC) technologies. In 2003, DOE announced plans to construct a near-zero emissions commercial scale R&D facility called FutureGen with an alliance of coal mining and coal-based electric generating companies. DOE had originally pledged about three-quarters of the estimated $1 billion cost of the FutureGen project (in constant fiscal year 2004 dollars). With escalation costs and rising price of materials and labor, the estimated project costs rose to nearly $1.8 billion. As a result, DOE announced in January 2008 that it is restructuring FutureGen to focus on multiple, competitively selected projects that demonstrate carbon capture and sequestration at commercially viable power plant project sites. The impact of DOE’s restructuring on FutureGen at this time is not known, but an industry official from the FutureGen Alliance noted that the project cannot go forward without federal government assistance. Separate from the FutureGen project, DOE also conducts R&D on near- zero emission power plants—including carbon capture and sequestration—through its fuels and power systems programs and its Clean Coal Power Initiative. DOE has focused nuclear energy R&D in the following three areas: The Nuclear Power 2010 program focuses on reducing regulatory and technical barriers to deploying advanced “Generation III” nuclear power reactors, which are designed to be more efficient than currently operating reactors. Because over the past 30 years, no electric power company had applied to the Nuclear Regulatory Commission for a license to construct a new nuclear reactor, Nuclear Power 2010 shares the costs with industry of preparing early site permits and or construction and operating license applications for submission to the Nuclear Regulatory Commission. Nuclear Power 2010 also regulates the risk insurance authorized by the Energy Policy Act of 2005 that protects industry from certain regulatory delays during licensing and construction. The Global Nuclear Energy Partnership program––an extension of the Advanced Fuel Cycle Initiative––develops proliferation-resistant nuclear fuel cycles that maximizes energy output and minimizes waste. Specifically, the program is designed to reduce the threat of global nuclear proliferation by developing advanced technologies for reprocessing spent nuclear fuel in the 2030 time frame. One of the critical elements of this effort is to develop a sodium-cooled fast reactor designed to burn a wide variety of nuclear fuels to reduce the total amount, temperature, and radiotoxicity of the spent fuel that might otherwise have to be stored for thousands of years in a repository. Beginning in fiscal year 2008, the Generation IV Program is focusing solely on the Next Generation Nuclear Plant (NGNP), designed as a versatile, efficient, high-temperature reactor capable of generating electricity and producing hydrogen. DOE collaborates with 12 other international partners on R&D related to fuels, materials, and design methodologies as part of the Generation IV International Forum. In the current wake of higher energy costs and the growing recognition that fossil energy consumption is contributing to global climate change, the nation is once again assessing how best to stimulate the deployment of advanced energy technologies. While still considerably below its peak in the late 1970s, DOE’s budget authority for renewable, fossil, and nuclear energy R&D has rebounded to $1.4 billion during the past 10 years after hitting a low point in fiscal year 1998. However, despite DOE’s energy R&D funding of $57.5 billion over the last 30 years, the nation’s energy portfolio remains heavily reliant on fossil fuels. Many technical, cost and environmental challenges must be overcome in developing and demonstrating advanced technologies before they can be deployed in the U.S. market. Our December 2006 report suggested that the Congress consider further stimulating the development and deployment of a diversified energy portfolio by focusing R&D funding on advanced energy technologies. However, because it is unlikely that DOE’s energy R&D funding alone will be sufficient to significantly diversify the nation’s energy portfolio, coordinating energy R&D with other federal programs, policies, incentives, standards, and mandates that can impact the nation’s energy portfolio will be important for targeting any desired goals to change the nation’s energy portfolio. In addition, state and local governments and other nations, along with a worldwide private sector, will play a role in developing and deploying advanced energy technologies both here and throughout the global energy market. A key factor to any sustainable deployment of advanced energy technologies will be to make them cost competitive, while addressing technical and environmental challenges, so that the market can support a more diversified portfolio. Otherwise, without sustained higher energy prices for our current portfolio, or concerted, high-profile federal government leadership, U.S. consumers are unlikely to change their energy-use patterns, and the U.S. energy portfolio will not significantly change. Fiscal year 2009 budget request (7) (70) (29) (1) (100) (100) (60) (58.0) Fiscal year 2009 budget request (100) (53.2) Exclde budget authority for Vehicle Technologie, which inclde the FreedomCAR nd Fel Prtnerhip nd the 21t Centry Trck Prtnerhip. The Vehicle Technologie R&D progrm focus on improving the energy efficiency of vehicle y developing lightweight mteri, dvnced batterie, power electronic, nd electric motor for hyrid nd plg-in hyrid vehicle, nd dvnced combustion engine nd fel. The Hydrogen Fel Inititive inded eptely throgh DOE’ Office of Energy Efficiency nd Renewable Energy, Fossil Energy, Ncler Energy, nd Science nd the Deprtment of Trporttion. In ddition to Hydrogen Technology R&D, Energy Efficiency nd Renewable Energy nd Fel Cell Technology R&D, which hitoriclly has een n energy efficiency progrm. The fil yer 2008 pproprition for Fel Cell Technology R&D i $116.6 million, nd DOE’ reqt for fil yer 2009 i $79.3 million The Hydrogen Fel Inititive received totl of $283.5 million in budget authority in fil yer 2008; the dminitrtion i reqting $236 million for the inititive in fil yer 2009. Dring fil yer 2008, Energy Efficiency nd Renewable Energy trferred ome of the Hydrogen Fel Inititive ctivitie to it Vehicle Technologie R&D progrm. Exclde the Mixed Oxide Fel Fabriction Fcility, which received $278.8 million in fil yer 2008. DOE i reqting $487 million for fil yer 2009. Dring fil yer 2008, R&D on the odim-cooled fast rector was trferred from the Genertion IV progrm to the Accelerted Fel Cycle Inititive/Global Ncler Energy Prtnerhip Progrm. For further information about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Richard Cheston, Robert Sanchez, Kerry Lipsitz, MaryLynn Sergent, and Anne Stevens 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. | For decades, the nation has benefited from relatively inexpensive energy, in the process growing heavily reliant on conventional fossil fuels--oil, natural gas, and coal. However, in the current wake of higher energy costs and environmental concerns about fossil fuel emissions, renewed attention is turning to the development of advanced energy technologies as alternatives. In the United States, the Department of Energy (DOE) has long conducted research, development, and demonstration (R&D) on advanced renewable, fossil, and nuclear energy technologies. DOE's Office of Science has also funded basic energy-related research. This testimony addresses (1) funding trends for DOE's renewable, fossil, and nuclear energy R&D programs and its Office of Science and (2) key challenges in developing and deploying advanced energy technologies. It is based on GAO's December 2006 report entitled Department of Energy: Key Challenges Remain for Developing and Deploying Advanced Energy Technologies to Meet Future Needs (GAO-07-106). In doing that work, GAO reviewed DOE's R&D budget data and strategic plans and obtained the views of experts in DOE, industry, and academia, as well as state and foreign government officials. Between fiscal years 1978 and 1998, DOE's budget authority for renewable, fossil, and nuclear energy R&D fell 92 percent when adjusted for inflation (from its $6 billion peak in fiscal year 1978 to $505 million in fiscal year 1998). It has since rebounded to $1.4 billion in fiscal year 2008. Energy R&D funding in the late 1970s was robust in response to the 1973 energy crisis caused by constricted oil supplies. However, R&D funding plunged in the 1980s as oil prices returned to their historic levels. DOE's fiscal year 2009 budget, as compared with 2008, requests slightly less budget authority for renewable energy R&D, while seeking increases of 34 percent for fossil energy R&D and 44 percent for nuclear energy R&D. In addition, DOE is requesting $4.7 billion for basic research under its Office of Science. The development and deployment of advanced energy technologies present key technical, cost, and environmental challenges. DOE's energy R&D program has focused on reducing high up-front capital costs; improving the operating efficiency of advanced energy technologies to enable them to better compete with conventional energy technologies; and reducing emissions of carbon dioxide, a greenhouse gas linked to global warming, and pollutants that adversely affect public health and the environment. However, while DOE has spent $57.5 billion over the past 30 years for R&D on these technologies, the nation's energy portfolio has not dramatically changed--fossil energy today provides 85 percent of the nation's energy compared to 93 percent in 1973. Because DOE's energy R&D funding alone will not be sufficient to deploy advanced energy technologies, coordinating energy R&D with other federal energy-related programs and policies will be important. In addition, other governments and the private sector will play a key role in developing and deploying advanced energy technologies that can change the nation's energy portfolio. |
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In fiscal year 1995, Medicaid, a program jointly funded by the federal government and the states, provided health care coverage for about 40 million low-income individuals. Over the past 10 years, Medicaid expenditures have more than tripled to $159 billion. Under current projections, they will double again within 8 years. As budgetary pressures intensify, many states are increasing enrollment of Medicaid beneficiaries in managed care—as an alternative to the fee-for-service health care delivery system—in an attempt to control program costs. States also expect managed care to increase beneficiary access to health care services and to improve the quality and oversight of these services. Many states have attempted to maximize the benefits of managed care by requiring beneficiaries to enroll. As of June 30, 1995, 36 states have mandated enrollment for some or all of their Medicaid beneficiaries in managed care plans. To date, most states have largely targeted their mandatory enrollment managed care programs to low-income families who receive financial assistance under Aid to Families With Dependent Children (AFDC) and pregnant women and children who qualify for Medicaid. However, states are increasingly including managed care options for low-income elderly, blind, and disabled individuals receiving assistance under the Supplemental Security Income (SSI) program and who qualify for Medicaid. In some managed care programs—primarily those that are voluntary—states rely on participating MCOs to inform beneficiaries about managed care and to encourage them to enroll. To do this, MCOs use a variety of methods, including direct marketing. Allowing MCOs to market to and enroll beneficiaries can benefit both the state and the MCOs. With the staff and experience to promote managed care, MCOs can relieve the state of the administrative burden of reaching beneficiaries and convincing them to enroll in managed care. In addition, if a state chooses to expand its managed care programs to some uninsured, MCOs can help solicit these newly eligible individuals, who can be hard to reach. MCOs also benefit as they can actively seek a larger share of enrollees. However, MCO marketing activities are funded with part of their monthly capitation payments from the state—funds which might otherwise be used for medical services. In addition, delegating marketing and enrollment activities to MCOs in the five states we reviewed—California, Florida, Maryland, New York, and Tennessee—has enabled some MCOs and their sales agents to commit a number of marketing abuses. These abuses include deliberately misinforming beneficiaries about benefits or available providers, subjecting beneficiaries to high-pressure sales tactics, and fraudulently enrolling beneficiaries. In some cases, these abuses have become more prominent when states announce that they intend to go to mandatory enrollment and plans anticipate that direct marketing will be restricted or prohibited. Many of these abuses have resulted in access problems for beneficiaries—which are sometimes compounded by MCOs’ delays in processing beneficiaries’ requests to disenroll from their plan. For example, in August 1994, an MCO sales agent in California assured a newly enrolled beneficiary that she could continue to take her children to their current provider. However, in November 1994, this provider denied care for the beneficiary’s infant because the provider was not affiliated with her MCO. Unable to find a provider for her infant, she took action to disenroll her family from the managed care plan. After several weeks of contacting the MCO to determine the status of her disenrollment, she received disenrollment forms—which she had already completed and submitted to the MCO. In March 1995, the beneficiary learned that she was still enrolled in the MCO when she attempted to take her infant to her fee-for-service provider for needed care. The beneficiary then sought assistance from the local Legal Aid office to help her switch back to fee-for-service. As a result of allegations of marketing and enrollment abuses, California has banned door-to-door marketing and enrollment by MCOs. MCOs that use commissions to compensate their sales agents create an incentive for agents to increase enrollment. However, this incentive may also increase the likelihood for abuses to occur. A 1995 Tennessee audit of the marketing activities of a Medicaid MCO found that the MCO’s sales agents had used fraudulent or abusive enrollment practices to enroll about 4,800 individuals. One MCO agent inappropriately enrolled over 200 prisoners, who are ineligible for Medicaid benefits. Another sales agent forged over 140 Medicaid enrollment applications for individuals who were not eligible because they were employed and had private health insurance. The state audit also found that over 4,500 homeless individuals with the same address had been enrolled in the MCO. When the state could not verify their residence or eligibility, they were disenrolled from the plan. Some MCO sales agents illegally obtained confidential information on beneficiaries, which enabled them to target potential enrollees, meet enrollment quotas, and increase commissions. For example, in Maryland, sales agents from four MCOs bribed state Medicaid officials to obtain the names, addresses, dependent information, and benefit status of Medicaid beneficiaries eligible for enrollment in managed care. Each of the five states with reported marketing and enrollment abuses has taken a number of enforcement actions or levied fines against fraudulent and abusive MCOs. For example, Tennessee prosecuted and imprisoned two sales agents for fraudulent enrollments and recouped over $1.9 million in payments made to the MCO that had inappropriately enrolled homeless individuals. Maryland convicted 24 individuals—including sales agents and state workers—on charges related to bribery, unlawful disclosure of confidential information, and Medicaid fraud. According to a Maryland official, the state recouped over $25,000 in MCO overpayments. Florida imposed over $520,000 in fines on MCOs found to have fraudulently enrolled beneficiaries. (App. II contains more detail about recently reported abuses and corrective actions in California, Florida, Maryland, New York, and Tennessee.) In addition to these actions, four states—California, Florida, New York, and Tennessee—have since banned or restricted door-to-door marketing by MCOs. Banning direct marketing, however, has resulted in significant declines in managed care enrollment in Florida and New York. As a result, New York has temporarily suspended its ban on direct marketing in order to increase enrollment again and is implementing certain steps to help avert marketing abuses by MCOs. Mandatory managed care programs obviate the need for states to convince beneficiaries to switch to managed care from fee-for-service. Therefore, as states transition from voluntary to mandatory managed care programs—or move directly to mandatory managed care—they can reassess the value of delegating marketing and enrollment activities to MCOs. Each of the four states we visited as examples of innovative enrollment programs has prohibited or significantly restricted MCOs from initiating contact with beneficiaries not enrolled in their plans. Each state also has elected to assume—either directly or through its counties or enrollment broker—the enrollment function and, as part of this process, to concentrate its resources on educating beneficiaries about managed care and helping them select a health plan rather than be assigned to one by default. Table 1 shows the marketing and enrollment strategies and other selected characteristics of the managed care programs in the four states we visited. Because of their concern about potential marketing and enrollment abuses, Minnesota, Missouri, Ohio, and Washington prohibit MCOs from marketing door-to-door and at public assistance offices to beneficiaries in their mandatory programs. Beyond this prohibition, these states have adopted somewhat different approaches as to what type of direct contact the MCOs are allowed to initiate with beneficiaries. Missouri and Ohio allow limited contact with beneficiaries because each state believes that some types of marketing have a role in outreach and education. For example, Missouri allows MCOs to make presentations to groups if all participating MCOs are present and to distribute nominal gifts if they are given to all Medicaid beneficiaries, not just to those who enroll with the MCO. Ohio allows MCOs to display marketing materials at enrollment centers and to mail promotional materials to beneficiaries via the state. Missouri and Ohio also review and approve marketing materials to ensure that they are accurate and understandable. Missouri further requires that MCO materials meet certain content and presentation standards. For example, Missouri requires that MCO marketing materials be written at a sixth-grade reading level. Minnesota and Washington prohibit MCOs from initiating contact with Medicaid beneficiaries before enrollment. Both states review any materials that MCOs provide beneficiaries upon request and require that these materials meet certain criteria, such as reading-level and translation standards. When implementing mandatory programs or enrolling new beneficiaries, the four states we visited assume the task of informing beneficiaries about how to access care in a managed care system and of counseling them on important choices they must make in selecting a specific plan and a primary care provider. Most beneficiaries are accustomed to fee-for-service care, where they may select services from any qualified provider. In contrast, managed care requires enrollees to select a primary care provider, or gatekeeper, who authorizes all care, including access to specialists. These states believe that the more beneficiaries understand managed care principles, the better the managed care system works for them. For example, the four states believe that when beneficiaries understand the role of the primary care provider and the availability of services, their use of more costly emergency room services for nonemergency care will decrease. In the states we visited, one approach used to inform beneficiaries about the requirement to enroll in managed care is to provide this information when they come to their local public assistance office to apply for or seek redetermination of eligibility for financial assistance. Each state then provides an overview of managed care, which generally emphasizes the benefits of developing a relationship with a primary care provider, the importance of primary and preventive care, and the appropriate use of emergency room services. Beneficiaries also are informed of the MCOs they can choose from, how and where to enroll, and their rights and responsibilities as a participant in managed care. After beneficiaries have selected a plan, states sometimes also try to identify those beneficiaries who have certain high-risk medical conditions, such as asthma and diabetes, and encourage them to seek routine care. For example, enrollment counselors in Minnesota and Missouri guide beneficiaries through a self-assessment of their health care needs, which is passed on to the plan in which they enroll. These states also provide to varying extents choice counseling to assist beneficiaries in selecting an MCO and in completing the enrollment paperwork. These states prefer that, when multiple plans are available, beneficiaries choose their own plan—as opposed to being assigned to one by the state. Officials in these states believe that by choosing a plan, beneficiaries are more committed to managed care and are more likely to use the system appropriately. However, choosing a plan is not a simple exercise. The materials that describe managed care are generally complex and range in length from a few pages to over 100 pages. In reviewing these materials, beneficiaries must consider a number of factors, including whether their provider of choice is associated with a plan and whether other associated providers, such as hospitals, are conveniently located. In addition, numerous plans are offered in some areas. In the Seattle area, there are 11 plans to choose from; in St. Louis, Missouri, there are 7. To help beneficiaries choose a plan, the four states offer literature that lists providers in each MCO’s network and, to varying degrees, work with individual beneficiaries to try to match them with plans that include their regular physicians, if the beneficiaries have established such relationships. Although the states we visited use choice counseling, the intensity of this counseling varies. Where one state may offer extensive assistance to ensure that beneficiaries make informed choices, another state may be wary of biasing beneficiary decisions and, thus, simply inform beneficiaries of their options. Minnesota, for example, encourages enrollment counselors to work closely with beneficiaries to identify their individual needs and to help beneficiaries select the MCO and primary care provider that best meet these needs. Minnesota believes that the chance of a beneficiary selecting an MCO increases when the beneficiary receives such individualized counseling. In contrast, Ohio officials believe that beneficiary selection of an MCO should not be influenced by enrollment broker staff. Therefore, Ohio’s enrollment brokers focus on providing beneficiaries with information needed to make an informed selection; dialogue is reserved to answering questions beneficiaries may have about this information. In the states we visited, their circumstances and goals—such as staff resources, expertise required, the importance states attach to assisting individuals in choosing a plan, whether the program is being first implemented or is ongoing, and state implementation schedules—influence their education and enrollment strategies in two key ways. The first is in how the states communicate with beneficiaries, such as through in-person meetings, mail and telephone contacts, or some combination of both. The second is in who carries out these activities—state and local employees or an enrollment broker. The four states’ education and enrollment efforts also are augmented by other players. Community organizations, such as maternal and child health advocacy groups, play significant roles in informing beneficiaries about managed care programs—sometimes at the urging of the state and sometimes at their own initiative. Once beneficiaries are enrolled in a plan, MCOs continue to educate them—as explicitly required by state contracts—on issues such as prenatal and well-child care, nutrition, and family planning. In addition, the states continue, at some level, to provide beneficiaries support in navigating the managed care system. A major contrast among states that we visited is whether the state chooses to educate and enroll beneficiaries in managed care through (1) in-person meetings with beneficiaries when they come to local public assistance offices to apply or request redetermination of eligibility for financial assistance or (2) mail and telephone contacts. While each approach has its advantages and disadvantages, these states seem to use in-person interactions when the resources are available and mail and telephone contacts to facilitate a rapid enrollment schedule or maintain enrollment in an ongoing program. In-person meetings can include small group or individual presentations—sometimes supplemented by charts and videos—or individualized counseling, or both. Meeting in the local public assistance office provides enrollment counselors an opportunity to sit with beneficiaries to review MCO and other potentially complex materials and explain the differences among plans. These face-to-face meetings can help beneficiaries sort out these differences and make difficult decisions about health plans and providers. However, this type of interaction requires additional staff resources for counseling. In addition, for states transitioning beneficiaries from the fee-for-service program to managed care, in-person interaction can take 6 to 12 months if these states link enrollment of current Medicaid beneficiaries in managed care to their semiannual or annual process for redetermining eligibility for financial assistance. Minnesota uses face-to-face meetings because state officials believe that this type of contact helps beneficiaries make informed selections that they can commit to. Ohio uses similar methods in its in-person meetings, although with less individualized guidance in choosing a plan. As an alternative to in-person meetings and enrollment, some states with managed care programs may opt to mail managed care information packages to beneficiaries and to enroll them by mail or telephone. Through mail, more beneficiaries can be reached at less cost to the state. However, some MCOs and advocates are concerned that this form of contact may not provide some beneficiaries the assistance they need in learning about managed care. Washington, whose statewide program has been in place for several years, relies primarily on mail to inform beneficiaries about the requirement to enroll in managed care; however, beneficiaries can contact the state by telephone to obtain additional information or receive counseling in choosing their plan and provider. Beneficiaries can enroll by mail or telephone. Missouri uses both in-person and mail and telephone contacts. The state always has available enrollment staff to meet with beneficiaries who come in to the local public assistance office. When expanding its program into new counties, Missouri uses mail and telephone contacts to expedite enrollment. In 1995, for example, the state enrolled 150,000 people in the St. Louis metropolitan area in a 3-month period. Education and enrollment responsibilities can be done by state and local staff or contracted out to an enrollment broker. The four states that we visited considered a number of factors in determining who takes on this role. Although only two of these states—Missouri and Ohio—use enrollment brokers, experts that we spoke with indicate that states are increasingly contracting out their education and enrollment functions. We were informed that more than half of the states with Medicaid mandatory managed care programs now contract or are considering contracting with enrollment brokers. Using state and local workers can be advantageous to a state because they are already on the public payroll; as the state transitions from a fee-for-service to a managed care program, staff can transition as well. Public staff already know and understand the Medicaid program and the population being served. However, transitions can be difficult. When managed care and fee-for-service programs are running simultaneously—especially if the new program has a rapid start-up—there can be a high volume of work and staff may require additional training on managed care. In addition, if a state cannot increase its staff or resources for local enrollment efforts, adding Medicaid managed care responsibilities to existing staff workloads can overburden staff and may result in beneficiaries not receiving sufficient education and enrollment counseling. Contracting out education and enrollment functions has a number of advantages. In general, enrollment brokers can respond more readily to the demand of high-volume enrollment periods because they are frequently not constrained by state personnel rules and they can more easily build—or reduce—workforce capacity. In addition, enrollment brokers can provide information systems and expertise that assist states with verification of eligibility for MCO enrollment, enrollment processing, and data transmission at a potentially lower cost to the state than developing such a system in-house. Other services that states contract with enrollment brokers to provide include developing innovative education and outreach techniques; meeting the special needs of beneficiaries who do not speak English or who have vision, speech, or hearing impairments; and providing toll-free telephone lines to respond to beneficiary inquiries. Despite these advantages, enrollment broker employees initially may have less knowledge of the Medicaid program than state and local workers. Moreover, state staff may need to acquire new skills and additional state resources may be needed to monitor broker education and enrollment activities, ensure compliance with contract requirements, and carry out other contract management activities. Regardless of who performs the education and enrollment function, the state, local government workers, and enrollment brokers need to coordinate their efforts. Experience has shown that when local government workers are not included or kept informed, they may not communicate to beneficiaries the importance of the managed care program or sufficiently encourage them to meet with the enrollment broker. The states we visited did not conduct extensive analyses of the relative effectiveness or costs of using public employees or an enrollment broker. Rather, deciding which of these two approaches to use was primarily made on the basis of other factors, such as implementation schedules, the availability of adequate staff resources, and prior experience. For example, Missouri contracts with an enrollment broker primarily because of limits in hiring additional full-time state employees. In addition, contracting out allows Missouri to bring in the expertise needed to facilitate a rapid enrollment schedule. Ohio opted to use enrollment brokers when it expanded its mandatory program, because of its positive experience with a broker in the Dayton area, which Ohio felt provided a neutral source of information. (App. III describes in more detail the terms and services in Missouri’s and Ohio’s contracts and the states’ performance expectations for enrollment brokers.) When Minnesota began its managed care program in the mid-1980s, it contracted with an enrollment broker but found that the broker lacked the necessary understanding of Medicaid. Consequently, the state now provides counties funding for the staff that carries out education and enrollment responsibilities. However, due to budgetary concerns, Minnesota is considering alternative approaches for its statewide program expansion to rural counties and non-Medicaid individuals. Because there are few beneficiaries in rural counties and non-Medicaid individuals are expected to enroll in settings other than the local public assistance office, state officials believe that using county staff dedicated to education and enrollment activities in these areas may not be cost-effective. Washington also opted to use state workers to educate and enroll beneficiaries in managed care. When the state moved to implement its mandatory program statewide, many state workers who had been working on claims processing for the former fee-for-service program became available to carry out managed care functions. In the four states we visited, community-based groups and MCOs also play important roles in educating Medicaid beneficiaries about managed care and enrollment choices and in promoting preventive and primary health care. Generally, various community groups and programs—such as churches, Head Start, maternal and child health programs, programs for homeless people, and legal aid services—promote beneficiary understanding of a state’s managed care program and provide assistance to beneficiaries in choosing an MCO. Because of their frequent direct contact with the Medicaid population, community groups have some understanding of the health care needs of beneficiaries and know the providers and MCOs in the community. Washington, for example, informed us that it relies heavily on community-based organizations to augment its mail and telephone outreach and enrollment efforts. Among other initiatives, this state has used a train-the-trainer approach that prepares these community organizations to provide face-to-face counseling to beneficiaries and help them enroll. In turn, community and advocacy groups that we contacted readily acknowledge that the state encouraged their involvement in its managed care program. As part of their contractual agreement, the states we visited require MCOs to initiate contact with new enrollees in their plans and, in some cases, conduct an initial health assessment screening to identify individuals with certain high-risk health conditions. MCOs provide enrollees information, through mailings and other contacts, on the importance of primary and preventive care and enrollee responsibilities—such as contacting their primary care provider first when they need care and reserving emergency room use for emergencies only. MCOs may also be required to provide toll-free telephone lines to answer members’ questions on services and other matters and to handle members’ complaints. Some of the MCOs in the states we visited also assist enrollees by providing services that are not required by the state. For example, in general, the MCOs we spoke with had at least one social worker on staff to handle problems beyond health care. In addition to their direct contact with beneficiaries, community groups in Washington and Ohio are part of county advisory committees, whose membership also includes providers; government officials; and, in Ohio, MCOs. These committees meet regularly to discuss issues regarding the managed care programs, particularly as they affect beneficiaries, and are generally viewed as constructive in addressing program challenges and concerns. In Ohio, for example, members of a county advisory committee worked with the local telephone company to help provide beneficiaries basic telephone services to facilitate their communications with their primary care provider and MCO. The four states we visited provide additional support to beneficiaries once they are enrolled in a plan. Each state has a complaint and grievance process, as required by federal regulations, and three have toll-free telephone lines to assist beneficiaries with questions and complaints on issues, such as access and health care services provided by their plans. In addition, Washington and Minnesota have state officials dedicated to assisting beneficiaries who encounter difficulties in the managed care system. Of the states we visited, Minnesota has the most extensive system for supporting enrollees. The state provides funding for counties to hire advocates, who assist beneficiaries in resolving problems that may arise with their MCO. Minnesota also has a state ombudsman for the Medicaid managed care program to mediate grievances between beneficiaries and MCOs. The state and MCOs credit the advocates and ombudsman with generally being able to resolve problems to the satisfaction of beneficiaries and all other stakeholders. Collectively, the states we visited point to a number of data sources that can indicate beneficiary understanding of and satisfaction with the Medicaid managed care program. These include assignment rates, rates at which beneficiaries voluntarily switch MCOs, complaints, and results of customer satisfaction surveys. However, these sources—as currently designed and analyzed—do not directly measure the effectiveness of their enrollment and education programs. Despite some limitations, assignment rates appear to be the best available indicator for measuring the effectiveness of a state’s education and enrollment activities. A low assignment rate may indicate that beneficiaries have knowingly exercised their choice to select an MCO and a primary care provider. It is not, however, a perfect indicator of a beneficiary’s knowledge and understanding of a state’s managed care program. For example, a state or contractor could count a beneficiary as having made a choice when the beneficiary did not understand how the program or the selected MCO worked. Comparing assignment rates across states also is problematic. The states we visited define assignment rates somewhat differently. For example, when enrolling newborns in their mothers’ plans, Washington considers them assigned enrollees, whereas Ohio considers them voluntary. The states’ process of assignments also vary somewhat. For example, the time allowed to beneficiaries to select a plan—which can affect the number of beneficiaries who choose a plan for themselves—ranged from 15 to 60 days. The states we visited generally attempt to keep assignment rates at 20 percent or less. The most recent data available indicate that Minnesota’s assignment rate has been stable at 12 percent, Missouri’s assignment rate is between 14 and 20 percent, and Ohio’s assignment rate is 32 percent in one county and 41 percent in another. In Washington, assignment rates reveal an interesting pattern. After an extensive education and enrollment effort during the statewide implementation of managed care, the assignment rate was relatively low—between 20 and 25 percent. In recent months, however, the assignment rate crept above 30 percent, and both state and MCO officials we contacted believe that to ensure beneficiary knowledge about managed care, sufficient resources need to be devoted to education and enrollment on an ongoing basis. Rates at which beneficiaries switch MCOs may be an important indicator of overall program quality and satisfaction, although not necessarily of the effectiveness of an education and enrollment program. Rates of rapid disenrollment—the percentage of enrollees choosing to switch plans within the first 90 days of joining a plan in those states that allow monthly plan changes—might be a more direct indicator of the effectiveness of education and enrollment programs. Choosing to leave a plan within such a short time period can indicate that the plan does not meet the enrollee’s expectations or needs. However, neither Missouri nor Washington—the two states we visited that allow monthly plan switches—analyze their data for these purposes. Other data sources, if modified, may have the potential to be used as indicators of the success of state education and enrollment efforts. For example, data are available on the number and nature of beneficiary complaints registered with MCOs and the state. However, more focused tracking and analysis of complaints and appeals might enable states to better identify and correct problems associated with their education and enrollment programs. Customer satisfaction surveys also could be used to measure the effectiveness of state education and enrollment programs. However, these surveys generally have focused on beneficiary views on the overall quality of care received and have suffered from very low response rates. To better measure the effectiveness of their education and enrollment programs, states might include in their satisfaction surveys specific questions related to these programs. Washington has begun to do this. The state conducts monthly customer satisfaction surveys of random groups of beneficiaries and surveys of beneficiaries who switch MCOs to obtain reasons for plan changes. Both surveys include questions pertaining to beneficiary knowledge about their managed care plans. Allowing MCOs to directly market to Medicaid beneficiaries—whether to boost enrollment in voluntary managed care programs or to reach newly eligible uninsured in certain mandatory programs—has resulted in some abusive practices that states have found difficult to prevent. As states move to mandatory enrollment, they are increasingly retaining primary responsibility for the enrollment process or contracting with enrollment brokers. The four states we visited that are considered to have effective enrollment programs are focusing on educating beneficiaries about how to access services in a plan and counseling them to choose a primary care provider and MCO that best meets their health care needs. For the majority of Medicaid beneficiaries, who are accustomed to a fee-for-service system in which they can choose their own provider, learning how to navigate the managed care system and choosing a plan can be a perplexing process. This process also can be difficult for new beneficiaries who are unfamiliar with fee-for-service or managed care. Consequently, some states believe that investing resources in educating beneficiaries—with an emphasis on choosing a primary care physician and appropriately using health care services—is important for the beneficiary’s smooth transition to this new health care delivery approach. Differences in the relative effectiveness of how a state communicates with beneficiaries or who handles these communications have not been fully evaluated. Although in-person counseling can be more time-consuming and resource-intensive than mail and telephone contacts, this type of counseling may best meet the states’ aim to match beneficiaries to an MCO and primary care provider. Learning about managed care and choosing an MCO can be a daunting responsibility, and some states believe that face-to-face interaction results in better understanding and use of the program. When faced with the decision to keep the education and enrollment activities in-house or to contract them out, states are increasingly electing to contract with an enrollment broker. Again, however, there is little evidence that this approach is more effective or less costly than performing functions in-house. Rather, states, such as the ones we visited, have made their decisions on the basis of factors such as available staff resources and the ability to meet peak workload demands associated with program expansions. Also lacking are strong performance measures of effective education and enrollment efforts. While the rate at which beneficiaries select an MCO is one available indicator, it alone does not reflect the degree to which Medicaid beneficiaries understand and appropriately use the managed care system. Focused analyses of complaints and voluntary disenrollment patterns—especially within the first 90 days of enrollment—and well-designed customer surveys are additional tools that states might explore to further strengthen their education and enrollment processes. A draft of this report was reviewed by officials in HCFA’s Office of Managed Care and the Medicaid Bureau. HCFA officials provided technical comments that we incorporated as appropriate. We also provided the draft report to Medicaid staff from the nine states discussed in our report. All the states responded with technical or clarifying comments, generally agreeing with the accuracy of the information. In addition, three states—California, Florida, and New York—informed us of new initiatives they have recently undertaken or planned that are similar to the education and enrollment strategies used by states discussed in this report. Specifically, these states have restricted the types of direct-marketing activities MCOs can use. They also have acquired or plan to acquire the services of enrollment brokers to assume the functions of educating and enrolling beneficiaries in managed care. Based on their comments, we updated the report where appropriate to reflect these initiatives. In addition to requesting comments from HCFA and state agencies, we provided the draft report to independent researchers from the National Academy for State Health Policy, Virginia Commonwealth University, and Health Policy Crossroads. These experts generally agreed with the accuracy and comprehensiveness of our presentation of the issues and programs. We also incorporated their technical and clarifying comments 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. At that time, we will send copies to the Secretary of Health and Human Services. We also will make copies available to others on request. Please contact me on (202) 512-7114 or Kathryn G. Allen on (202) 512-7059 if you or your staff have any questions. Lourdes R. Cho, Richard N. Jensen, and Karen M. Sloan were major contributors to this report. To describe the role of marketing in expanding participation in managed care and the types of marketing and enrollment abuses that have occurred in Medicaid managed care to date, we obtained and reviewed documentation from state Medicaid agencies and state attorneys general offices. We selected cases in five states—California, Florida, Maryland, New York, and Tennessee—that have received media attention due to Medicaid managed care marketing problems. We reviewed these cases with state Medicaid officials and discussed their planned actions to correct the abuse problems identified with these cases. To identify states’ efforts to curb or prevent fraud and abuse in Medicaid managed care marketing and enrollment, we discussed existing or emerging state models for educating and enrolling beneficiaries in MCOs with experts in Medicaid managed care. We discussed these issues with officials from HCFA’s Office of Managed Care and a representative from the American Public Welfare Association. We also consulted with the following researchers: Jane Horvath and Neva Kaye, National Academy for State Health Policy; Robert Hurley, Virginia Commonwealth University; Sara Rosenbaum, Center for Health Policy Research of The George Washington University; and Mary Kenesson, Health Policy Crossroads. We also reviewed the general literature on Medicaid managed care marketing and education. We judgmentally selected four states for case studies—Minnesota, Missouri, Ohio, and Washington. Each state has mandatory capitated managed care programs in some or all of its counties that represent diversity of program maturity, strategies for education and enrollment, and grographic areas. In these four states, we focused on programs for low-income families, women, and children, who constitute the majority of Medicaid beneficiaries in these states. Among other selection criteria, these states had been recommended to us as having assignment rates that were low in relation to other states—one potential indicator of an effective education and enrollment process. In each of the four states, we interviewed state Medicaid officials and reviewed documentation to determine how the managed care programs were organized and operated and how education, marketing, and enrollment functions were conducted. In addition, we interviewed local public assistance officials and community-based groups to obtain their views on how well the educational, marketing, and enrollment efforts were proceeding. We also interviewed representatives of selected managed care plans in each state to obtain their views on education and marketing issues. Finally, we interviewed the enrollment brokers in Missouri and Ohio. To identify states’ efforts to measure the effectiveness of their education and enrollment approaches, we discussed the use of various performance indicators with program officials in the four states. We then assessed the extent to which these indicators accurately gauge the effectiveness of these states’ education and enrollment programs. We conducted our review from November 1995 to August 1996 in accordance with generally accepted government auditing standards. In the past 2 years, at least five states have received media attention due to deceptive or inappropriate marketing, enrollment, and disenrollment practices by some MCOs. Each of these states allowed plans to market directly to Medicaid beneficiaries. At the time of the reports of marketing abuses, four of the states—California, Florida, Maryland, and New York—had managed care programs with voluntary enrollment in MCOs. Since then, California and Florida have switched to mandatory enrollment, and Maryland plans to switch in January 1997. Beyond moving to mandatory programs, these states and New York have taken several actions intended to respond to marketing and enrollment abuses. In May 1996, California banned door-to-door marketing and MCO enrollment and significantly restricted the types of marketing activities MCOs can use. In July 1996, it contracted with an independent firm to enroll and disenroll beneficiaries in managed care statewide. Florida has banned direct marketing in managed care programs effective July 1995, and is in the process of acquiring the services of an enrollment broker. Effective October 1996, Maryland will ban direct marketing to prepare for its mandatory program. New York banned door-to-door marketing in New York City, where marketing abuses were found, and has begun the process of contracting with an enrollment broker to educate and enroll beneficiaries in managed care. In addition to these actions and in direct response to problems associated with abusive or fraudulent practices, states have modified their MCO contracts and taken enforcement actions against the MCOs and sales agents. For example, Florida cancelled or did not renew the contracts of three MCOs as a result of its investigation into the plans’ marketing and enrollment activities. In addition, Florida imposed over $520,000 in fines on MCOs found to have fraudulently enrolled beneficiaries. Maryland prosecuted and convicted MCO representatives found to have bribed state officials for information on Medicaid beneficiaries. Maryland also successfully recouped $25,000 from the MCOs involved in the cases. Tennessee successfully prosecuted three sales agents and recouped over $1.9 million in MCO overpayments. Table II.1 summarizes abuses encountered by the five states and actions taken by state officials to address these abuses. We did not evaluate the effectiveness of these corrective actions because they were recently implemented and were outside the scope of our work. Prosecuted and convicted MCO representatives and state employees Recouped $25,000 in payments to plans for fraudulent enrollments Established fines of up to $5,000 for each violation of marketing and enrollment contract requirements Established fines of up to $10,000 per Medicaid beneficiary enrolled as a result of marketing fraud (continued) Of the four states we visited, Missouri and Ohio elected to use enrollment brokers to conduct their Medicaid managed care education and enrollment functions. Both states contract for similar types of services; however, there are several notable differences in their enrollment broker contracts with regard to contract terms, service requirements, and performance expectations. Tables III.1 and III.2 delineate these differences, as well as the similarities. Missouri’s and Ohio’s enrollment broker contracts both delineate the geographic area to be covered, the duration of the contract, and the method of reimbursement; however, some key terms vary. Missouri awarded one contract to a national Medicaid claims processing firm to serve as a statewide enrollment broker. In contrast, Ohio awarded seven county-based contracts and encouraged local companies to bid for these contracts. Both states currently reimburse brokers on a per-enrollment basis. Ohio initially reimbursed the enrollment broker on a cost basis, but found that this type of reimbursement required too much direct oversight. Neither state reimburses their enrollment brokers for plan switches. Annual with renewal option for two more 1-year periods 7 contracts ranging from $130,000-$760,000 (with most about $230,000) Type of company holding current contract(s) In their enrollment broker contracts, Missouri and Ohio specified education, beneficiary, and administrative and clerical services that would complement state capabilities. Although there are many similarities in the states’ requirements for carrying out these services, there are some notable differences. For example, Missouri’s enrollment broker carries out all enrollment functions using automated systems to input enrollment data and to transfer these data to the state and MCOs. In Ohio, the enrollment brokers send completed enrollment forms to the state; the state then inputs the enrollment data and provides the MCOs with enrollment information. Table III.2 displays the similarities and differences in these two states’ contracts. Develop innovative education and outreach techniques to target specific needs of the county and maintain and distribute all state- and MCO-provided materials to beneficiaries. Create, produce, and mail education and enrollment materials, including letters, brochures, and other outreach materials. Conduct neutral and impartial presentations to beneficiaries about MCO options. Provide choice counseling to beneficiaries to help them select an MCO and a primary care provider. Assist beneficiaries in completing enrollment forms. Contact and provide over-the-telephone education and counseling to beneficiaries who do not meet with staff at public assistance offices. Meet the special needs of non-English- speaking beneficiaries and beneficiaries with vision, speech, or hearing impairments. Provide toll-free telephone lines to respond to beneficiary inquiries, provide MCO enrollment information, and log beneficiary complaints. Use toll-free telephone lines to enable beneficiaries to enroll and switch MCOs. Provide enrollment counselors access to the state information systems to enable them to respond rapidly to beneficiary questions about eligibility, to review MCO provider networks, and to conduct enrollment. Conduct a health assessment, identify third-party health insurance coverage, and promote voter registration. (continued) Provide enrollment counselors training on managed care, how to disseminate information in an effective manner, and general customer service principles, including managing hostile callers. Provide enrollment counselors 40 hours of training on managed care and cultural sensitivity. Develop and use automated systems to log in enrollment applications received through the mail, to verify eligibility status (through state eligibility files), generate eligible-specific enrollment forms, and accept client enrollments electronically from local public assistance offices. Verify enrollment eligibility using the state automated system. Assign beneficiaries to MCOs based on the state’s algorithm. Resolve or refer to the MCO or state beneficiary complaints about the enrollment broker, participating MCOs, and providers. Make available to the state on a regular basis via electronic media a list of newly enrolled beneficiaries. Track and monitor beneficiary inquiries and complaints. Provide periodic statistical reports on all broker activities, such as enrollments, assignments, and the number and types of inquiries received. Maintain logs of completed enrollment forms mailed to the state for processing and of processed forms picked up by MCOs. Maintain active communication with the local public assistance offices and other key stakeholders in the enrollment process. Missouri and Ohio have set a number of performance expectations for their enrollment brokers in facilitating beneficiary selection of an MCO. Missouri explicitly requires its enrollment broker to maintain an assignment rate of 20 percent or less. Other state requirements include performance expectations for education and beneficiary services. In educating beneficiaries, both states require their enrollment brokers to meet certain special needs. For example, Missouri requires that education materials be written at a sixth-grade reading level and be printed in several languages to ensure that most beneficiaries will comprehend the materials. Ohio requires that the enrollment broker have available interpreters and other staff to assist non-English-speaking beneficiaries and those with vision, speech, and hearing impairments. Both states expect their enrollment brokers to be responsive to beneficiaries. Ohio requires that enrollment packages be mailed within 2 days of receiving a request. Missouri requires that undeliverable packages returned to the broker be forwarded to the state within 3 days of return. Both states’ toll-free telephone lines must be operational during typical business hours, Monday through Friday. Missouri also requires that lines be answered by the fifth ring 97 percent of the time and that no caller can be put on hold for longer than 2 minutes. Ohio requires that the enrollment brokers provide a system that allows beneficiaries to obtain basic program information and to leave requests for call-backs 24 hours a day, 7 days a week. Call-backs must be made no later than the end of the next business day. 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. | Pursuant to a congressional request, GAO provided information on state efforts to enroll Medicaid beneficiaries in managed care, focusing on: (1) the role of managed care organizations (MCO) in marketing and expanding managed care participation; (2) the types of marketing and enrollment abuses that have occurred and states' efforts to curb these abuses and ensure that beneficiaries are informed about their health plan options; and (3) state efforts to measure the effectiveness of their education and enrollment approaches. GAO found that: (1) to boost enrollment in their Medicaid managed care programs, especially where participation is voluntary, some states have allowed MCOs to use various direct-marketing strategies, including door-to-door marketing, to encourage beneficiaries to sign up with their plan; (2) however, some MCOs and their agents have engaged in unscrupulous practices to maximize beneficiary enrollment, and thereby maximize plan revenues and commissions; (3) these practices include bribing public officials to obtain confidential information on beneficiaries, paying beneficiaries cash and other incentives to sign up, deliberately misinforming beneficiaries about access to care, and enrolling ineligible beneficiaries; (4) to address or avoid these marketing problems, many states have banned or restricted direct-marketing activities by MCOs and have retained responsibility for enrolling or disenrolling Medicaid beneficiaries; (5) as part of their enrollment programs, these states devote considerable efforts to facilitating beneficiaries' difficult transition from fee-for-service to managed care; (6) to do this, they have developed strategies to help beneficiaries understand the principles of managed care and make the often complex decisions involved with selecting an MCO; (7) despite their common emphasis on using the enrollment process as an opportunity to promote beneficiary understanding of the program and selection of an MCO, the four states GAO visited varied in their specific approaches, in part, due to their goals and circumstances; (8) these four states' education and enrollment efforts are also often augmented by community groups, such as maternal and child health advocates, and by MCOs, who are contractually required to inform enrollees on a continuing basis of plan services and operations; (9) although community groups in the four states generally believe that their states' education and enrollment efforts have facilitated beneficiaries' transition or introduction to managed care, methods used to measure the effectiveness of these approaches have been limited; (10) state officials and experts GAO contacted consider the best current measure to be the rate at which beneficiaries select their own health plan, rather than being assigned to one by the state; (11) while these states attempt to reach voluntary selection rates of 80 percent or higher, their actual experience has ranged from 59 to 88 percent; and (12) as general measures of the overall operation of their Medicaid managed care programs, these states also track other indicators, but none of these was designed or analyzed to specifically measure the effectiveness of the education and enrollment process. |
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With virtually billions of records, the federal government is the largest single producer, collector, and user of information in the United States. In order to carry out the various missions of the federal government, federal agencies collect and maintain personal information such as name, date of birth, address, and SSNs to distinguish among individuals and ensure that people receive the services or benefits they are entitled to under the law. SSA is responsible for issuing SSNs as part of its responsibility for administering three major income support programs for the elderly, disabled, and their dependents: the Old-Age and Survivors Insurance; Disability Insurance; and Supplemental Security Income. SSA is also the repository of information on individuals’ wages and earnings. This information is used in tax administration and is reported by individuals on their federal income tax returns. Tax return information may only be disclosed as permitted by the IRC. Information transmitted to SSA has been protected from disclosure by statute and regulation since the inception of the Social Security program. To maintain the confidentiality of the personal information the agency collects to carry out its mission, in June 1937, SSA adopted its first regulation, known as “Regulation No. 1,” to protect the privacy of individuals’ records and to include a pledge of confidentiality. The regulation was reinforced by amendments to the Social Security Act in 1939, which became the statutory basis for maintaining the confidentiality of SSA’s records. For decades, the act, along with Regulation No. 1, formed the basis for SSA’s disclosure policy. However, the enactment of subsequent legislation—the Freedom of Information Act (FOIA) in 1966 and Government in the Sunshine Act in 1976—caused SSA to reexamine its disclosure and confidentiality policy. This legislation placed the burden on SSA, as well as other federal agencies, to justify withholding information requested. Still, SSA’s policy is designed to protect the privacy rights of individuals to the fullest extent possible while permitting the exchange of records required to fulfill its administrative and program responsibilities. Over the years, SSA’s disclosure policy has been revised to comply with about 25 statutes, including the Privacy Act. The Privacy Act of 1974 is the primary law governing the protection of personal privacy by agencies of the federal government. The Privacy Act regulates the collection, maintenance, use, and disclosure of personal information that federal agencies maintain in a system of records. The act requires that, at the time the information is collected, agencies inform an individual of the following: (1) authority for the collection and whether it is mandatory or voluntary, (2) the principal purpose for the collection of information, (3) what the routine uses for the information may be, and (4) what the consequences are of not providing the information. The act applies to systems of records maintained by federal agencies, and with certain exceptions, prohibits agencies from disclosing such records without the consent of the individual whose records are being sought. The act authorizes 12 exceptions under which a federal agency may disclose information in its records without consent, as shown in table 1. The Privacy Act requires that the Office of Management and Budget (OMB) issue guidance and oversee agency implementation of the act. The act does not generally apply to state and local government records; state laws vary widely regarding disclosure of personal information in state government agencies’ control. The Privacy Act, under the law enforcement exception, outlines the minimum criteria that must be met by a law enforcement agency to obtain personal information without an individual’s consent. The act requires that the request specify the information being sought and the law enforcement activity being carried out. The request must be in writing, and signed by the agency head. In addition, OMB guidance permits agencies to disclose a personal record covered by the Privacy Act to law enforcement at the agencies’ own initiative, when a violation of law is suspected; provided that such disclosure has been established in advance as a “routine use” and misconduct is related to the purposes for which the records are maintained. The routine use exception of the Privacy Act permits disclosure of individuals’ personal information if the requested use is compatible with the purpose for which the information was initially collected. Under the act, agencies are required to keep an accurate accounting regarding each disclosure of a record to any person or to another agency and to retain the accounting for at least 5 years or the life of the record, whichever is longer. Under OMB guidance, an agency need not keep track of every disclosure at the time it is made, but the agency must be able to reconstruct an accurate and complete accounting of disclosures. While SSA’s policy permits the sharing of nontax information with law enforcement, it does so only under certain conditions and is more restrictive than both the law enforcement exception specified under the Privacy Act and the disclosure policies of most federal agencies. Before allowing the disclosure of information, SSA’s disclosure policy requires SSA officials to consider several factors such as the nature of the alleged criminal activity, what information has been requested, and which agency has made the request. Such considerations are above and beyond what is included in the law enforcement exception to the Privacy Act. SSA maintains that it must have a restrictive disclosure policy because much of the information the agency collects is especially personal. In addition, SSA officials believe that the agency must uphold the pledge it made to the public to keep this information confidential when SSA first began collecting it. Unlike SSA, the policies of most major federal agencies allow the disclosure of information to law enforcement if the requests for information meet the requirements outlined in the Privacy Act. However, like SSA’s disclosure policy, the disclosure policies of the IRS and the Bureau of the Census, which have disclosure requirements prescribed in their statutes, are more restrictive than the Privacy Act and the disclosure policies of most federal agencies. While SSA has a long history of protecting individuals’ privacy, the agency’s disclosure policy allows the disclosure of information to law enforcement under certain conditions. These conditions require that SSA officials consider several factors before they release individuals’ personal information. For example, they must examine the nature of the alleged criminal activity, what information has been requested, and which agency has made the request. SSA will share information if the criminal activity involves one of the following: Fraud or other criminal activity in Social Security programs. SSA will provide information necessary to investigate or prosecute fraud or other criminal activity in Social Security programs. Nonviolent crimes and criminal activity in other government programs that are similar to Social Security programs. SSA may also disclose information to investigate and prosecute fraud and other criminal activity in similar benefit programs, including state welfare/social services programs such as Medicare or Medicaid, unemployment compensation, food stamps, and general assistance and federal entitlement programs administered by the Department of Veterans Affairs, Office of Personnel Management, and the Railroad Retirement Board. Violent and serious crimes. SSA may disclose information when a violent crime has been committed and the individual who is the subject of the information requested has been (1) indicted or convicted of the crime and (2) the penalty for conviction is incarceration for at least 1 year and a day regardless of the sentence imposed. SSA might also disclose information when a person violates parole and the violent crime provisions of the original conviction have been met. SSA defines violent and serious crimes as those characterized by the use of physical force or by the threat of physical force causing actual injury, or coercing the victim to act for fear of suffering serious bodily harm. Such crimes include but are not limited to: murder; rape; kidnapping; armed robbery; burglary of a dwelling; arson; drug trafficking or drug possession with intent to manufacture, import, export, distribute or dispense; hijacking; car-jacking; and terrorism. Provisions of other federal statutes that require that SSA disclose its records such as in connection with civil or criminal violations involving federal income tax or the location of aliens. SSA will disclose information when another federal statute requires disclosure, such as the IRS statute for tax purposes or the Immigration and Naturalization statute for locating aliens. The jeopardy or potential jeopardy of the security and safety of SSA’s clients, personnel, or facilities. SSA will disclose information about an individual if that individual is involved in an activity that places the health, safety or security of SSA clients, personnel, or facilities in jeopardy or potential jeopardy. After the disclosure, SSA must send a notice of the disclosure to the individual whose record was disclosed. SSA’s disclosure policy is contained in 20 C.F.R. Part 401 and is promulgated through regulations outlined in its “Program Operations Manual System” (POMS) and Emergency Messages. POMS is the primary tool the field offices use to assist them in making appropriate disclosure decisions when they receive requests from law enforcement agencies. POMS provides detailed guidance and incorporates references to disclosures covered by 25 different statutes, which are located in at least 15 different sections of the POMS. SSA uses Emergency Messages, usually limited to a one-time only emergency situation, to provide implementing guidance in emergency situations. For example, on September 19, 2001, SSA issued an emergency message to field offices instructing them to direct all law enforcement requests related to the terrorists’ attacks of September 11, 2001, to SSA’s OIG’s Office. SSA’s regulations are designed for implementation at all levels of the agency, including SSA’s field offices, regions, and headquarters offices. SSA can make disclosures through its headquarters, 1,336 field offices, or 10 regional offices. Disclosures can also be made through SSA’s OIG, the law enforcement component of SSA that is responsible for conducting audits and investigations of agency programs and activities. The OIG is authorized to handle disclosures through a memorandum of understanding (MOU) with SSA. The OIG investigations staff conducts and coordinates activity related to fraud, waste, abuse, and mismanagement of SSA programs and operations. The OIG investigations staff also conducts joint investigations with other federal, state, and local law enforcement agencies. The OIG investigations staff is located in 60 locations that comprise 31 field offices and 10 field divisions. SSA’s OIG is authorized to disclose individuals’ personal information to law enforcement agencies as agreed with SSA under a MOU. In July 2000, SSA’s OIG and the Commissioner of SSA signed an MOU, which outlines the conditions under which the OIG can disclose to law enforcement agencies certain limited information from SSA’s records in cases involving fraud of a Social Security program or misuse of an SSN. Under the MOU, the OIG can disclose whether a given name and SSN match the name and SSN in records at SSA, referred to as SSN verification. The MOU delegates authority to OIG employees at all levels. SSA requires that the OIG ensure that law enforcement requests meet the same requirements outlined in the Privacy Act as well as those outlined in SSA’s POMS and other guidance. In addition, law enforcement requests must include the name and SSN to be reviewed and a certification that the individual about whom information is sought is suspected of misusing an SSN or of committing another crime against a Social Security program. Under the MOU, the OIG is permitted to open an investigation and participate in joint investigations with law enforcement officials, if the OIG determines that further investigation is warranted. SSA requires that the OIG submit an annual report to the Commissioner of SSA, no later than 30 days after the end of the fiscal year. The annual report must reflect the total number of SSN verification requests received and responses made, if the number is different, broken down by OIG field division. SSA also requires that the OIG maintain records from each fiscal year for 1 year. The Commissioner of SSA can revoke the delegation of authority to the OIG described in the MOU at any time by providing a 30-day notice. While any SSA office can make disclosures, the Privacy Officer within SSA’s Office of Disclosure Policy, located in the Office of General Counsel, has overall responsibility for overseeing the agency’s implementation of the disclosure policy. Except for requests involving national security issues, which are referred to the Privacy Officer at SSA headquarters and ultimately to the Commissioner of SSA, field locations handle requests for disclosing information because the offices are at the local level where information is frequently needed. Privacy Coordinators are located in the regional offices and are available to assist the field offices on questions about disclosures. The Privacy Coordinators report to the Privacy Officer. When SSA receives a request from law enforcement agencies, SSA officials must first determine whether the request is valid, that is, in writing on the agency’s letterhead, specifies the records being requested, and is signed by an official of the requesting office. SSA field office officials are instructed to rely on their knowledge of local law enforcement agencies to determine whether a request is from the proper person. For valid requests, SSA officials must also determine whether the agency requesting the information has jurisdiction in the particular case. Other specific criteria considered in determining whether SSA will disclose individuals’ personal information to law enforcement agencies are outlined in figure 1. Tax information is disclosed consistent with IRC 6103. SSA officials told us that in all cases, the agency’s practice is to provide only the minimum amount of information necessary to assist law enforcement. For law enforcement requests that do not fit neatly in the categories described or do not meet the specific criteria outlined in SSA’s policy, SSA’s Commissioner decides whether or not the agency will share the requested information using the Commissioner’s ad hoc authority. The Commissioner’s ad hoc authority is generally reserved for exceptional cases approved on a case-by-case basis. For example, following the September 11th, 2001, terrorist attacks, the Commissioner’s ad hoc authority was invoked to disclose to the FBI and other law enforcement agencies information in SSA’s files concerning suspects or other persons who may have had information on the attacks and to help identify and locate victims and members of their families. Certain requirements must be met in order to invoke the Commissioner’s ad hoc authority. The request must be deemed appropriate and necessary, SSA’s regulations cannot specify what is to be done in the circumstance in question, and no provision of law can specifically prohibit the disclosure. SSA policy prohibits the disclosure of tax return information under the Commissioner’s ad hoc authority. SSA officials told us that the Commissioner invokes this authority infrequently and had rendered decisions to disclose information to law enforcement agencies 35 times between April 1981 and October 2002. Unlike SSA’s disclosure policy, the Privacy Act requires that fewer criteria be met before a disclosure is made. However, SSA officials state that the agency must protect tax information and maintain the pledge of confidentiality that the agency made long before the Privacy Act was enacted. Therefore, SSA’s policy imposes additional requirements as a condition for disclosure. Over the years, SSA has modified its disclosure policy to incorporate legislative requirements, but where it had discretion, SSA has continued to focus its policy on protecting individuals’ privacy and upholding the pledge of confidentiality. The law enforcement exception of the Privacy Act permits disclosure of individuals’ personal information when a law enforcement agency (1) requests the information for an authorized law enforcement activity, (2) makes the request through the agency head, (3) submits the request in writing, and (4) specifies the information requested and the law enforcement activity involved. Under the Privacy Act, a law enforcement agency investigating a person suspected of embezzlement or shoplifting could submit a request to most federal agencies, including SSA, for information seeking or verifying the person’s name, SSN, date of birth, last known address, and other data. Most federal agencies would probably provide that information from their records covered by the Privacy Act. However, under SSA’s policy, no information would be given to the law enforcement agency because SSA has determined that these are not crimes that warrant any disclosure of individuals’ personal information. Additionally, the Privacy Act includes a routine use exception, which allows personal information to be disclosed on the initiative of the custodian agency. To qualify for a routine use, the proposed use of the information must be compatible with the purpose for which the information was obtained. Agencies must publish their routine uses in the Federal Register. SSA relies on the routine use exception to disclose information to law enforcement when fraud or other violations are suspected in SSA’s programs and other similar federal income or health maintenance programs. SSA’s disclosure policy is more restrictive than the disclosure policies of most major federal agencies, with IRS and the Census Bureau, being exceptions. However, unlike SSA’s disclosure policy, the policies of the IRS and Census are specifically provided in statute. Most major federal agencies’ policies allow for disclosures to law enforcement agencies under the law enforcement or the routine use exceptions of the Privacy Act. The law enforcement exception of the Privacy Act permits all federal agencies to disclose personal information to law enforcement agencies upon written request from the law enforcement agency. Twenty of the 24 major federal agencies have issued regulations that reference that disclosure authority. In addition, OMB guidance permits agencies to disclose personal information covered by the Privacy Act to law enforcement agencies under the routine use exception of the Privacy Act. The routine use exception permits federal agencies, at their own initiative, to disclose personal information without consent if the use is compatible with the purpose for which the information was collected. OMB guidance permits such a disclosure to a law enforcement agency when a violation of law is suspected, provided that such disclosure has been established in advance as a “routine use” and the misconduct is related to the purposes for which the information is collected and maintained. Fourteen of the 24 major federal agencies have established law enforcement routine use exceptions that are generally applicable to their systems of records. Some agencies alternatively only apply the law enforcement routine use exception to specific systems of records. Accordingly, under the Privacy Act, disclosure of personal information to law enforcement agencies may be permitted, depending on the agency and the circumstances, either by the law enforcement exception or the routine use exception. SSA, however, does not permit such disclosures from SSA program records under either exception. As already discussed, SSA requires considerations above and beyond the requirements in the Privacy Act. (See app. II for a list of federal agencies’ rules referencing the Privacy Act law enforcement disclosure authority and those authorizing a general law enforcement routine use exception.) Although SSA’s disclosure policy for law enforcement is restrictive relative to most other federal agencies, IRS and Census also have restrictive disclosure requirements, which are outlined in these agencies’ statutes. IRS’s disclosures of tax returns and return information are governed by Internal Revenue Code Section 6103, which prohibits disclosures unless specifically authorized in statute. This statutory restriction serves to protect the confidentiality of personal and financial information in IRS’s possession and ensure compliance with tax laws. A court order is generally required to open tax returns or other tax information to federal law enforcement officials investigating a federal nontax crime or preparing for a grand jury or other judicial proceeding, without the knowledge or consent of the taxpayer involved. The Attorney General, the Deputy Attorney General, and other Justice Department officials specifically named in the statute, are permitted to seek a court order. To obtain a court order, the requester has to demonstrate that: reasonable cause exists to believe that a specific criminal act has been committed and tax return information is or may be relevant to a matter relating to the commission of the criminal act; the information being sought will be used exclusively in a federal criminal investigation concerning the criminal act; and cannot be reasonably obtained, under the circumstances, from another source. Information federal law enforcement obtains from IRS generally cannot be shared with state and local law enforcement. However, the Victims of Terrorism Tax Relief Act of 2001 permits federal law enforcement agencies involved in terrorist investigations/intelligence gathering to redisclose this information to officers and employees of state and local law enforcement who are directly engaged in investigating or analyzing intelligence concerning the terrorist incidents, threats, or activities. The disclosure authority for Census is spelled out in statute under Title 13 of the United States Code. The Census statute prohibits the disclosure of any individual’s Census data other than for use by the Census, making information that the Bureau of the Census collects and maintains immune from the legal process. Unlike IRS, a court order will not permit the Census Bureau to disclose information to law enforcement agencies or any other entities that may request an individual’s personal information. Regulations provide that a person’s individual census information may not be disclosed to the public for 72 years from the decennial census for which the information was collected and the fine for wrongful disclosure of confidential census information is imprisonment of up to 5 years or a fine up to $250,000, or both. The statute further restricts the use of individuals’ Census data to the Secretary of Commerce, or bureau and agency employees. Additionally, Census data for individuals may only be (1) used for statistical purposes for which it was supplied; (2) published in a manner so that an individual’s information cannot be identified; and (3) examined by persons who have been sworn as officers or employees of the Department of Commerce, or the Bureau of the Census. The statute even protects from compulsory disclosure, copies of Census information that an individual may have retained for their own personal use. Accordingly, “no department, bureau, agency, officer, or employee of the government, except the Secretary of Commerce in carrying out the statutory duties of the agency, shall require copies of information an individual may have retained.” An individual’s personal retained copies of census forms are immune from the legal process and cannot be admitted as evidence in any action, suit, or other judicial or administrative proceeding without the individual’s consent. SSA maintains that it must have a restrictive disclosure policy to protect individuals’ personal information, even from law enforcement requests, because much of the information the agency collects is especially personal and was initially obtained under the pledge of confidentiality. SSA officials told us that they try to limit disclosure because the agency has no control over the extent to which information will be safeguarded once disclosed. In addition, Social Security has universal coverage and an individual cannot refuse to be assigned an SSN. The Social Security Act requires that SSA compile wage and employment data for each individual. According to an SSA official, individuals cannot receive Social Security benefits without having an SSN. In SSA’s disclosure policy, the agency recognizes that its rules for disclosure are more restrictive than the Privacy Act and cites several reasons why. According to SSA, it seldom has records that are useful to law enforcement agencies and information from tax returns— such as addresses or employment information—cannot be disclosed. Also, SSA contends that its resources should not be diverted for nonprogram purposes. Finally, SSA says that it has a long-standing pledge to the public to maintain the confidentiality of its records. Although SSA’s policy supports sharing limited information with law enforcement under certain conditions, we found evidence that some SSA field office staff are confused about the policy that could result in staff applying it inconsistently. Information provided to law enforcement is generally limited to the verification of a name and SSN, though more information may be provided under certain circumstances. Information obtained through our selected site visits and survey results indicated that SSA field offices might have denied law enforcement requests when they could have provided information and instances in which offices might have provided more information than was permitted under SSA’s policy. Because SSA is not required to and therefore, does not maintain aggregated data showing what requests were made, whether they were approved, and what information was given to fulfill them, we could not determine the extent to which these inconsistencies occurred. Information provided to law enforcement is routinely limited to the verification of a name and SSN, though more information may be provided under certain circumstances. When law enforcement provides SSA with the name and SSN of an indicted or convicted criminal, SSA can conduct a search on the SSN to determine if it is valid and if it matches the name provided by law enforcement. If the name and the SSN do not match, SSA will not usually identify to whom the SSN actually belongs, though they will tell law enforcement that there was no match. Except to identify and locate illegal aliens, SSA generally will not provide any information if law enforcement only provides an SSN and wants to know to whom it is assigned. Under certain circumstances, such as when SSA’s OIG conducts a joint investigation with other law enforcement agencies involving fraud against one of SSA’s programs, the OIG is allowed to provide any information available in SSA’s data system, short of IRS data. SSA tries to ensure that its disclosure policy is consistently implemented in all field offices. SSA takes various steps to ensure the consistent applications of its disclosure policy. For example, SSA has taken steps to educate its staff about its disclosure policy. SSA managers indicated that SSA staff is given disclosure policy training when they start employment and such training is refreshed as needed. Additionally, SSA posts the policy on its internal Web site and on Compact Disc-Read-Only Memory (CD-ROM) for staff reference. Furthermore, a regional “privacy coordinator” is available to answer staff questions about proper disclosure procedures. One SSA regional office provided a chart to all SSA field offices within its “program circle” that briefly summarizes SSA’s policy on access and disclosure without consent. Although this chart had not been updated since July 1996, it was viewed by the manager we talked with as a handy guide for what could be disclosed and also provided references to the location of a more thorough explanation of SSA’s policy in their POMS. In addition, to ensure that disclosure procedures are followed, field office managers told us that they usually handle information requests from law enforcement officials rather than leaving this duty to staff. However, we noted in our survey and during selected site visits, a limited number of instances where SSA’s disclosure policy appears to have been inconsistently applied. In some instances, law enforcement might have received more information than permitted under SSA’s policy. For example, one SSA OIG office we visited provided a law enforcement agency with the name, SSN, date of birth, place of birth, and parents’ name when it seemed that only the name and SSN verification results should have been provided. In another case, an SSA official reported that a state law enforcement officer stopped an individual and telephoned SSA requesting information to verify the SSN, date of birth, place of birth, and sex and was provided the results over the telephone. Although SSA’s policy permits the verification of the name and SSN, such requests are required to be in writing. In other instances, requests that should have been approved might have been turned down. For example, one SSA field office manager told us that nothing could be disclosed to law enforcement if the request for information pertained to an individual suspected of misusing an SSN because the individual had not been indicted or convicted of this crime. However, SSA’s policy would appear to permit disclosure in this situation. Another SSA field office manager told us that office would not disclose any information without consent from the individual for whom the information is being requested. Several possible reasons exist for the inconsistent application of SSA’s disclosure policy. Although our survey showed that most SSA field offices receive requests for information from law enforcement, SSA field officials we spoke with said that they do not receive requests frequently. For example, several officials told us that they received fewer than 10 requests in 2002. Because requests are infrequent, staff must often consult the policy to help them to respond properly. However, many staff members consider the policy confusing. For example, one field office manager said that, “We have doubts as to what information should be provided to U.S. Border Patrol.” Similarly, a manager in another field office said, “SSA disclosure policy should be written in “Plain English” to make it easy to understand by all readers.” A different field office manager commented, “ Disclosure policy is still frequently confusing for much of our staff.” This lack of clarity leads to confusion about what should be disclosed. For example, one manager said, “ is quite confusing. It’s hard to know what you can disclose.” Another manager commented, “I think the policy should be clearer than it is. There’s too much…’if this, then that, but not this and so on.’” In addition, SSA’s responsibilities to both assist law enforcement and protect individuals’ privacy may be exacerbating the confusion and inconsistent application of the agency’s policy. For example, officials at SSA headquarters said that they want to help law enforcement as much as possible, but they believed they must also protect the privacy of the information in their systems of records in order to perform SSA’s primary mission. Some managers in SSA field offices believed that the agency should provide information to law enforcement. However, several field office managers expressed their concerns and reluctance about sharing information with law enforcement agencies. Employees who provide information to an individual inappropriately could be subject to a penalty, including suspension or termination from SSA. Therefore, rather than risk disclosing information inappropriately, some officials might err on the side of caution and not disclose information even when it is permitted under the agency’s disclosure policy. Consistent application of SSA’s disclosure policy cannot be assessed because, according to OMB guidelines, SSA is not required to maintain aggregated data showing what requests were made, whether they were approved, and what information was given to fulfill them. According to SSA, disclosures of individuals’ personal information are kept in individuals’ files. While SSA policy does not stipulate that field offices must keep track of requests made by a law enforcement agency, our survey revealed some information about these requests. For example, we estimate that 82 percent of SSA field offices indicated that they had received requests for personal information from law enforcement agencies. However, 71 percent of SSA’s field offices do not maintain a record of requests made by law enforcement agencies. While the majority of SSA field offices do not maintain records of law enforcement requests, results from our survey showed that 90 percent of the SSA OIG offices maintain these data for disclosures the OIG made. The SSA OIG is required to report to the SSA Commissioner aggregated data annually on disclosures made. According to the OIG, it also keeps a hard copy of requests made by law enforcement agencies for at least 1 year. On the basis of these aggregated data, between fiscal years 2000 and 2002, SSA OIG regional divisions fulfilled almost 30,000 requests from law enforcement agencies for name and SSN verification. Table 2 shows the number of verifications fulfilled by SSA OIG regional divisions and headquarters. However, no numbers are kept on denied law enforcement requests. According to SSA OIG officials, in most cases, law enforcement officers contact OIG offices by telephone before submitting a request so no written record exists if the OIG does not grant the request for information. While some law enforcement officials we spoke with were unfamiliar with SSA’s disclosure policies, most were generally satisfied with the information provided by SSA, though most would like more. Some law enforcement agencies at the state and local level were unfamiliar with the process for obtaining information and expressed frustration with their attempts to obtain information from SSA. Law enforcement officials indicated that the SSN and name verification SSA provided was often helpful to their investigations. However, most wanted SSA to provide additional information such as address, date of birth, and employer or family information. SSA officials have several concerns about expanding SSA’s disclosure policy. Findings from site visits indicated that some law enforcement officers at the state and local level, who generally request information from SSA field offices, are unfamiliar with the process for obtaining information from SSA offices. Because SSA does not have written procedures on its disclosure policy available to law enforcement, some officers find out how to obtain information virtually by trial and error. For example, one officer told us that after having his initial request for information, which was not in writing turned down because he had not followed proper procedures, he obtained a search warrant to obtain the information from SSA. The officer said that no one at SSA explained to him the procedures for obtaining information until he got the search warrant. It is unclear when or if SSA officials let law enforcement officers know what procedures need to be followed to get information. Federal law enforcement agencies, on the other hand, more often understood the Privacy Act’s procedures. Further, most federal law enforcement agencies we spoke with submitted their requests to SSA’s OIG—itself, a federal law enforcement agency. Our survey results indicated that on average in 2002, 46 percent of the requests made to OIG offices came from federal law enforcement agencies while 27 percent of the requests made to SSA field offices on average came from federal law enforcement agencies. While details on SSA’s disclosure policy are available in their POMS and other SSA documents that summarize this information, it is not readily available to law enforcement. A summary of the policy can be found on SSA’s Web site under the caption “Code of Federal Regulations for Social Security.” However, it is not easy to find and provides little detail on what SSA will provide to law enforcement. Further, the Web site does not provide law enforcement with instructions on what they need to do to get the information. Officials from federal, state, and local law enforcement agencies we spoke with were generally satisfied with the information provided by SSA although most would like more information on individuals. Law enforcement officials indicated that, although in most cases SSA only verified a name and SSN, the information received was useful to their investigations and, in some cases, was enough to help convict an individual of a crime. The information received from SSA was considered by law enforcement as the most accurate and up-to-date information available to help in their investigations. Law enforcement was also satisfied with the time in which SSA provided the information. In many cases, law enforcement officers we spoke with indicated that SSA provided the information very quickly. In addition, one SSA OIG official told us that when procedures are followed correctly, the OIG can reply back in 24 hours or less, depending on the information requested. SSA confirmed the timeliness of its responses to law enforcement requests. We estimate that over 90 percent of both SSA field office and OIG respondents reported that it took 24 hours or less to fulfill a request. Our survey results showed that 40 percent of SSA field offices and 21 percent of SSA OIG offices reported that it took less than an hour to fulfill a request from a law enforcement agency. Although most of the law enforcement officials we spoke with were satisfied with information provided by SSA, several believed the information provided was insufficient. Several of these law enforcement officials believed that the name and SSN verification was not enough to help with their investigations. These individuals generally wanted additional information such as the suspect’s wage information, address, employer, and date of birth. In documents provided to us, SSA’s OIG listed the following situations in which the OIG could not provide information to law enforcement. provides the SSN and wants to know to whom it is assigned; wants information to locate witnesses or suspects in high profile cases or wants information on individuals with Alzheimer’s disease who are lost, wants information on next of kin; wants information to locate a fugitive who may be receiving benefits under SSA’s Old-Age and Survivors Insurance program and its Disability Insurance program; wants information to make identifications in child pornography cases; wants information to determine if there has been any activity on a Social Security account in a custodial interference case; and wants information on SSNs related to non-SSA-related fraud cases or counterfeit cases. Some law enforcement officials were unhappy with SSA’s refusal to provide such information, especially because they believed that SSA could easily provide it in a short period of time. For example, one federal officer who investigates nonviolent felony crimes said that SSA seems more concerned about someone committing fraud against one of its programs than about identity theft involving the use of someone’s SSN. He also said that SSA would not provide him with any information on the person whose identity was being stolen. Another officer said that because he could not get necessary information from SSA, he had resorted to other means of gathering the information needed. The officer said that depending on resources available, it could take up to 3 weeks to get someone’s SSN through other sources. Furthermore, the officer said that while he could make the case without the SSA information, the information SSA can provide would be invaluable to helping fully prosecute a case. Many SSA officials in the field and OIG offices agreed that SSA’s disclosure policy is too restrictive. Many believed that, for legitimate investigations, the policy should allow for disclosures to law enforcement officials of whatever information they need. One SSA OIG official said that, as a law enforcement officer, he believed that he should be able to provide information to another law enforcement officer especially when he knew that doing so would help with a case and also because law enforcement officers would be more willing to share information with the OIG. While the SSA Commissioner can invoke ad hoc authority for certain specific cases to disclose information, as was done in response to the disclosure requests related to the September 11 terrorist attacks, SSA officials said that the use of this authority must be limited. SSA headquarters officials believe that expanding its disclosure policy would hamper its ability to ensure that individuals’ personal information is protected and that resources are not diverted from administering Social Security benefit programs. Protecting individuals’ privacy and providing information to law enforcement that could be helpful in solving crimes or ensuring national security are two important yet sometimes seemingly conflicting policy objectives. SSA places a high priority on privacy, and its policy for disclosure to law enforcement agencies goes beyond the requirements of the Privacy Act. SSA’s disclosure policy attempts to preserve its pledge to maintain individuals’ privacy while cooperating with law enforcement and complying with applicable statutes. The end result is a complex policy that is more restrictive than the Privacy Act requirements and those of most federal agencies and more like the policies of IRS and Census, agencies that maintain personal information whose requirements are embodied in statute. In addition, some SSA field office staff and local law enforcement officers find SSA’s policy confusing and sometimes frustrating. As a possible consequence of SSA staff and local law enforcement’s confusion about SSA’s policy, law enforcement may be denied requested information even though SSA’s policy permits its disclosure or law enforcement may receive information that SSA’s policy does not permit. Although we could not assess the overall level of consistency in the application of SSA’s policy, we believe eliminating or reducing confusion about the agency’s policy would help ensure consistent application, and that this can be achieved with relatively modest actions on SSA’s part. To help ensure consistent application of SSA’s disclosure policy for law enforcement in all of its offices and to better assist law enforcement agencies making disclosure requests, we recommend that the Commissioner of SSA do the following: Take steps to eliminate confusion about the agency’s disclosure policy. These steps could include clarifying SSA’s policy; providing additional or refresher training to staff; or delegating decision-making authority for law enforcement requests to specified locations such as the OIG, regional privacy coordinators, or other units that SSA determines would have expertise in this area. Provide law enforcement with information on SSA’s disclosure policy and procedures. For example, this information could be provided on its Web site, in informational pamphlets, or some other written format. We obtained written comments on a draft of this report from the Commissioner of SSA. SSA’s comments are reproduced in appendix III. SSA also provided technical comments, which we incorporated in the report as appropriate. We also provided a draft of this report to the Departments of Commerce, Justice, and Treasury for review and comment. These three agencies reported that they had no comments. SSA stated that our draft report accurately reflected the importance of SSA’s disclosure policy to the agency’s mission but it presents an incomplete description of both the statutory basis for and rationale behind the policy. Further, SSA stated that the draft report does not take into account the statutory basis for the nondisclosure of tax information or the statutory support for the agency’s long-standing confidentiality pledge; therefore, SSA believes that our findings and recommendations are “overbroad.” We are aware of SSA’s obligation under the IRC and took this into consideration during our review of SSA’s disclosure policy; however, we have revised the report, where appropriate, to clarify that our observations about SSA’s disclosure policy relative to the Privacy Act do not extend to SSA’s disclosure of tax information. Disclosure of tax information is controlled by section 6103 of the IRC. We also provided additional reference to the statutory basis and rationale behind SSA’s disclosure policy. SSA also commented that 42 U.S.C. 1306 provided an independent basis for nondisclosures, apart from the Privacy Act. The report recognizes that 42 U.S.C. 1306 provides the basis for SSA’s disclosure policy and we have added a citation for this authority. Section 1306 provides SSA authority to regulate the dissemination of information in its custody as otherwise permitted by federal law. Other federal law includes the Privacy Act. Our report merely points out that SSA has used this authority to regulate in a more restrictive fashion than the Privacy Act requires. SSA stated that it believed that our characterizing the agency’s policy as more restrictive than most federal agencies does SSA a disservice because many federal agencies have little interaction with the public at large. SSA states that the only two agencies of SSA’s size and scope with respect to gathering information from the public to accomplish their missions are IRS and Census, which have more restrictive disclosure policies and statutes that prohibit disclosures. We believe that our comparison and characterization of SSA’s disclosure policy is fair. We compared SSA’s disclosure policy to those of the other 23 agencies covered by the Chief Financial Officers’ Act. We decided also to compare SSA’s policy to those of IRS and Census because they are similar in size and scope of data maintained on individuals. All of the agencies we compared are subject to the Privacy Act. As we reported, SSA’s disclosure policy, as well as those of IRS and the Census Bureau is more restrictive than most federal agencies. SSA agreed in part with our recommendation that the Commissioner take steps to eliminate confusion that may cause inconsistent application of the policy. SSA acknowledged that the policy is complex and could lead to occasional inconsistent application. However, SSA stated that it provides extensive instructions in its POMS for employees and the instructions refer staff to experts in regional and central offices for assistance when needed. SSA also stated that its regional offices have provided employees access to Intranet sites that clarify disclosure policy, but the agency will consider providing additional refresher training as appropriate. In addition, SSA stated it is currently reviewing improvements to the POMS sections that address law enforcement disclosures that the agency believes will address our concerns. SSA expressed concern about the option to consider delegating “decision-making authority for law enforcement requests to specified locations such as the OIG...” SSA stated that the Inspectors General Act of 1978 prohibits agencies from transferring programmatic functions to the Inspector General. We acknowledge in our report that SSA provides guidance on its disclosure policy in its POMS. While we found that employees were aware of this guidance, SSA staff told us that they found SSA’s policy confusing. We believe additional training as well as improvements to the POMS that clarify or simplify SSA’s policy should help ensure consistent application. With respect to SSA’s concern about our recommendation to consider delegating decision-making authority for law enforcement requests to specified locations such as the OIG, regional privacy officers, or other units that SSA determines would have expertise in this area, we did not intend to imply that programmatic functions be transferred to the OIG. Our recommendation was aimed at directing disclosure requests to units that currently perform this function and that appear to have expertise in SSA’s disclosure policy. We simply intended to provide options for SSA to better utilize the resources they already have in place to determine whether law enforcement requests are permitted under SSA’s disclosure policy. The OIG, who currently responds to law enforcement requests as authorized under an MOU with SSA, was only one of the units we suggested as an option. We continue to believe that delegating authority to handle disclosure requests to specified units with expertise in SSA’s disclosure policy would be a plausible option for helping to ensure consistent application of SSA’s policy. This option could reduce or eliminate the need for SSA field office officials who receive sporadic requests from law enforcement to relearn SSA’s disclosure policy. SSA agreed with our recommendation that the Commissioner of SSA should provide law enforcement with information on SSA’s disclosure policy and procedures and SSA believes the agency has done so. However, SSA stated it would review its Web site and other public informational materials to see if additional material or formatting changes would be helpful. We acknowledged in our report that SSA’s policy can be found on the Internet, but noted that it is not easily found and does not clearly explain how law enforcement could obtain information. Although SSA officials told us that they provided limited discussion of the agency’s disclosure policy and procedures at law enforcement conferences, these officials did not indicate the number of conferences attended or whether these conferences involved federal, state, or local law enforcement. Some of the local law enforcement officials we spoke with were unfamiliar with how to obtain information from SSA. Therefore, we continue to believe that information that clearly defines SSA’s disclosure policy and procedures would be helpful to law enforcement. Further, we believe that our findings and recommendations are central to many concerns expressed by both SSA and law enforcement officials and we view the steps that SSA indicated that it plans to consider, or already has in process to ensure consistent application of its disclosure policy and law enforcement’s understanding of how to obtain information from SSA as appropriate steps toward correcting the concerns expressed. We are sending copies of this report to the Commissioner of Social Security; the Secretaries of Commerce, Treasury, and Homeland Security; the U.S. Attorney General; appropriate congressional committees; and other interested parties. We will also make copies of this report 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 staffs have questions about this report, please call me on (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix IV. To attain our objectives for this assignment, we reviewed and compared the Social Security Administration’s (SSA) disclosure policy for law enforcement and the Privacy Act. We also compared SSA’s disclosure policy with that of the Internal Revenue Service (IRS) and the Bureau of the Census because SSA officials believe that these agencies are comparable with SSA. Additionally, we compared SSA’s disclosure policy with the general law enforcement disclosure policies for the other 23 Chief Financial Officers’ (CFO) Act agencies. To help determine how SSA’s disclosure policy affects information sharing with law enforcement, we conducted site visits and detailed interviews at SSA field offices and SSA’s Office of the Inspector General (OIG), as well as nearby field offices for federal, state, and local law enforcement agencies in Los Angeles, California; Chicago, Illinois; and Dallas, Texas. We also administered an electronic survey to all SSA OIG field offices and a stratified random sample of SSA field offices. We interviewed SSA officials in both headquarters and field offices and law enforcement officials at the federal, state, and local levels of government about their experiences with sharing individuals’ personal information. At the headquarters level, we interviewed SSA officials responsible for disclosure policy in the Office of General Counsel and the SSA OIG, Baltimore, Maryland. We interviewed law enforcement officials from the Departments of Justice and Treasury, including the Federal Bureau of Investigation (FBI); Bureau of Immigration and Customs Enforcement, formerly Immigration and Naturalization Service (INS) and Customs; Executive Office for United States’ Attorneys; Drug Enforcement Agency; United States Marshals Service; Secret Service; Internal Revenue Service (IRS); and Alcohol, Tobacco and Fire Arms, headquartered in Washington, D.C. During the course of our review, several of these law enforcement agencies merged into the Department of Homeland Security, or were otherwise reorganized. We also interviewed OIG officials for investigation at the Departments of Education and Housing and Urban Development in Washington, D.C. Our site visits included interviews with the Bureau of Immigration and Customs Enforcement, at Dallas, Texas, and law enforcement officials of the Arlington Police Department, Arlington, Virginia. We surveyed SSA offices in order to: (1) estimate the type and volume of law enforcement requests for personal information received by SSA; (2) determine the distribution of these requests across federal, state, and local law enforcement agencies; and (3) gain some understanding of the bases for the granting and denial of these requests. Our working definition of a personal information request is an instance for which a law enforcement agency requested the personal information of one or more individuals between fiscal years 1999 and 2002. For example, if a law enforcement agency requested addresses for two people in a single instance, this would count as one personal information request. We were specifically interested in law enforcement agencies’ requests for personal information, such as social security numbers, names, addresses, birth dates, and income. We designed an Internet-based survey and organized it into multiple sections that included the following areas: receipt of law enforcement requests, response time for fulfilling law enforcement requests, and methods for handling law enforcement requests. We selected a stratified random sample of 335 SSA field offices to participate in the survey. This number was based on an expected response rate as well as a precision level. The sample was stratified by 10 regional locations and taken from a listing of 1,286 field offices that SSA provided. The original list contained 1,336 locations. Fifty locations that are not considered field offices and, therefore, do not receive law enforcement agency requests were excluded from the sampling frame. All 31 SSA Inspector General offices were surveyed since these sites routinely accept law enforcement agencies’ requests for personal information. The survey was mailed electronically to the manager in charge at SSA and Inspector General field offices. Both office types received the same on-line survey. Survey data were collected between February 25, 2003, and March 21, 2003. The overall response rate was 90 percent; with 97 percent of the Inspector General’s field offices and 90 percent of SSA’s field offices responding. Regional response rates in the sample ranged from 86 percent to 95 percent across 10 regional locations. To provide some indication of the reliability of the survey results, standard errors were calculated. The sample was weighted in the analysis to statistically account for the sample design and nonresponse. We are 95 percent certain that the survey estimates provided in this report are within plus or minus 10 percentage points of those estimates that would have been obtained had all SSA offices been captured. To minimize some of the potential biases of other errors that could figure into the survey results, we conducted pretests that included both the SSA Inspector General and SSA field offices. Four pretest sites were SSA field offices located in Wheaton, Maryland; Washington, D.C. (Anacostia); Seattle, Washington; and Chicago, Illinois. One pretest site was an SSA Inspector General office located in Washington, D.C. The pretests were conducted either through teleconferences or face-to-face interviews, and were completed between December 2002 and January 2003. We conducted our audit work between August 2002 and July 2003 in accordance with generally accepted government auditing standards. Rule referencing Privacy Act disclosure General routine use exception of Privacy Act permits disclosure to law enforcementauthority 15 CFR 4.30(a)(5)(vii) 46 FR 63501 (12/31/81) 32 CFR 310 App. C 34 CFR 5b.9(b)(7) 34 CFR 5b. App. B 10 CFR 1008.17(b)(7) 45 CFR 5b.9(b)(7) 45 CFR 5b. App. B 24 CFR 16.11(a)(5) 43 CFR 2.56(b)(5) 67 FR 16816 (4/8/02) 49 CFR 10.35(a)(7) 31 CFR 1.24(a)(7) 38 CFR 1.576(b)(7) 67 FR 8246 (2/22/02) 14 CFR 1212.203(f)(7) 22 CFR 215.10(c)(7) 44 CFR 6.20(g) 67 FR 3193 (1/23/02) 41 CFR 105-64.201(g) 10 CFR 9.80(a)(7) 67 FR 63774 (10/15/02) 5 CFR 293.401(g) & 406 60 FR 63075 (12/8/95) Shelia Drake (202) 512-7172 ([email protected]) Jacqueline Harpp (202) 512-8380 ([email protected]) In addition to those named above, Margaret Armen, Richard Burkard, Malcolm Drewery, Kevin Jackson, Corinna Nicolaou, and David Plocher made key contributions to this report. Barbara Hills, Theresa Mechem, and Mimi Nguyen provided assistance with graphics. | Law enforcement agencies' efforts to investigate the events of September 11th increased awareness that federal agencies collect and maintain personal information on individuals such as name, social security number, and date of birth that could be useful to law enforcement. The Social Security Administration (SSA) is one of the country's primary custodians of personal information. Although the Privacy Act protects much of this information, generally, federal agencies can disclose information to law enforcement. However, determining when the need for disclosure takes priority over an individual's privacy is not clear. GAO was asked to describe (1) SSA's disclosure policy for law enforcement and how it compares with the Privacy Act and those of other federal agencies, (2) SSA's experience sharing information with law enforcement, and (3) law enforcement's experience obtaining information under SSA's policy. Although SSA's disclosure policy permits the sharing of information with law enforcement entities, it is more restrictive than the Privacy Act and the disclosure policies of most federal agencies. While the Privacy Act permits disclosures to law enforcement for any type of crime, SSA only allows disclosures under certain conditions. For example, for serious and violent crimes, SSA will disclose information to law enforcement if the individual whose information is sought has been indicted or convicted of that crime. Even when information is disclosed, it might be limited to results obtained from verifying a social security number and name unless the investigation concerns fraud in SSA or other federal benefit programs, then the agency can work with law enforcement officials as part of a task force or joint investigation. However, the disclosure policies for law enforcement of the Internal Revenue Service (IRS) and the Census Bureau, both of which have requirements prescribed in their statutes, are also more restrictive than the Privacy Act and the policies of most federal agencies. SSA officials consider SSA's disclosure policy integral to carrying out the agency's mission. The various restrictions in SSA's disclosure policy create a complex policy that is confusing and could cause inconsistent application across the agency's more than 1,300 field offices. This could result in uneven treatment of law enforcement requests. Because aggregated data were not available, GAO was unable to assess the extent to which SSA does not consistently apply its policy. However, GAO was told of instances in which SSA officials in some field offices did not give law enforcement information that appeared to be permitted under the policy as well as instances in which they gave them more than what appeared to be allowed. Generally, law enforcement officials find the limited information SSA shares useful to their investigation, but many law enforcement officials, particularly state and local law enforcement officials, are not familiar with the policy or the process for requesting information from SSA. Most law enforcement officials expressed a desire for more information than is currently permitted under SSA's policy, but SSA maintains that providing more information would hurt its ability to carry out its primary mission. |
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Many foreign physicians who enter U.S. graduate medical education programs do so as participants in the Department of State’s Exchange Visitor Program—an educational and cultural exchange program aimed at increasing mutual understanding between the peoples of the United States and other countries. Participants in the Exchange Visitor Program enter the United States with J-1 visas. Nearly 6,200 foreign physicians with J-1 visas took part in U.S. graduate medical education programs during academic year 2004–05. Physicians participating in graduate medical education on J-1 visas are required to return to their home country or country of last legal residence for at least 2 years before they may apply for an immigrant visa, permanent residence, or certain nonimmigrant work visas. They may, however, obtain a waiver of this requirement from the Department of Homeland Security at the request of a state or federal agency if they have agreed to practice in an underserved area for at least 3 years. States were first authorized to request J-1 visa waivers on behalf of foreign physicians in October 1994. Federal agencies were first authorized to request J-1 visa waivers for physicians in graduate medical education in September 1961. In general, waiver physicians must practice in areas that HHS has designated as underserved. HHS has specified that waiver physicians may practice in HPSAs or medically underserved areas or populations (MUA/P). HPSAs are geographic areas, population groups within areas, or facilities that HHS has designated as having a shortage of health professionals; HPSAs for primary care are generally identified on the basis of the ratio of population to primary care physicians and other factors. MUA/Ps are areas or populations that HHS has designated as having shortages of health care services; these are identified using several factors in addition to the ratio of population to primary care physicians. HPSAs and MUA/Ps can overlap; as a result, a facility can be located in both a HPSA and an MUA/P. States and federal agencies have some discretion in shaping their J-1 visa waiver programs to address particular needs or priorities. For example, while states and federal agencies can request waivers for physicians to work in both primary care and nonprimary care specialties and in a variety of practice settings, they may choose to limit the number of waivers they request for physicians to practice nonprimary care or require that waiver physicians work in certain practice settings. States and federal agencies may also choose to conduct monitoring activities to help ensure that physicians are meeting their waiver agreements—for example, that they are working at the facilities for which their waivers were granted. Although states and federal agencies are generally subject to the same statutory provisions regarding requests for J-1 visa waivers for physicians, there are two notable distinctions. First, states are limited in the number of waivers that may be granted in response to their requests each year. Initially, states were authorized to request waivers for up to 20 physicians each fiscal year; in 2002, the limit was increased to 30 waivers per state per year. Federal agencies are not statutorily limited in the number of waivers that may be granted in response to their requests each year. Second, while federal agencies’ waiver requests must be for physicians to practice in underserved areas, Congress gave states the flexibility, in December 2004, to use up to 5 of their 30 waiver allotments each year for physicians to work in facilities located outside of HHS-designated undeserved areas, provided that the facilities treat patients who reside in underserved areas. We refer to these waivers as “flexible waivers.” Obtaining a J-1 visa waiver at the request of a state or federal agency to practice in an underserved area involves multiple steps (see fig. 1). A physician must submit an application to obtain a case number from the Department of State and must secure a bona fide offer of employment from a health care facility that is located in an underserved area or, in the case of flexible waivers, from a health care facility that treats residents of an underserved area. The physician, the prospective employer, or both apply to a state or federal agency to request a waiver on the physician’s behalf. If, after reviewing the application, the state or federal agency decides to request a waiver, the state or federal agency submits a letter of request to the Department of State affirming that it is in the public interest for the physician to remain in the United States. If the Department of State decides to recommend the waiver, it forwards its recommendation to the Department of Homeland Security’s U.S. Citizenship and Immigration Services (USCIS). USCIS is responsible for making the final determination and notifying the physician when the waiver is granted. According to officials involved in recommending and approving waivers at the Department of State and USCIS, after a review for compliance with statutory requirements and security issues, nearly all waiver requests are recommended and granted. Once the physician is granted the waiver, the employer petitions USCIS for the physician to obtain H-1B status (a nonimmigrant classification used by foreign nationals employed temporarily in a specialty occupation). The physician must work at the facility specified in the waiver application for a minimum of 3 years, unless the physician obtains approval from USCIS to transfer to another facility. USCIS considers transfer requests only in extenuating circumstances, such as closure of the physician’s assigned facility. Once the physician fulfills the employment contract, the physician may apply for permanent residence, continued H-1B status, or other nonimmigrant status, if the physician wishes to remain in the United States. No single federal agency is responsible for managing or tracking the use of J-1 visa waivers for physicians to practice in underserved areas. HHS is the primary federal agency responsible for addressing physician shortages, both in terms of administering NHSC programs that place physicians and other providers in areas experiencing shortages of health professionals and in designating areas as underserved. HHS’s oversight of waiver physicians practicing in underserved areas, however, has generally been limited to the few physicians for whom it has requested J-1 visa waivers. USCIS and the Department of State process J-1 visa waiver requests but do not maintain comprehensive information about waiver physicians’ numbers, practice locations, and practice specialties. States and federal agencies that request waivers maintain such information for the physicians for whom they request waivers, but this information is not centrally collected and maintained by any federal agency. Although the use of J-1 visa waivers has not been systematically tracked, available data indicate that the pool of physicians who could seek waivers—that is, the number of foreign physicians in graduate medical education with J-1 visas—has declined in recent years. In academic year 1996–97, a little more than 11,600 foreign physicians took part in U.S. graduate medical education programs with J-1 visas; by academic year 2004–05 this number had decreased more than 45 percent to slightly less than 6,200. The reasons for this decrease are not completely understood. States and federal agencies reported requesting more than 1,000 J-1 visa waivers in each of fiscal years 2003 through 2005 (see fig. 2). We estimated that, at the end of fiscal year 2005, there were roughly one and a half times as many waiver physicians practicing in underserved areas (3,128) as U.S. physicians practicing in underserved areas through NHSC programs (2,054). In contrast to our findings a decade ago, states have become the primary source of waiver requests for physicians to practice in underserved areas, accounting for 90 percent or more of requests in each of fiscal years 2003 through 2005. The number of states that reported ever having requested a J-1 visa waiver has grown steadily since they were first authorized to do so, from 20 states in fiscal year 1995 to 53 states (all but Puerto Rico) as of fiscal year 2005. States varied, however, in the number of waivers they requested in fiscal years 2003 through 2005. For example, in fiscal year 2005, about one-quarter of the 54 states requested the maximum of 30 waivers, about one-quarter requested 10 or fewer, and two (Puerto Rico and the U.S. Virgin Islands) requested no waivers (see fig. 3). The number of waivers requested by federal agencies has decreased significantly since 1995, with the exit of the two agencies that requested the most waivers for physicians to practice in underserved areas that year. The Department of Agriculture, which stopped requesting waivers for physicians to practice in underserved areas in 2002, and the Department of Housing and Urban Development, which stopped in 1996, together requested more than 1,100 waivers for physicians to practice in 47 states in 1995, providing a significant source of physicians for some states. Federal agencies accounted for about 94 percent of waiver requests that year, in contrast to fiscal year 2005, when federal agencies made about 6 percent of requests. Of the 1,012 waivers requested by states and federal agencies in fiscal year 2005, ARC, DRA, and HHS accounted for 56 requests for physicians to practice in 14 states. States and federal agencies requested waivers for physicians to practice a variety of specialties, with states requesting waivers for physicians to practice both primary and nonprimary care and federal agencies generally focusing on primary care. Although the waivers states and federal agencies requested were for physicians to work in diverse practice settings, most were for physicians to work in hospitals and private practices. These practice settings were about equally divided between rural and nonrural areas. Additionally, less than half of the states opted to request flexible waivers for physicians to work outside of designated underserved areas. Overall, a little less than half (46 percent) of the waivers requested by states and federal agencies in fiscal year 2005 were for physicians to practice exclusively primary care, while a slightly smaller proportion (39 percent) were for physicians to practice exclusively nonprimary care (see fig. 4). A small proportion of waiver requests (5 percent) were for physicians to practice both primary and nonprimary care—for example, for individual physicians to practice both internal medicine and cardiology. An additional 7 percent of waiver requests in fiscal year 2005 were for physicians to practice psychiatry. States and federal agencies differed, however, in the proportion of waivers they requested for physicians to practice primary versus nonprimary care (see fig. 5). Less than 50 percent of the waivers requested by states in fiscal year 2005 were for physicians to practice exclusively primary care, compared with 80 percent of those requested by federal agencies. Nearly all of the states and DRA reported that their fiscal year 2005 policies allowed them to request waivers for physicians to practice nonprimary care. Twenty-seven of these states, however, reported placing some limits on such requests, including limiting the number of requests for physicians to practice nonprimary care or restricting the number of hours a physician could practice a nonprimary care specialty. Even with these limitations, the number of waivers requested for physicians to practice nonprimary care increased among both states and federal agencies over the 3-year period beginning in fiscal year 2003. Overall, requests for physicians to practice exclusively nonprimary care increased from about 300 (28 percent) in fiscal year 2003 to nearly 400 (39 percent) in fiscal year 2005. States and federal agencies reported requesting waivers in fiscal year 2005 for physicians to practice more than 40 nonprimary care specialties (e.g., anesthesiology) and subspecialties (e.g., pediatric cardiology); the most common of these were anesthesiology, cardiology, and pulmonology (the study and treatment of respiratory diseases). Regarding practice settings, more than three-quarters of the waivers requested by states in fiscal year 2005 were for physicians to practice in hospitals (37 percent) and private practices (41 percent) (see fig. 6). In addition, 16 percent were for physicians to practice in federally qualified health centers (facilities that provide primary care services in underserved areas) and rural health clinics (facilities that provide outpatient primary care services in rural areas). Although the largest proportion of waivers that states requested was for physicians to work in private practices, more than 80 percent of the states and all three federal agencies reported that their fiscal year 2005 policies required the facilities where waiver physicians work—regardless of practice setting—to accept some patients who are uninsured or covered by Medicaid. Overall, about half of all waiver requests in fiscal year 2005 were for physicians to practice in areas that respondents considered rural, although the proportions differed between states’ and federal agencies’ requests. States’ waiver requests in fiscal year 2005, which accounted for the vast majority of total requests that year, were about equally divided between those for physicians to work in areas respondents considered rural and those they considered nonrural. Federal agencies’ waiver requests were mostly (93 percent) for physicians to work in areas considered rural (see fig. 7). Most of the waivers requested by states and federal agencies in fiscal year 2005 were for physicians to practice in HPSAs. While federal regulations generally permit states and federal agencies to request waivers for physicians to work in HPSAs or MUA/Ps, about a quarter of the states and two federal agencies (ARC and HHS) had policies in place in fiscal year 2005 that limited at least some types of physicians to practicing in HPSAs. Overall, more than three-quarters (77 percent) of waivers requested by states and federal agencies in fiscal year 2005 were for physicians to work in facilities located in HPSAs, and 16 percent were for physicians to work in facilities located in MUA/Ps that were outside of HPSAs. Additionally, less than half of the states (23 states) reported taking advantage of the option to request flexible waivers—those for physicians to work in facilities that, while located outside of HHS-designated underserved areas, treat patients residing in underserved areas. Requests for flexible waivers in fiscal year 2005, the first year such waivers were allowed, accounted for 7 percent of all waiver requests that year. Most states and federal agencies reported that they conducted monitoring activities to help ensure that physicians were meeting their agreements to work in underserved areas. Although monitoring is not explicitly required of states and federal agencies that request waivers, more than 85 percent of states and two of the three federal agencies that requested waivers in any fiscal year from 2003 through 2005 reported that they conducted at least one monitoring activity in fiscal year 2005. These activities included actions to help determine, for example, whether physicians were working in the locations for which their waivers were requested or whether they were treating the intended patients, such as those who were uninsured or covered by Medicaid. The most common monitoring activity—reported by 40 states, ARC, and DRA—was to require periodic reports from physicians or employers (see fig. 8). For example, some states and federal agencies required written reports submitted once or twice a year that included information such as the number of hours waiver physicians worked or the number of patients for whom Medicaid claims were submitted. States and federal agencies that requested waivers also reported that they monitored waiver physicians through regular communications with employers and physicians, such as through phone calls, and through site visits to waiver physicians’ practice locations. In addition, a small number of states reported conducting other monitoring activities. For example, one state official said the state’s J-1 visa waiver program used Medicaid data to confirm that waiver physicians were treating patients covered by Medicaid. Although most states and federal agencies reported conducting at least one monitoring activity, the number of monitoring activities varied. Ten states and DRA reported conducting at least four different activities, while six states and HHS—together accounting for about 13 percent of waiver requests in fiscal year 2005—reported that they did not conduct any monitoring activities in fiscal year 2005. Four of the six states that reported they did not conduct monitoring activities reported requesting more than 25 waivers in each of fiscal years 2003 through 2005. States and federal agencies reported identifying relatively few incidents in fiscal years 2003 through 2005 in which physicians were not meeting their waiver agreements. These incidents included cases in which the physician was not working in the practice specialty or at the facility specified in his or her waiver agreement, was not seeing the intended patients, or did not serve the entire 3-year employment contract. The most common issue cited was physicians’ transferring to another location or employer without the approval of the state or federal agency that requested their waivers. In addition, several states reported that they had identified cases in which waiver physicians never reported to work. Officials from these states cited examples in which physicians simply failed to appear at the practice sites and did not contact the state that had made the waiver requests on the physicians’ behalf. According to states and federal agencies that reported identifying any incidents, physicians were not solely responsible in all cases in which they did not meet their waiver agreements. Some state officials provided examples of employers who directed physicians to work in locations other than those for which their waivers were requested, including locations outside of underserved areas. States and federal agencies that requested waivers reported that they use a variety of practices to prevent or respond to cases of physicians’ not meeting their waiver agreements (see fig. 9). For example, 38 states and HHS reported that it is their practice to bar employers who are responsible for problems involving waiver physicians from consideration for future J-1 visa waiver physician placements, either temporarily or permanently. Forty states and two federal agencies reported that it is their practice to inform USCIS if they identify physicians who are not meeting their waiver agreements. Physicians not meeting their waiver agreements would again be subject to the 2-year foreign residence requirement and would need to return to their home country or country of last legal residence before they could apply for an immigrant visa, permanent residence, or certain nonimmigrant work visas. USCIS officials said that reports of physicians not meeting their waiver agreements have been relatively rare. Some states and federal agencies that requested waivers also reported that they require physicians’ contracts to stipulate fees to be imposed if the physicians fail to meet their waiver agreements. These requirements include, for example, liquidated damages clauses, which set a particular amount that physicians agree to pay employers if the physicians break their employment contracts. Other practices that states reported included reporting problems with waiver physicians to state medical boards. States cited a number of factors affecting their ability to monitor or take other actions that they believed could help them ensure that physicians meet their waiver agreements. More than one-quarter of the states reported that funding and staffing constraints limited their ability to carry out monitoring activities. For example, four states commented that time and staff constraints limited their ability to conduct visits to physicians’ practice sites. Several states noted that they have little or no authority to take actions that would help ensure that physicians meet their waiver agreements. For example, one state commented that beyond reporting physicians who do not meet their waiver agreements to USCIS, it has no authority over waiver physicians. In addition, a few states noted that their ability to effectively monitor physicians is limited by the fact that they are not notified when USCIS grants waivers or approves transfers. Consequently, states may not know with certainty which physicians USCIS has authorized to work in, or move to or from, their states. One federal agency (ARC) cited two factors that positively affected its ability to help ensure that physicians meet their waiver agreements: the liquidated damages clauses for violating employment agreements that ARC requires to be in physicians’ employment contracts, and site visits by staff of ARC’s Office of Inspector General. According to a senior ARC official, these unannounced visits have occasionally resulted in the discovery of physicians working at sites other than those at which the physicians were authorized to work. The official commented that the visits have also had a deterrent effect. Although the use of J-1 visa waivers remains a major means of providing physicians to practice in underserved areas, HHS does not have the information needed to account for waiver physicians in its efforts to address physician shortages. Without such information, when considering where to place NHSC physicians, HHS has no systematic means of knowing whether the needs of a HPSA are already being met through waiver physicians. Our analysis indicates that some states could have had more waiver and NHSC physicians practicing primary care in HPSAs than HHS identified as needed, while other states were below HHS’s identified need. Although data were not available to determine the number of waiver physicians practicing primary care specifically in HPSAs, our analysis showed that in seven states the estimated number of waiver physicians practicing primary care in all locations (including HPSAs, MUA/Ps, and nondesignated areas), combined with the number of NHSC physicians practicing primary care in HPSAs at the end of fiscal year 2005, exceeded the number of physicians HHS identified as needed to remove the primary care HPSA designations in the state. In six of these seven states, the estimated number of primary care waiver and NHSC physicians exceeded by at least 20 percent the number needed to remove primary care HPSA designations. Meanwhile, in each of 25 states, the estimated number of primary care waiver and NHSC physicians was less than half of the state’s identified need for primary care physicians. The lack of information on waiver physicians could also affect HHS’s efforts to revise how it designates primary care HPSAs and other underserved areas. Multiple federal programs use HHS’s primary care HPSA designation system to allocate resources or provide benefits, but as we have reported, the designation system does not account for all primary care providers practicing in underserved areas, including waiver physicians. Specifically, waiver physicians practicing primary care in an area are not counted in the ratio of population to primary care physicians, one of the factors used to determine whether an area may be designated as a primary care HPSA. HHS has been working on a proposal—in process since 1998—to revise the primary care HPSA designation system, which would, among other things, account for waiver physicians, according to HHS officials. HHS officials acknowledged, however, that the department lacked complete data on waiver physicians, needed to implement such a provision. Recognizing the lack of a comprehensive database with information on J-1 visa waiver physicians and other international medical graduates, HHS in 2003 contracted with ECFMG—the organization that sponsors all foreign physicians with J-1 visas participating in graduate medical education—to assess the feasibility of developing a database that would provide access to information on the U.S. practice locations of, populations served by, and other information about international medical graduates. ECFMG completed the study and in 2004 submitted a draft report to HHS that included recommendations. As of September 2006, a final report had not been published. The use of J-1 visa waivers remains a major means of placing physicians in underserved areas of the United States, supplying even more physicians to these areas than NHSC programs. Although thousands of physicians practice in underserved areas through the use of J-1 visa waivers, comprehensive data on their overall numbers, practice locations, and practice specialties are not routinely collected and maintained by HHS. Only by surveying states and federal agencies that requested waivers were we able to collect information for this report. Having comprehensive data on waiver physicians could help HHS more effectively target the placement of NHSC physicians and implement proposed changes to designating underserved areas. To better account for physicians practicing in underserved areas through the use of J-1 visa waivers, we recommend that the Secretary of Health and Human Services collect and maintain data on waiver physicians— including information on their numbers, practice locations, and practice specialties—and use this information when identifying areas experiencing physician shortages and placing physicians in these areas. We provided a draft copy of this report to the five federal agencies that are involved with waivers for physicians to practice in underserved areas: ARC, DRA, HHS, the Department of Homeland Security, and the Department of State. We received written comments on the draft report from HHS (see app. III). HHS concurred with our recommendation that data should be collected and maintained to track waiver physicians. HHS noted that the department had also discussed, internally, tracking other physicians who are working under H-1B visas, stating that this would allow a more complete accounting of the actual number of physicians providing care in underserved areas. HHS commented that the department’s goal is to assure that the limited resources of the J-1 visa waiver program and other programs addressing areas and populations with limited access to health care professionals are targeted most effectively and that the availability of complete data on these additional providers would enhance the data used to identify such shortage areas. HHS also commented that the draft report may have overstated, to a degree, the “oversupply” of physicians in some states. HHS acknowledged that we made important adjustments in our analysis for physicians practicing nonprimary care and psychiatry. The department, however, expressed concern that our calculations did not address the fact that some J-1 visa waiver placements are not in HPSAs, referring to our finding that 23 percent of waivers requested in fiscal year 2005 were for physicians to practice outside of HPSAs. We believe that applying this percentage to our analysis would be inappropriate for several reasons. First, this percentage pertained to waiver physicians practicing all specialties, including primary care, nonprimary care, and psychiatry, while our analysis focused on physicians practicing primary care. Further, the 23 percent figure represents waivers requested in only one fiscal year (fiscal year 2005), while our analysis covered waivers requested in 3 fiscal years. In addition, fiscal year 2005 was the only year in our analysis in which states could request waivers for physicians to practice in nondesignated areas. In our draft report, we did not use the term “oversupply,” but we acknowledge that our report should clearly specify the limitations in the data used in our analysis. To do so, we clarified the text describing our methodology and results. We also received technical comments from HHS and the Department of Homeland Security’s USCIS, which we incorporated as appropriate. Three agencies—ARC, DRA, and Department of State—said that they did not have comments on the draft report. We are sending copies of this report to the Secretary of Health and Human Services, the Secretary of Homeland Security, the Secretary of State, the Federal Co-chair of ARC, the Federal Co-chairman of DRA, and appropriate congressional committees. We will also provide copies to others upon request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (312) 220-7600 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. This appendix presents the following information for each state as of the end of fiscal year 2005: (1) the number of primary care physicians the Department of Health and Human Services (HHS) identified as needed to remove primary care health professional shortage area (HPSA) designations, (2) our estimate of the number of J-1 visa waiver physicians practicing primary care, (3) the number of National Health Service Corps (NHSC) physicians practicing primary care, and (4) primary care waiver and NHSC physicians as a percentage of the HHS-identified need. To determine the need for primary care physicians in each state, we used the number of physicians HHS reported as needed to remove primary care HPSA designations in the state, a measurement used by HHS to identify the need for physicians. Specifically, we used summary data from HHS’s Health Resources and Services Administration on the number of additional full-time equivalent (FTE) primary care physicians needed to remove primary care HPSA designations in the state as of September 30, 2005. HHS determines the number of additional full-time primary care physicians needed to remove primary care HPSA designations for geographic areas, population groups, and facilities. For geographic areas, HHS’s threshold for the ratio of population to primary care physicians is 3,500 to 1 (or 3,000 to 1 under special circumstances); for population groups, it is 3,000 to 1; for facilities that are state or federal correctional institutions, it is 1,000 to 1. In calculating the ratio of population to primary care physicians, HHS does not take into account waiver physicians and most NHSC physicians. In addition to HPSAs, waiver physicians may also practice in designated medically underserved areas or populations (MUA/P). HHS does not, however, have a similar measure of the number of physicians needed in MUA/Ps. To determine the number of NHSC physicians practicing primary care in HPSAs in each state as of September 30, 2005, we used data obtained from the Health Resources and Services Administration on the number of primary care physicians practicing through the NHSC Scholarship, NHSC Loan Repayment, and NHSC Ready Responder programs. NHSC physicians are required to practice in HPSAs. Although data are not available on the number of physicians granted J-1 visa waivers and practicing primary care in underserved areas at any given time, we estimated this number using data on waivers requested by states and by three federal agencies—the Appalachian Regional Commission (ARC), the Delta Regional Authority (DRA), and HHS. We estimated the number of waiver physicians practicing primary care in each state as of September 30, 2005, by using the number of waivers requested in fiscal years 2003 through 2005 for such physicians. This number represents the number of primary care physicians expected to be fulfilling the minimum 3-year employment contract at the end of fiscal year 2005 or who had waivers in process to do so. Our estimate includes all waiver physicians practicing primary care in the state (including those practicing in HPSAs, MUA/Ps, and nondesignated areas). Data were not available to distinguish waiver physicians practicing primary care in HPSAs from those practicing in MUA/Ps or nondesignated areas. Table 1 shows the estimated number of waiver and NHSC physicians practicing primary care at the end of fiscal year 2005 and the number of physicians needed to remove primary care HPSA designations in each state. This appendix summarizes states’ and federal agencies’ responses to selected questions from GAO’s surveys, as well as data obtained from ARC, DRA, and HHS on their waiver requests by state. The following tables present data on the number of waivers states and federal agencies requested in each of fiscal years 2003 through 2005, in total (table 2), by federal agency (table 3), by practice specialty (table 4), and by practice setting (table 5). We also present data on states’ and federal agencies’ policies for requesting waivers (table 6). In addition to the contact named above, Kim Yamane, Assistant Director; Ellen W. Chu; Jill Hodges; Julian Klazkin; Linda Y.A. McIver; and Perry Parsons made key contributions to this report. Health Professional Shortage Areas: Problems Remain with Primary Care Shortage Area Designation System. GAO-07-84. Washington, D.C.: October 24, 2006. Foreign Physicians: Preliminary Findings on the Use of J-1 Visa Waivers to Practice in Underserved Areas. GAO-06-773T. Washington, D.C.: May 18, 2006. State Department: Stronger Action Needed to Improve Oversight and Assess Risks of the Summer Work Travel and Trainee Categories of the Exchange Visitor Program. GAO-06-106. Washington, D.C.: October 14, 2005. Health Workforce: Ensuring Adequate Supply and Distribution Remains Challenging. GAO-01-1042T. Washington, D.C.: August 1, 2001. Health Care Access: Programs for Underserved Populations Could Be Improved. GAO/T-HEHS-00-81. Washington, D.C.: March 23, 2000. Foreign Physicians: Exchange Visitor Program Becoming Major Route to Practicing in U.S. Underserved Areas. GAO/HEHS-97-26. Washington, D.C.: December 30, 1996. Health Care Shortage Areas: Designations Not a Useful Tool for Directing Resources to the Underserved. GAO/HEHS-95-200. Washington, D.C.: September 8, 1995. | Many U.S. communities face difficulties attracting physicians. To address this problem, states and federal agencies have turned to foreign physicians who have just completed graduate medical education in the United States under J-1 visas. Ordinarily, these physicians must return home after completing their programs, but this requirement can be waived at the request of a state or federal agency if the physician agrees to practice in an underserved area. In 1996, GAO reported that J-1 visa waivers had become a major source of physicians for underserved areas but were not well coordinated with Department of Health and Human Services (HHS) programs for addressing physician shortages. GAO was asked to examine (1) the number of waivers requested by states and federal agencies; (2) waiver physicians' practice specialties, settings, and locations; and (3) the extent to which waiver physicians are accounted for in HHS's efforts to address physician shortages. GAO surveyed states and federal agencies about waivers they requested in fiscal years 2003-2005 and reviewed HHS data. The use of J-1 visa waivers remains a major means of providing physicians to practice in underserved areas of the United States. More than 1,000 waivers were requested in each of fiscal years 2003 through 2005 by states and three federal agencies--the Appalachian Regional Commission, the Delta Regional Authority, and HHS. At the end of fiscal year 2005, the estimated number of physicians practicing in underserved areas through J-1 visa waivers exceeded the number practicing there through the National Health Service Corps (NHSC)--HHS's primary mechanism for addressing physician shortages. In contrast to a decade ago, when federal agencies requested the vast majority of waivers, states have become the primary source of J-1 visa waiver requests, accounting for 90 percent or more of waiver requests in fiscal years 2003 through 2005. States and federal agencies requested waivers for physicians to work in a variety of practice specialties, settings, and locations. In fiscal year 2005, a little less than half of the waiver requests were for physicians to practice exclusively primary care. More than three-quarters of the waiver requests were for physicians to work in hospitals or private practices, and about half were for physicians to practice in rural areas. HHS does not have the information needed to account for waiver physicians in its efforts to address physician shortages. Without such information, when considering where to place NHSC physicians, HHS has no systematic means of knowing if an area's needs are already being met by waiver physicians. |
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Collecting information is one way that federal agencies carry out their missions. For example, IRS needs to collect information from taxpayers and their employers to know the correct amount of taxes owed. The U.S. Census Bureau collects information used to apportion congressional representation and for many other purposes. When new circumstances or needs arise, agencies may need to collect new information. We recognize, therefore, that a large portion of federal paperwork is necessary and often serves a useful purpose. Nonetheless, besides ensuring that information collections have public benefit and utility, federal agencies are required by the PRA to minimize the paperwork burden that the collection of information imposes. Among the provisions of the act aimed at this purpose are requirements for the review of information collections by OMB and by agency CIOs. Under PRA, federal agencies may not conduct or sponsor the collection of information unless approved by OMB; information collections for which OMB approval is expired or missing are considered violations of the PRA. Before approving collections, OMB is required to determine that the agency’s collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility. Consistent with the act’s requirements, OMB has established a process to review all proposals by executive branch agencies (including independent regulatory agencies) to collect information from 10 or more persons, whether the collections are voluntary or mandatory. In addition, the act as amended in 1995 requires every agency to establish a process under the official responsible for the act’s implementation (now the agency’s CIO) to review program offices’ proposed collections. This official is to be sufficiently independent of program responsibility to evaluate fairly whether information collections should be approved. Under the law, the CIO is to review each collection of information before submission to OMB, including reviewing the program office’s evaluation of the need for the collection and its plan for the efficient and effective management and use of the information to be collected, including necessary resources. As part of that review, the agency CIO must ensure that each information collection instrument (form, survey, or questionnaire) complies with the act, certify that the collection meets 10 standards (see table 1), and provide support for these certifications. In addition, the original PRA of 1980 (section 3514(a)) requires OMB to keep Congress “fully and currently informed” of the major activities under the act and to submit a report to Congress at least annually on those activities. Under the 1995 amendments, this report must include, among other things, a list of any increases in burden. To satisfy this requirement, OMB prepares the annual PRA report, which reports on agency actions during the previous fiscal year, including changes in agencies’ burden-hour estimates as well as violations of the PRA. The 1995 PRA amendments also required OMB to set specific goals for reducing burden from the level it had reached in 1995: at least a 10 percent reduction in the governmentwide burden-hour estimate for each of fiscal years 1996 and 1997, a 5 percent governmentwide burden reduction goal in each of the next 4 fiscal years, and annual agency goals that reduce burden to the “maximum practicable opportunity.” At the end of fiscal year 1995, federal agencies estimated that their information collections imposed about 7 billion burden hours on the public. Thus, for these reduction goals to be met, the burden-hour estimate would have had to decrease by about 35 percent, to about 4.6 billion hours, by September 30, 2001. In fact, on that date, the federal paperwork estimate had increased by about 9 percent, to 7.6 billion burden hours. Over the years, we have reported on the implementation of PRA many times. In a succession of reports and testimonies, we noted that federal paperwork burden estimates generally continued to increase, rather than decrease as envisioned by the burden reduction goals in PRA. Further, we reported that some burden reduction claims were overstated. For example, although some reported paperwork reductions reflected substantive program changes, others were revisions to agencies’ previous burden estimates and, therefore, would have no effect on the paperwork burden felt by the public. In our previous work, we also repeatedly pointed out ways that OMB and agencies could do more to ensure compliance with PRA. In particular, we have often recommended that OMB and agencies take actions to improve the paperwork clearance process. After 2 years of slight declines, OMB reports that burden hours increased in fiscal year 2005 and are expected to increase again in fiscal year 2006. According to OMB’s most recent PRA report to Congress, the estimated total burden hours imposed by government information collections in fiscal year 2005 was 8.4 billion hours; this is an increase of 441 million burden hours (5.5 percent) from the previous year’s total of 8.0 billion hours. It is also almost a billion and a half hours larger than it was in 1995 and 3.8 billion larger than the PRA target for the end of fiscal year 2001 (4.6 billion burden hours). OMB’s report also states that burden will increase in fiscal year 2006 by an estimated 303 million hours to about 8.7 billion hours; however, according to OMB, most of this projected increase (250 million hours or 83 percent) is attributable to a new method of estimating burden that is being implemented by IRS, rather than to any increase in the actual burden. Finally, according to OMB, fewer violations of the act were reported than in previous years. Changes in paperwork burden estimates result from several causes, which OMB assigns to two main categories. OMB classifies all changes—either increases or decreases—in agencies’ burden-hour estimates as either program changes or adjustments. ● Program changes are the result of deliberate federal government action (e.g., the addition or deletion of questions on a form); these can occur as a result of ● agency-initiated actions, or ● the expiration or reinstatement of OMB-approved collections. ● Adjustments do not result from federal activities but from external factors. For example: ● an agency may reestimate the burden associated with a collection of information, or ● the population responding to a requirement may change—such as if the economy declines and more people complete applications for food stamps; the resulting increase in the Department of Agriculture’s paperwork estimate is considered an adjustment because it is not the result of deliberate federal action. As shown above, within the category of program changes, OMB distinguishes between changes due to new statutes and changes due to agency action, which it also refers to as agency discretionary actions. However, this term should not imply that agencies have no discretion in how they implement new statutes. A major goal of the PRA is to ensure that agencies consider how to make the burden of information collections, whether old or newly established, as small as possible. In the second part of my statement, I will address one of the ways set forth in the PRA to help achieve this goal. Table 2 shows the changes in reported burden totals from fiscal year 2004 to fiscal year 2005. As the table shows, the change due to new statutes was by far the largest factor in the increase for fiscal year 2005. OMB reports that the statute having the largest impact on burden was the statute establishing voluntary prescription drug coverage under Medicare; implementing the program mandated by this statute required the collection of significant amounts of information, leading to an increase in burden of 224 million hours. An additional significant increase—about 116 million hours—resulted from the implementation by the Federal Communications Commission (FCC) of the CAN-SPAM Act, which requires disclosure of certain information contained in unsolicited commercial e-mails. In contrast to changes due to new statutes, changes due to agency action did not contribute significantly to the overall change in burden this year, adding 180,000 hours out of the total rise of 441 million. Although the overall result was a slight increase, agencies did take many actions that decreased burden; without these actions, the governmentwide increase would have been greater. The annual report does not list all these actions, but it does highlight actions that led to significant paperwork reductions and increases. (These include increases and decreases in burden from statutory requirements and miscellaneous agency actions, as well as burden reductions from changing regulations, cutting redundancy, changing forms, and using information technology.) From both an individual agency perspective and a governmentwide perspective, the relatively small increase due to agency action is the result of large increases and decreases that mostly offset each other: ● From an individual agency perspective, the net change in an agency’s burden estimate is generally the result of disparate actions, some of which reduce burden and some of which increase it. An example is the IRS, which as an agency was responsible for a net decrease of about 3 million hours. Among the burden reductions that the annual report highlights are two IRS actions to change forms, both of which reduced burden by simplification and streamlining, for a reduction of about 19 million hours. The ICB also reports that in January 2006 IRS completed an initiative to simplify the process of applying for an extension to file an income tax return, which is associated with a burden reduction of 8 million hours. Elsewhere, on the other hand, five IRS actions are highlighted that together resulted in an increase of about 24 million hours. Examples of reasons IRS took these actions included increasing accuracy and improving the agency’s ability to monitor compliance with the law. ● Similarly, from a governmentwide perspective, the overall change is the result of some agencies whose actions produced a net decrease and others whose produced a net decrease. In fiscal year 2005, agencies with net decreases produced a reduction of about 14.02 million hours. This reduction was offset, however, by agencies with net increases, which totaled about 14.20 million hours. Compared to program changes as a whole, adjustments to the estimates were a relatively small factor (as table 2 also shows), accounting for a net increase in the burden of about 19 million hours. In previous years, adjustments have had a much greater impact and have tended to decrease overall burden estimates, thus masking the effect of increases from program changes. In fiscal years 2003 and 2004, the impact of adjustments was large enough to lead to overall burden estimates that were lower than for the year before. In fiscal year 2004, OMB reported a decrease of about 156 million hours in adjustments versus an increase of about 29 million hours in program changes; the result was a lower overall burden estimate than for the previous year. Similarly, overall burden in fiscal year 2003 was slightly less than in fiscal year 2002, also as a result of a decrease in adjustments (about 182 million hours) that more than offset an increase in program changes (about 72 million hours). Besides these large decreases due to adjustments, another reason for the slight decrease in total burden in fiscal years 2004 and 2003 was that increases due to program changes were relatively small, as shown in table 3. This year, both program changes and adjustments went up, so adjustments did not have the effect of masking increases in program changes. As the table also shows, fiscal year 2005 saw the largest net increase from program changes since 1998. In fiscal year 2005, IRS accounted for about 76 percent of the governmentwide paperwork burden: about 6.4 billion hours. As shown in figure 1, no other agency’s estimate approaches this level. Six agencies had burden-hour estimates of 100 million hours or more (the Departments of Health and Human Services, Labor, and Transportation; EPA; FCC; and the Securities and Exchange Commission). Thus, as we have previously reported, changes in paperwork burden experienced by the federal government have been largely attributable to changes associated with IRS. OMB reports that starting in fiscal year 2006, IRS began using a new methodology based on a statistical model—the Individual Taxpayer Burden Model—to estimate the reporting burden imposed on individual taxpayers. Among other things, this new model, which was developed to improve the accuracy and transparency of taxpayer burden estimates, reflects the major changes over the past two decades in the way that taxpayers prepare and file their returns, including the use of electronic preparation methods. According to OMB, rather than estimating burden on a form-by-form basis, the new methodology takes into account broader and more comprehensive taxpayer characteristics and activities, considering how the taxpayer prepares the return (e.g., with or without software or a paid preparer) as well as the taxpayer’s activities, such as gathering tax materials, completing forms, recordkeeping, and tax planning. In contrast, the previous methodology primarily focused on the length and complexity of each tax form. OMB states that this new model will make it possible to estimate the burden implications of new legislative and administrative tax proposals. OMB projects that these changes will create a one-time increase of about 250 million hours in the estimate of IRS burden levels in fiscal year 2006. This increase represents most (83 percent) of the total projected governmentwide increase for fiscal year 2006 of 303 million hours. However, according to OMB, this increase does not reflect any change in the actual burden experienced by taxpayers, but rather a change in the way the burden is measured. In the past, we reported that IRS’s previous estimation model ignored important components of burden and had limited capabilities for analyzing the determinants of burden. The new model is the result of work that IRS has performed over the past several years to improve its model and address these and other limitations. At this time, we have not analyzed IRS’s new model to determine the extent to which it improves the accuracy of burden estimates, and we have not assessed the accuracy of the new model’s estimates. However, IRS’s efforts to increase the accuracy of its model appear to be an important step towards addressing the previous model’s shortcomings. See GAO, EPA Paperwork: Burden Estimate Increasing Despite Reduction Claims, GAO/GGD-00-59 (Washington, D.C.: Mar. 16, 2000), for how one agency estimates paperwork burden. understood, these estimates can be useful as the best indicators of paperwork burden available. OMB reports reductions in PRA violations for fiscal year 2005 compared to previous years. The PRA prohibits an agency from conducting or sponsoring the collection of information unless (1) the agency has submitted the proposed collection to OMB, (2) OMB has approved the proposed collection, and (3) the agency displays an OMB control number on the collection. According to OMB’s annual report, agencies have made great progress in recent years in reducing the number of violations of these conditions and in resolving them more promptly. OMB attributed this reduction to several initiatives it had taken, including meeting with agency officials to discuss ways to reduce violations and adding reporting requirements. According to OMB, during fiscal year 2005, agencies reported a total of 97 violations: 60 information collections that expired during the year, and another 37 that had expired before October 1, 2004, and were not reinstated until fiscal year 2005. Of the 27 agencies included in the annual report, the three agencies with the greatest number of violations were the Departments of the Treasury and Homeland Security and the Small Business Administration. In addition, OMB reported no unresolved violations at the end of fiscal year 2005 and only 6 violations during the first 8 months of fiscal year 2006. The 97 violations reported in fiscal year 2005 is much less than the 164 violations in fiscal year 2004 and the 223 violations in fiscal year 2003. Although the reduction in violations is a positive trend, we should note that the violations reported may not be comprehensive; they include only those that agencies identified and reported to OMB. As a result, the statistics would omit violations of which agencies were unaware. In our May 2005 review, we examined forms posted on Web sites for four agencies (VA, HUD, Labor, and IRS). We found examples of violations among these forms of which the agencies were generally unaware. Based on our examination, we projected that the four agencies overall had an estimated 69 violations: 61 collections in use without OMB approval and 8 expired collections. For example, we estimated 16 violations at VA; at that time, OMB’s report reflected VA’s belief that it had no violations. Based on these results, we recommended that the four agencies periodically review their Web sites to ensure that all forms comply with PRA requirements; we also recommended that OMB alter its guidance so that all federal agencies would be required to periodically review Web sites in this way. Since then, VA has reported to us that it removed forms from its Web site that were in violation of PRA. However, OMB has not yet issued governmentwide guidance directing these types of reviews, so it is possible that some PRA violations remain undetected. Among the PRA provisions intended to help achieve the goals of minimizing burden while maximizing utility are the requirements for CIO review and certification of information collections. The 1995 amendments required agencies to establish centralized processes for reviewing proposed information collections within the CIO’s office. Among other things, the CIO’s office is to certify, for each collection, that the 10 standards in the act have been met, and the CIO is to provide a record supporting these certifications. The four agencies that we reviewed for our May 2005 report all had written directives that implemented the review requirements in the act, including the requirement for CIOs to certify that the 10 standards in the act were met. However, in the 12 case studies that we reviewed, this CIO certification occurred despite a lack of rigorous support that all standards were met. Specifically, the support for certification was missing or partial on 65 percent (66 of 101) of the certifications. Table 4 shows the result of our analysis of the case studies. We have attempted to eliminate duplication within the agency wherever possible. This assertion provides no information on what efforts were made to identify duplication or perspective on why similar information, if any, could not be used. Further, the files contained no evidence that the CIO reviewers challenged the adequacy of this support or provided support of their own to justify their certification. A second standard mandated by the act is that each information collection should reduce burden on the public, including small entities, to the extent practicable and appropriate. OMB guidance emphasizes that agencies are to demonstrate that they have taken every reasonable step to ensure that a given collection of information is the least burdensome necessary for the proper performance of agency functions. In addition, OMB instructions and guidance direct agencies to provide specific information and justifications: (1) estimates of the hour and cost burden of the collections and (2) justifications for any collection that requires respondents to report more often than quarterly, respond in fewer than 30 days, or provide more than an original and two copies of documentation. With regard to small entities, OMB guidance states that the standard emphasizes such entities because these often have limited resources to comply with information collections. The act and OMB guidance give various techniques for reducing burden on these small entities. Our review of the case examples found that for the certification on reducing burden on the public, the files generally contained the specific information and justifications called for in the guidance. However, none of the case examples contained support that addressed how the agency ensured that the collection was the least burdensome necessary. According to agency CIO officials, the primary cause for this absence of support is that OMB instructions and guidance do not direct agencies to provide this information explicitly as part of the approval package. In addition, four of our case studies did not provide complete information that would support certification that the collection specifically addressed reducing burden for small entities. Specifically, 7 of the 12 case studies involved collections that were reported to impact businesses or other for-profit entities, but the files for 4 of these 7 did not explain either ● why small businesses were not affected, or ● even though such businesses were affected, that burden could or could not be reduced. Instead, the files included statements such as “not applicable,” which do not inform the reviewer whether or not there was an effort made to reduce burden on small entities. When we asked agencies about these four cases, they indicated that the collections did, in fact, affect small business. OMB’s instructions to agencies on minimizing burden on small entities require agencies to describe any methods used to reduce burden only if the collection of information has a “significant economic impact on a substantial number of small entities.” This does not appropriately reflect the act’s requirements concerning small business: the act requires that the CIO certify that the information collection reduces burden on small entities in general, to the extent practical and appropriate, and provides no thresholds for the level of economic impact or the number of small entities affected. OMB officials acknowledged that their instruction is an “artifact” from a previous form and more properly focuses on rulemaking rather than on the information collection process. The lack of support for the 10 certifications required by the act appeared to be influenced by a variety of factors. In some cases, as described above, OMB guidance and instructions were not comprehensive or entirely accurate. In the case of the duplication standard specifically, IRS officials said that the agency did not need to further justify that its collections are not duplicative because (1) tax data are not collected by other agencies, so there is no need for the agency to contact them about proposed collections, and (2) IRS has an effective internal process for coordinating proposed forms among the agency’s various organizations that may have similar information. Nonetheless, the law and instructions require support for these assertions, which was not provided. Further, agency reviewers told us that management assigns a relatively low priority and few resources to reviewing information collections. Further, program offices have little knowledge of and appreciation for the requirements of the PRA. As a result of these conditions and a lack of detailed program knowledge, reviewers often have insufficient leverage with program offices to encourage them to improve their justifications. When support for the PRA certifications is missing or inadequate, OMB, the agency, and the public have reduced assurance that the standards in the act, such as those on avoiding duplication and minimizing burden, have been consistently met. IRS and EPA have supplemented the standard PRA review process with additional processes aimed at reducing the burden while maximizing the public benefit and utility of the information collected. These agencies’ missions require them both to deal extensively with information collections, and their management has made reduction of burden a priority. In January 2002, the IRS Commissioner established an Office of Taxpayer Burden Reduction, which includes both permanently assigned staff and staff temporarily detailed from program offices that are responsible for particular information collections. This office chooses a few forms each year that are judged to have the greatest potential for burden reduction (these forms have already been reviewed and approved through the CIO process). The office evaluates and prioritizes burden reduction initiatives by ● determining the number of taxpayers impacted; ● quantifying the total time and out-of-pocket savings for taxpayers; ● evaluating any adverse impact on IRS’s voluntary compliance ● assessing the feasibility of the initiative, given IRS resource limitations; and ● tying the initiative into IRS objectives. Once the forms are chosen, the office performs highly detailed, in- depth analyses, including extensive outreach to the public affected, users of the information within and outside the agency, and other stakeholders. This analysis includes an examination of the need for each data element requested. In addition, the office thoroughly reviews form design. The office’s director heads a Taxpayer Burden Reduction Council, which serves as a forum for achieving taxpayer burden reduction throughout IRS. IRS reports that as many as 100 staff across IRS and other agencies can be involved in burden reduction initiatives, including other federal agencies, state agencies, tax practitioner groups, taxpayer advocacy panels, and groups representing the small business community. The council directs its efforts in five major areas: ● simplifying forms and publications; ● streamlining internal policies, processes, and procedures; ● promoting consideration of burden reductions in rulings, regulations, and laws; ● assisting in the development of burden reduction measurement ● partnering with internal and external stakeholders to identify areas of potential burden reduction. According to IRS, this targeted, resource-intensive process has achieved significant reductions in burden. For example, it reported that about 95 million hours of taxpayer burden were reduced through increases in the income reporting threshold on various IRS schedules. Another example, mentioned earlier, was given in OMB’s latest annual PRA report: in January 2006 IRS completed an initiative to simplify the process of applying for an extension to file an income tax return, which is associated with a burden reduction of 8 million hours. Another example from the annual PRA report is a reduction of about 19 million hours from a redesign of IRS form 1041 to streamline the requirements and make it easier to read and file. Similarly, EPA officials stated that they have established processes for reviewing information collections that supplement the standard PRA review process. These processes are highly detailed and evaluative, with a focus on burden reduction, avoiding duplication, and ensuring compliance with PRA. According to EPA officials, the impetus for establishing these processes was the high visibility of the agency’s information collections and the recognition, among other things, that the success of EPA’s enforcement mission depended on information collections being properly justified and approved: in the words of one official, information collections are the “life blood” of the agency. According to these officials, the CIO staff are not generally closely involved in burden reduction initiatives, because they do not have sufficient technical program expertise and cannot devote the extensive time required. Instead, these officials said that the CIO staff’s focus is on fostering high awareness within the agency of the requirements associated with information collections, educating and training the program office staff on the need to minimize burden and the impact on respondents, providing an agencywide perspective on information collections to help avoid duplication, managing the clearance process for agency information collections, and acting as liaison between program offices and OMB during the clearance process. To help program offices consider PRA requirements such as burden reduction and avoiding duplication as they are developing new information collections or working on reauthorizing existing collections, the CIO staff also developed a handbook to help program staff understand what they need to do to comply with PRA and gain OMB approval. In addition, program offices at EPA have taken on burden reduction initiatives that are highly detailed and lengthy (sometimes lasting years) and that involve extensive consultation with stakeholders (including entities that supply the information, citizens groups, information users and technical experts in the agency and elsewhere, and state and local governments). For example, EPA reported that it amended its regulations to reduce the paperwork burden imposed under the Resource Conservation and Recovery Act. One burden reduction method EPA used was to establish higher thresholds for small businesses to report information required under the act. EPA estimated that the initiative will reduce burden by 350,000 hours and save $22 million annually. Another example is an ongoing EPA initiative reported in this year’s PRA report, the Central Data Exchange; this is an e-government initiative that is designed to enable fast, efficient, and more accurate environmental data submissions and exchange from state and local governments, industry, and tribes through the use of electronic reporting procedures. The estimated reduction for this initiative, which is expected to be complete in 2008, is 166,000 hours. Overall, EPA and IRS reported that they have produced significant reductions in paperwork burden by making a commitment to this goal and dedicating resources to it. In contrast, for the 12 information collections we examined, the CIO review process resulted in no reduction in burden. Further, the Department of Labor reported that its PRA reviews of 175 proposed collections over nearly 2 years did not reduce burden. Similarly, both IRS and EPA addressed information collections that had undergone CIO review and received OMB approval and nonetheless found significant opportunities to reduce the paperwork burden. In our 2005 report, we concluded that the CIO review process was not working as Congress intended: It did not result in a rigorous examination of the burden imposed by information collections, and it did not lead to reductions in burden. In light of these findings, we suggested options that Congress might want to consider when it next reauthorizes the act, including mandating pilot projects to test and review alternative approaches to achieving PRA goals. Such pilot projects could build on the lessons learned at IRS and EPA, which have used a variety of approaches to reducing burden, sharing information (for example, by facilitating cross-agency information exchanges), standardizing data for multiple uses, and integrating data to avoid duplication; and re-engineering work flows. Pilot projects would be most appropriate for agencies for which information collections are a significant aspect of the mission. In addition, we recommended (among other things) that agencies strengthen the support provided for CIO certifications and that OMB update its guidance to clarify and emphasize this requirement (including that agencies provide support showing that they have taken steps to reduce burden, determined whether small entities are affected and reduced reporting burden on them, and established a plan to manage and use the information to be collected, including the identification of necessary resources). OMB and the agencies agreed with most of the recommendations, although they disagreed with aspects of GAO’s characterization of agencies’ compliance with the act’s requirements. Since our report was issued, the four agencies have reported taking steps to strengthen their support for CIO certifications: ● According to the HUD CIO, the department established a senior- level PRA compliance officer in each major program office, and it revised its certification process to require that before collections are submitted for review, they be approved at a higher management level within program offices. ● The Treasury CIO established an Information Management Sub- Council under the Treasury CIO Council and added resources to the review process. ● According to the VA’s 2007 budget submission, the department obtained additional resources to help review and analyze its information collection requests. ● According to the Office of the CIO at the Department of Labor, the department intends to provide guidance to components regarding the need to provide strong support for clearance requests and has met with component staff to discuss these issues. OMB has updated parts of its guidance and plans to incorporate other guidance into an automated system to be used by agencies submitting information collections for clearance. In January 2006, OMB revised its guidance to agencies on surveys and statistical information collections. This guidance, among other things, is aimed at strengthening the support that agencies must provide for certifying collections, as we recommended. For example, the guidance requires agencies submitting requests for approval to include context and detail that will allow OMB to evaluate the practical utility of the information to be collected. However, this guidance does not apply to all information collections. Rather, it applies only to surveys that are used for general-purpose statistics or as part of program evaluations or research studies. In addition, it does not provide clear guidance on one of the topics mentioned in our recommendation: determining whether small entities are affected by the collection and reducing reporting burden on these entities. OMB also reported that its guidance to agencies will be updated through a planned automated system that is to begin operating this month. According to the former acting head of OMB’s Office of Information and Regulatory Affairs, the new system will permit agencies to submit clearance requests electronically, and the instructions will provide clear guidance on the requirements for these submissions, including the support required. This official stated that OMB has worked with agency representatives with direct knowledge of the PRA clearance process in order to ensure that the system and its instructions clearly reflect the requirements of the process. If this system is implemented as described and OMB withholds clearance from submissions that lack adequate support, it could lead agencies to strengthen the support provided for their certifications. In conclusion, Madam Chairman, the PRA puts in place mechanisms to focus agency attention on the need to minimize the burden that information collections impose—while maximizing the public benefit and utility of government information collections—but these mechanisms have not succeeded in achieving the ambitious reduction goals set forth in the 1995 amendments. Achieving real reductions in the paperwork burden is an elusive goal, as attested by years of OMB’s annual PRA reports, including the latest. That report shows the largest rise in estimated burden for the last several years, mostly due to new statutory requirements and how they have been implemented. As we have seen, the tendency is for burden to rise unless agencies take active steps to reduce it. Agencies have taken such actions—by cutting redundancy, changing forms, and using information technology, among other things—but these have not been enough to make up for the increases. Besides demonstrating once again how challenging it is for the government to achieve true burden reduction, this year’s results highlight the need to look for new ways to achieve this and the other goals of the PRA. Among the mechanisms already in place is the CIO review and certification process. However, as it was implemented at the time of our review, this process had limited effect on the quality of support provided for information collections, and it appeared to have no appreciable impact on burden. The targeted approaches to burden reduction used by IRS and EPA appear promising, but the experience of these agencies suggests that success requires top-level executive commitment, extensive involvement of program office staff with appropriate expertise, and aggressive outreach to stakeholders. However, such an approach would probably also be more resource-intensive than the CIO certification process, and thus it may not be warranted at agencies where paperwork issues do not rise to the level of those at IRS and similar agencies. Consequently, it is critical that efforts to expand the use of the IRS and EPA models take these factors into consideration. Madam Chairman, this completes my prepared statement. I would be pleased to answer any questions. For future information regarding this testimony, please contact Linda Koontz, Director, Information Management, at (202) 512-6420, or [email protected]. Other individuals who made key contributions to this testimony were Barbara Collier, Nancy Glover, and Alan Stapleton. Paperwork Reduction Act: New Approaches Can Strengthen Information Collection and Reduce Burden. GAO-06-477T. Washington, D.C.: March 8, 2006. Paperwork Reduction Act: Subcommittee Questions Concerning the Act’s Information Collection Provisions. GAO-05-909R. Washington, D.C.: July 19, 2005. Paperwork Reduction Act: Burden Reduction May Require a New Approach. GAO-05-778T. Washington, D.C.: June 14, 2005. Paperwork Reduction Act: New Approach May Be Needed to Reduce Government Burden on Public. GAO-05-424. Washington, D.C.: May 20, 2005. Paperwork Reduction Act: Agencies’ Paperwork Burden Estimates Due to Federal Actions Continue to Increase. GAO-04-676T. Washington, D.C.: April 20, 2004. Paperwork Reduction Act: Record Increase in Agencies’ Burden Estimates. GAO-03-619T. Washington, D.C.: April 11, 2003. Paperwork Reduction Act: Changes Needed to Annual Report. GAO- 02-651R. Washington, D.C.: April 29, 2002. Paperwork Reduction Act: Burden Increases and Violations Persist. GAO-02-598T. Washington, D.C.: April 11, 2002. Information Resources Management: Comprehensive Strategic Plan Needed to Address Mounting Challenges. GAO-02-292. Washington, D.C.: February 22, 2002. Paperwork Reduction Act: Burden Estimates Continue to Increase. GAO-01-648T. Washington, D.C.: April 24, 2001. Electronic Government: Government Paperwork Elimination Act Presents Challenges for Agencies. GAO/AIMD-00-282. Washington, D.C.: September 15, 2000. Tax Administration: IRS Is Working to Improve Its Estimates of Compliance Burden. GAO/GGD-00-11. Washington, D.C.: May 22, 2000. Paperwork Reduction Act: Burden Increases at IRS and Other Agencies. GAO/T-GGD-00-114. Washington, D.C.: April 12, 2000. EPA Paperwork: Burden Estimate Increasing Despite Reduction Claims. GAO/GGD-00-59. Washington, D.C.: March 16, 2000. Federal Paperwork: General Purpose Statistics and Research Surveys of Businesses. GAO/GGD-99-169. Washington, D.C.: September 20, 1999. Paperwork Reduction Act: Burden Increases and Unauthorized Information Collections. GAO/T-GGD-99-78. Washington, D.C.: April 15, 1999. Paperwork Reduction Act: Implementation at IRS. GAO/GGD-99-4. Washington, D.C.: November 16, 1998. Regulatory Management: Implementation of Selected OMB Responsibilities Under the Paperwork Reduction Act. GAO/GGD- 98-120. Washington, D.C.: July 9, 1998. Paperwork Reduction: Information on OMB’s and Agencies’ Actions. GAO/GGD-97-143R. Washington, D.C.: June 25, 1997. Paperwork Reduction: Governmentwide Goals Unlikely to Be Met. GAO/T-GGD-97-114. Washington, D.C.: June 4, 1997. Paperwork Reduction: Burden Reduction Goal Unlikely to Be Met. GAO/T-GGD/RCED-96-186. Washington, D.C.: June 5, 1996. Environmental Protection: Assessing EPA’s Progress in Paperwork Reduction. GAO/T-RCED-96-107. Washington, D.C.: March 21, 1996. Paperwork Reduction: Burden Hour Increases Reflect New Estimates, Not Actual Changes. GAO/PEMD-94-3. Washington, D.C.: December 6, 1993. 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. | Americans spend billions of hours each year providing information to federal agencies by filling out information collections (forms, surveys, or questionnaires). A major aim of the Paperwork Reduction Act (PRA) is to minimize the burden that responding to these collections imposes on the public, while maximizing their public benefit. Under the act, the Office of Management and Budget (OMB) is to approve all such collections and to report annually on the agencies' estimates of the associated burden. In addition, agency chief information officers (CIO) are to review information collections before submitting them to OMB for approval and certify that the collections meet certain standards set forth in the act. GAO was asked to testify on OMB's burden report for 2005 and on a previous study of PRA implementation (GAO-05-424), which focused on the CIO review and certification processes and described alternative processes that two agencies have used to minimize paperwork burden. To prepare this testimony, GAO reviewed the current burden report and its past work in this area. For its 2005 study, GAO reviewed a governmentwide sample of collections, reviewed processes and collections at four agencies that account for a large proportion of burden, and performed case studies of 12 approved collections at the four agencies. After 2 years of slight declines, OMB reports that paperwork burden grew in fiscal year 2005 and is expected to increase further in fiscal year 2006. Estimates in OMB's annual report to Congress show that the total paperwork burden imposed by federal information collections increased last year to about 8.4 billion hours--an increase of 5.5 percent from the previous year's total of about 8.0 billion hours. Nearly all this increase resulted from the implementation of new laws (for example, about 224 million hours were due to the implementation of voluntary prescription drug coverage under Medicare). The rest of the increase came mostly from adjustments to the estimates due to such factors as changes in estimation methods and in the numbers of respondents. Looking ahead to fiscal year 2006, OMB expects an increase of about 250 million hours because of a new model for estimating burden being implemented by the Internal Revenue Service (IRS). According to OMB, this expected rise does not reflect any real change in the burden on taxpayers, but only in how IRS estimates it. The PRA requires that CIOs review information collections and certify that they meet standards to minimize burden and maximize utility; however, these reviews were not always rigorous, reducing assurance that these standards were met. In 12 case studies at four agencies, GAO determined that CIOs certified collections proposed by program offices despite missing or inadequate support. Providing support for certifications is a CIO responsibility under the PRA, but agency files contained little evidence that CIO reviewers had made efforts to improve the support offered by program offices. Numerous factors contributed to these problems, including a lack of management attention and weaknesses in OMB guidance. Based on its review, GAO recommended (among other things) that agencies strengthen the support provided for certifications and that OMB update its guidance to clarify and emphasize this requirement. Since GAO's study was issued, the four agencies have reported taking steps to strengthen their support for CIO certifications, such as providing additional resources and guidance for the process, and OMB has updated parts of its guidance. In contrast to the CIO review process, which did not lead to reduced paperwork burden in GAO's 12 case studies, IRS and the Environmental Protection Agency (EPA) have set up alternative processes specifically focused on reducing burden. These agencies, whose missions involve numerous information collections, have devoted significant resources to targeted burden reduction efforts that involve extensive outreach to stakeholders. According to the two agencies, these efforts have led to significant reductions in paperwork burden on the public. In light of these promising results, the weaknesses in the current CIO review process, and the persistent increases in burden, a new approach to burden reduction appears warranted. GAO suggested that Congress should consider mandating pilot projects to target some collections for rigorous analysis along the lines of the IRS and EPA approaches. |
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The nation’s nuclear weapons stockpile remains a cornerstone of U.S. national security policy. As a result of changes in arms control, arms reduction, and nonproliferation policies, the President and the Congress in 1993 directed that a science-based Stockpile Stewardship Program be developed to maintain the stockpile without nuclear testing. After the establishment of that program, DOE, in January 1996, created the Stockpile Life Extension Program. The purpose of this program is to develop a standardized approach for planning nuclear weapons refurbishment activities to enable the nuclear weapons complex to extend the operational lives of the weapons in the stockpile well beyond their original design lives. Within NNSA, the Office of Defense Programs is responsible for the stockpile. This responsibility encompasses many different tasks, including the manufacturing, maintenance, refurbishment, surveillance, and dismantlement of weapons in the stockpile; activities associated with the research, design, development, simulation, modeling, and nonnuclear testing of nuclear weapons; and the planning, assessment, and certification of the weapons’ safety and reliability. A national complex of nuclear weapons design laboratories and production facilities supports the Office of Defense Programs’ mission. This complex consists of three national laboratories that design nuclear weapons: Lawrence Livermore National Laboratory in California, Los Alamos National Laboratory in New Mexico, and Sandia National Laboratories in New Mexico and California. The complex also includes the Nevada test site and four production sites: the Pantex plant in Texas, the Y-12 plant in Tennessee, the Kansas City plant in Missouri, and the Savannah River site in South Carolina. NNSA refurbishes nuclear weapons according to a process called Phase 6.X, which was jointly developed with the Department of Defense. This process consists of the following elements: Phase 6.1, concept assessment. This phase consists of studies to provide planning guidance and to develop information so that a decision can be made on whether or not to proceed to a phase 6.2. Phase 6.2, feasibility study. This phase consists of developing design options and studying their feasibility. Phase 6.2A, design definition and cost study. This phase consists of completing definition of selected design option(s) from phase 6.2 through cost analysis. Phase 6.3, development engineering. This phase consists of conducting experiments, tests, and analyses to validate the design option and assess its potential for production. Phase 6.4, production engineering. This phase consists of making a strong commitment of resources to the production facilities to prepare for stockpile production. Phase 6.5, first production. This phase consists of producing a limited number of refurbished weapons and then disassembling and examining some of them for final qualification of the production process. Phase 6.6, full-scale production. This phase consists of ramping up to full-production rates at required levels. As of May 1, 2003, according to NNSA officials, four nuclear weapons were undergoing phase 6.X refurbishment activities. The W-80 warhead, the B-61 bomb, and the W-76 warhead are all in phase 6.3, development engineering, while the W-87 warhead is in phase 6.6, full-scale production. Prior to its budget submission for fiscal year 2001, the Office of Defense Programs divided the operating portion of the Weapons Activities account into two broad program activities—stockpile stewardship and stockpile management. Stockpile stewardship was defined as the set of activities needed to provide the physical and intellectual infrastructure required to meet the scientific and technical requirements of the (overall) Stockpile Stewardship Program. Stockpile management activities included DOE’s historical responsibilities for surveillance, maintenance, refurbishment, and dismantlement of the enduring stockpile. However, each category was dominated by a single large activity known as core stewardship and core management, which made it difficult to determine precisely where funds were being spent. For example, in the Office of Defense Programs’ budget submission for fiscal year 2000, core stewardship accounted for 48 percent of the stockpile stewardship activity’s budget request, while core management accounted for 73 percent of the stockpile management activity’s budget request. The lack of clarity associated with this broad structure caused concern both at DOE and in the Congress. In February 1999, the Deputy Assistant Secretary for Research, Development, and Simulation, who manages the stockpile stewardship activity, began to develop a new program activity structure to improve the planning process for his program and more closely integrate the program with the needs of the stockpile. The new structure was built around three new program activities—Campaigns, Directed Stockpile Work, and Readiness in Technical Base and Facilities. Campaigns are technically challenging, multiyear, multifunctional efforts conducted across the Office of Defense Programs’ laboratories, production plants, and the Nevada test site. They are designed to develop and maintain the critical capabilities needed to enable continued certification of the stockpile into the foreseeable future, without underground testing. Campaigns have milestones and specific end-dates or goals, effectively focusing research and development activities on clearly defined deliverables. Directed Stockpile Work includes the activities that directly support specific weapons in the stockpile. These activities include the current maintenance and day-to-day care of the stockpile, as well as planned life extensions. Readiness in Technical Base and Facilities includes the physical infrastructure and operational readiness required to conduct Campaign and Directed Stockpile Work activities at the production plants, laboratories, and the Nevada test site. This includes ensuring that the infrastructure and facilities are operational, safe, secure, compliant, and ready to operate. Within each of these three activities is a set of more detailed subactivities. For example, within the Campaigns activity are individual campaigns to study, among other things, the primary in a nuclear weapon or to develop a new capability to produce nuclear weapons pits. Similarly, the Directed Stockpile Work activity includes subactivities to conduct surveillance or produce components that need regular replacement within nuclear weapons. Finally, the Readiness in Technical Base and Facilities activity includes subactivities to capture the costs for the operation of its facilities. In submitting its new program activity structure to the Office of the Chief Financial Officer for review and approval for use in the budget submission for fiscal year 2001, the Office of Defense Programs believed that the new structure would, among other things, better reflect its current and future missions; focus budget justification on major program thrusts; and improve the linkage between planning, budgeting, and performance evaluation. Budget requests developed since fiscal year 2001 have been presented using the Campaigns, Directed Stockpile Work, and Readiness in Technical Base and Facilities activity structure. Within the Office of Defense Programs, two organizations share the responsibility for overall weapons refurbishment management. Those organizations are the Office of the Assistant Deputy Administrator for Research, Development, and Simulation and the Office of the Assistant Deputy Administrator for Military Application and Stockpile Operations. The first office directs funding to the laboratories for research and development, while the second office directs funding for engineering development and production to the laboratories and production sites. According to NNSA’s Life Extension Program Management Plan, both organizations also share responsibilities. Both oversee life extension program execution; ensure that the life extension program baseline, if successfully accomplished, will meet customer requirements; and provide life extension program information to higher levels for review. The management plan also stipulates that each life extension shall have one program manager and one deputy program manager, with one being assigned from each of the two aforementioned organizations, and that these two individuals will share program management responsibilities. While NNSA’s fiscal year 2003 budget request did not provide a clear picture of all activity necessary to complete the Stockpile Life Extension Program, NNSA has begun to take action to produce a more comprehensive and reliable picture of the program for fiscal year 2004 and beyond. With respect to fiscal year 2003, NNSA did not develop a comprehensive Stockpile Life Extension Program budget because historically it has developed its budget by broad function—such as research and development—rather than by individual weapon system or program activity such as the Stockpile Life Extension Program. NNSA provided the Congress with supplementary information in its fiscal year 2003 budget request that attempted to capture the budget for the Stockpile Life Extension Program; however, this information was not comprehensive because it did not include the budget for activities necessary to successfully complete the life extension efforts. For example, the budget for high explosives work needed to support three life extension efforts was shown in a different portion of NNSA’s budget request. Recently NNSA has decided, after forming a task force to study the issue, to budget and manage by weapon system beginning with its fiscal year 2004 budget request, with this transition officially taking place with congressional approval of the fiscal year 2005 budget request. As a result, NNSA’s fiscal year 2004 budget request was more comprehensive because it attributed a larger portion of the Defense Programs’ budget to the life extension program. NNSA’s fiscal year 2003 and 2004 budget requests were also not reliable because the data used to develop them had not been formally reviewed—through a process known as validation—as required by DOE directive. Instead, NNSA relied on more informal and less consistent analyses. NNSA officials have stated that a formal budget validation process would be reintroduced for the fiscal year 2005 budget cycle. NNSA’s congressional budget request for fiscal year 2003 did not contain a comprehensive, reliable budget for the Stockpile Life Extension Program or the individual weapon systems undergoing refurbishment. NNSA developed its budget by broad function—such as Campaigns, Directed Stockpile Work, and Readiness in Technical Base and Facilities—rather than by individual weapon system or program activity such as the Stockpile Life Extension Program. While the Congress has accepted previous NNSA budget submissions as structured, it also has requested detailed information on NNSA’s stockpile life extension efforts. Specifically, the fiscal year 2002 Energy and Water Development Appropriations Act conference report directed NNSA to include detailed information by weapon system in the budget justification documents for its fiscal year 2003 and subsequent presidential budget requests to Congress. The conference report also indicated that the budget should clearly show the unique and the fully loaded cost of each weapon activity, including the costs associated with refurbishments, conceptual study, and/or the development of new weapons. NNSA responded to the congressional requirement by providing an unclassified table in an annex to its fiscal year 2003 budget that contained data on the budget request for the four individual life extensions. This data, however, did not contain budget funding for work outside the Directed Stockpile Work program activity that is required to carry out the life extensions. For example: The narrative associated with the High Explosives Manufacturing and Weapons Assembly/Disassembly Readiness Campaign indicates that $5.4 million, or an 80 percent funding increase, was needed in fiscal year 2003 to support the B-61, W-76, and W-80 refurbishments. The narrative did not provide a breakdown by individual refurbishment. However, NNSA’s implementation plan for this campaign indicated that nearly $50 million would be needed to support the three refurbishments over fiscal years 2002 through 2006. The narrative associated with an expansion project at the Kansas City plant within the Readiness in Technical Base and Facilities program activity indicated that $2.3 million was needed in fiscal year 2003 and $27.9 million was needed in the outyears to support the B-61, W-76, and W-87 refurbishments. The narrative also indicated that this expansion was required in order to meet first production unit schedules associated with the refurbishments. In addition, a significant portion of the funding in the annex table was not assigned to any specific refurbishment but rather was included under a budget line item termed “multiple system.” NNSA officials told us they did not ask field locations to break down the multiple system funding by individual refurbishment because this funding was for “general capability” activities that would continue to be required even if a weapon system were cut. Further, they said that there was currently no good allocation scheme, so a breakdown by weapon system would be inaccurate and, therefore, serve no useful purpose. However, NNSA officials provided us no information indicating that NNSA had ever studied possible allocation schemes or showing that allocation was not feasible. Moreover, according to the DOE’s chief financial officer, NNSA can and should break out the multiple system funding by weapon system. This official indicated that doing so would put the budget in line with presidential guidance and Office of Management and Budget objectives that advocate presenting a budget by product rather than by process. In commenting on our report, NNSA stated that DOE’s chief financial officer had no basis for making any assertions about whether NNSA should break out the multiple system funding by weapon system. However, the chief financial officer has responsibility for ensuring the effective management and financial integrity of DOE’s programs. More broadly, because NNSA provided the Congress with a table by weapon system in a budget annex and in Nuclear Weapon Acquisition Reports, the agency questioned the need for further identification of the Stockpile Life Extension Program in the fiscal year 2003 budget. Agency officials, including the Deputy Administrator for Defense Programs, told us that NNSA was reluctant to budget by weapon system because it would like to retain the “flexibility” the current budget structure affords the agency in responding to unanticipated demands and shifting priorities in the Stockpile Stewardship Program. Officials expressed concern that dissemination of more detailed Stockpile Life Extension Program information would encourage the Congress to cut the most expensive weapon system or systems. Furthermore, they asserted that eliminating a weapon system would not save all of the funds associated with that weapon system, because a certain portion would be fixed costs that would have to be transferred to the remaining users. During the course of our work, however, NNSA has begun to take action to produce a more comprehensive budget for the Stockpile Life Extension Program. Specifically, NNSA decided, after forming a task force to study the issue, to begin budgeting and managing by weapon system in the fiscal year 2004 budget. Starting with that budget, the agency supplied to the Congress a classified annex that allocated more of the costs that were in the multiple system line item to individual weapon systems. In addition, NNSA officials said that more than $100 million that had been included in the Readiness in Technical Base and Facilities activity was moved to the Directed Stockpile Work activity. However, for fiscal year 2004, no refurbishment-related work in the Campaigns activity has been moved. NNSA officials said that during the fiscal year 2005 budget cycle the agency will review the Readiness Campaigns activity to determine which portion of that activity could also be attributed to weapon systems. NNSA officials indicated the agency decided not to implement all budget changes in fiscal year 2004 in order to ensure that classification concerns are resolved, contractors have time to modify their accounting systems as needed, and NNSA has time to fully understand the costs and characteristics of managing, budgeting, and reporting by weapon system. NNSA’s budget requests for fiscal years 2003 and 2004 were not reliable because the data used to develop the budgets have not been formally reviewed—through a process known as validation—as required by DOE directive. Instead, NNSA has relied on a review that has become more informal and less consistent. Specifically, DOE Order 130.1, on budget formulation, requires budget requests to be based on estimates that have been thoroughly reviewed and deemed reasonable by the cognizant field office and headquarters program organization. The order further requires field offices to conduct validation reviews and submit documentation and to report any findings and actions to headquarters. A proper validation, as described by DOE’s Budget Formulation Handbook, requires the field office to review budget data submissions in detail, sampling 20 percent of the submissions every year such that 100 percent would be evaluated every 5 years. NNSA officials indicated that no formal validation has been done with respect to refurbishment research and development funding. With respect to refurbishment production funding, NNSA officials described their validation review as a “reasonableness” test regarding the budget’s support of a program’s needs based on a historical understanding of appropriate labor, materials, and overhead pricing estimates. NNSA officials acknowledged that, in recent years, the agency has not fulfilled the budget validation requirement as specified in DOE Order 130.1, and that the validation review that has been used has become increasingly less formal and less consistent. Prior to this reduction in the quality of the review process, the DOE Albuquerque Operations Office performed formal validation reviews at production plant locations through fiscal year 1996. Since then, the Albuquerque office has relied on a pilot project by which the four contractors directly under its jurisdiction—Sandia National Laboratories, Los Alamos National Laboratory, Kansas City plant, and the Pantex plant—submitted self-assessments for Albuquerque’s review. For the fiscal year 2003 and 2004 budgets, however, NNSA officials said headquarters no longer requested field validation as the agency commenced implementation of a new planning, programming, budgeting, and evaluation process. One NNSA field office, we found, still chose to perform validation reviews of the contractors under its jurisdiction. Specifically, the Oakland office performed a validation review of the Lawrence Livermore National Laboratory. However, other locations, such as the Kansas City plant, the Y-12 plant, and the Savannah River site did not have their budgets reviewed by any NNSA field office. We also were informed by NNSA officials that NNSA headquarters staff did not review the validation reports that were done, as required by DOE Order 130.1, before transmitting the fiscal year 2003 and 2004 budgets to DOE’s budget office, which then submitted them to the Office of Management and Budget. NNSA’s director of the Office of Planning, Programming, Budgeting, and Evaluation said that her office plans to introduce a formal validation process for the fiscal year 2005 budget cycle, adding that such a process was not used for the fiscal year 2004 budget cycle because of time constraints. NNSA documentation regarding the validation process to be used specifies that validation teams will be led by field federal staff elements working with headquarters program managers; the Office of Planning, Programming, Budgeting, and Evaluation staff; and others. However, NNSA documentation is silent on how the validation process will be conducted. Therefore, it is unclear if the validation process will be performed thoroughly and consistently across the weapons complex and if the process will be formally documented, as required by DOE Order 130.1. Once a budget is established, having reliable information on the cost of federal programs is crucial to the effective management of government operations. Such information is important to the Congress and to federal managers as they make decisions about allocating federal resources, authorizing and modifying programs, and evaluating program performance. The Statement of Federal Financial Accounting Standards (SFFAS) Number 4, “Managerial Cost Accounting Standards,” establishes the framework under which such cost information is gathered. In particular, the standard states that federal agencies should accumulate and report the costs of their activities on a regular basis for management information purposes. The standard sees measuring costs as an integral part of measuring the agency’s performance in terms of efficiency and cost- effectiveness. The standard suggests that such management information can be collected through the agency’s cost accounting system or through specialized approaches—known as cost-finding techniques. Regardless of the approach used, SFFAS Number 4 states that agencies should report the full costs of the outputs they produce. However, under Federal Acquisition Regulations and SFFAS Number 4, NNSA’s contractors do have the flexibility to develop the managerial cost accounting methods that are best suited to their operating environments. NNSA does not have a system for accumulating and tracking stockpile life extension program costs. Similar to its approach in the budget arena, NNSA currently does not collect cost information for the stockpile life extension program through the agency’s accounting system. This is because NNSA has defined its programs and activities, and thus the cost information it collects, at a higher level than the stockpile life extension program. Specifically, DOE collects cost information to support its Defense mission area. The Defense mission area includes the types of broad activities mentioned earlier, such as Campaigns, Directed Stockpile Work, and Readiness in Technical Base and Facilities. Moreover, DOE’s current accounting system does not provide an adequate link between cost and performance measures. Officials in DOE’s Office of the Chief Financial Officer recognize these shortcomings and are considering replacing the agency’s existing system with a system that can provide managers with cost information that is better aligned with performance measures. Moreover, NNSA does not accumulate life extension program cost information in the agency’s accounting system because NNSA does not require its contractors to collect information on the full cost of each life extension by weapon system. Full costs include the costs directly associated with the production of the item in question—known as direct costs—as well as other costs—known as indirect costs, such as overhead—that are only indirectly associated with production. SFFAS Number 4 states that entities should report the full cost of outputs in its general-purpose financial reports. General-purpose financial reports are reports intended to meet the common needs of diverse users who typically do not have the ability to specify the basis, form, and content of the reports they receive. Direct costs are captured within NNSA’s Directed Stockpile Work activity and include such things as research and development or maintenance. However, NNSA’s Directed Stockpile Work activity also includes indirect costs that benefit more than one weapon system or life extension. Examples of indirect costs within Directed Stockpile Work include evaluation and production support costs. Indirect costs are also found within Campaigns and Readiness in Technical Base and Facilities activities. Specifically, as noted earlier, NNSA’s budget justification identifies certain Campaign activities, which represent an indirect cost, that support individual life extensions. A portion of both of these sources of indirect costs could be allocated to individual weapon systems; however, NNSA does not currently require such an allocation by its contractors. It is important to recognize that under SFFAS Number 4, NNSA’s contractors do have the flexibility to develop the cost accounting methodologies that are best suited to their operating environments. The contractors involved in the life extension program are structured differently and have different functions. For example, Lawrence Livermore National Laboratory is run by the University of California and conducts mostly research that may or may not produce a tangible product. In contrast, the production plants are run by private corporations which produce parts, as is the case at the Kansas City or Y-12 plants, or assemble the parts into a completed weapon, as is done at the Pantex plant. As a result, even if NNSA required contractors to report the full cost of individual refurbishments, some differences in the data, which reflects the contractor’s different organizations and operations, would still exist. While the agency’s accounting system does not accumulate and report costs for the Stockpile Life Extension Program or its individual refurbishments, NNSA has developed several mechanisms to assist the Congress and program managers who oversee the life extension effort. Specifically: In previous years, NNSA has requested that its contractors provide supplemental data on actual costs by weapon system. These data have been used to respond to congressional information requests. However, similar to the way NNSA addresses its budget request, NNSA has not required its contractors to allocate the supplemental cost information in the multiple system category to individual refurbishments. In addition, also similar to the way it approached its budget presentation, NNSA has not required its contractors to include the costs for supporting activities, such as Campaigns and Readiness in Technical Base and Facilities in the reports. Some life extension program managers require their contractors to provide them with status reports on the individual refurbishments they are overseeing. However, these reports are prepared inconsistently or are incomplete. For example, while the W-76 program manager requires monthly reports, the B-61 program manager requires only quarterly reports. In contrast, the W-80 and W-87 program managers do not require any routine cost reporting. NNSA is trying to develop a consistent method for its life extension program managers to request cost information; however, NNSA officials have stated that NNSA has to first define what its needs are. Similar to the supplemental cost data described above, these status reports do not contain all of the costs for supporting activities, such as Campaigns and Readiness in Technical Base and Facilities. Finally, as part of the production process, NNSA’s contractors prepare a report known as the Bill of Materials. The Bill of Materials accumulates the materials, labor, and manufacturing costs of the production of a weapon, starting with an individual part and culminating in the final assembly of a complete weapon. NNSA uses the resulting Master Bill of Materials to record—capitalize—the production costs of each weapon system in its accounting system. However, the costs accumulated by the Bill of Materials include only production costs and do not include costs such as related research and development costs or costs associated with Campaigns and Readiness in Technical Base and Facilities. Finally, despite the importance of reliable and timely cost information for both the Congress and program managers, similar to the situation we found with the budget, life extension program costs are not independently validated either as a whole or by individual weapon system. Specifically, neither the DOE Inspector General nor DOE’s external auditors specifically audit the costs of the life extension program. While both parties have reviewed parts of the life extension program—for example, the Inspector General recently reviewed the adequacy of the design and implementation of the cost and schedule controls over the W-80 refurbishment—their work has not been specifically intended to provide assurance that all life extension program costs are appropriately identified and attributed to the life extension program as a whole or to the individual refurbishments. The management of critical programs and projects has been a long- standing problem for DOE and NNSA’s Office of Defense Programs. According to NNSA’s fiscal year 2001 report to the Congress on construction project accomplishments, management costs on DOE projects are nearly double those of other organizations, and DOE projects take approximately 3 years longer to accomplish than similar projects performed elsewhere. As a result, NNSA has repeatedly attempted to improve program and project management. For instance, in September 2000, the Office of Defense Programs initiated an improvement campaign to develop solutions to its project management problems and to enact procedural and structural changes to the Defense Programs’ project management system. Later, in August 2002, the Office of Defense Programs established a project/program management reengineering team. As the basis for assembling that team, its charter noted that NNSA does not manage all projects and programs effectively and efficiently. However, despite these NNSA attempts at improvement, management problems associated with the stockpile life extension program persist. Front-end planning is, in many ways, the most critical phase of an activity and the one that often gets least attention. The front-end planning process defines the activity. The decisions made in this phase constrain and support all the actions downstream and often determine the ultimate success or failure of the activity. NNSA, we found, does not have an adequate planning process to guide the individual life extensions and the overall program. Specifically, NNSA has not (1) established the relative priority of the Stockpile Life Extension Program against other defense program priorities, (2) consistently established the relative priority among the individual refurbishments, (3) developed a formalized list of resource and schedule conflicts between the individual refurbishments in order to systematically resolve those conflicts, and (4) finalized the individual refurbishment project plans on a timely basis. Priority ranking is an important decision-making tool at DOE. It is the principal means for establishing total organizational funding and for making tradeoffs between organizations. DOE uses such a ranking at the corporate level to make departmental budget decisions. To perform that ranking, DOE formally requires each of its organizational elements to annually submit to the DOE Office of Budget reports that provide a budget year priority ranking and a ranking rationale narrative. In discussing this matter with an NNSA budget official, we found that NNSA had not submitted these priority-ranking reports for fiscal years 2002, 2003, and 2004, and this official was also unable to explain why. NNSA officials, in commenting on our report, indicated that NNSA is not required to follow the DOE requirement regarding priority budget ranking; however, these officials could not provide us with any policy letter supporting their position that NNSA has been officially exempted from this requirement. Prioritization is also an important part of NNSA’s strategic planning process. According to that process, priorities must be identified in an integrated plan developed by each major NNSA office. This integrated plan links sub-office program plans, such as the plan for refurbishing the B-61, to NNSA’s strategic plan. With respect to the Office of Defense Programs, however, we found that this office has not finalized an integrated plan. According to an NNSA official, Defense Programs developed a draft plan in January 2002 but has not completed that plan and has instead devoted itself to working on the sub-office program plans. Absent a finalized integrated plan, it is unclear how sub-office program plans could be developed and properly linked to NNSA’s strategic plan. According to the director of Defense Programs’ Office of Planning, Budget, and Integration, prioritizing Defense Programs activities is essential. This is because the priorities of Defense Programs, its contractors, and the Department of Defense, which is Defense Programs’ customer for life extension refurbishments, may not necessarily be the same. In this official’s view, the issue of setting priorities needs to be addressed. This official indicated that the Office of Defense Programs developed a draft list of activities in August 2001, but did not prioritize those activities. Included among those activities were efforts to continue stockpile surveillance activities and to complete planned refurbishments on schedule. For fiscal years 2003 and 2004, according to this official, Defense Programs published budget-related guidance regarding priorities, but he did not believe the guidance was specific enough. This official added that, for fiscal year 2005, the guidance would have sufficient detail. While prioritizing work among Office of Defense Programs activities such as stockpile surveillance and refurbishment is important, it is also important to prioritize work within those activities. In the competition for budget funds, the Office of Defense Programs must continually ask which of the three refurbishments undergoing research and development work is a higher priority and should be given funding preference. However, NNSA has not taken a consistent position on prioritizing the life extensions. For instance, in October 2002, NNSA indicated by memorandum that, because of the continuing resolution for fiscal year 2003, the priority order for the three refurbishments would be the W-76, followed by the B-61, followed by the W-80. In November 2002, however, NNSA indicated by memorandum that the three refurbishments had the same priority. In neither memorandum did NNSA identify the criteria or reasons for these two contradictory decisions. According to NNSA officials, no priority criteria have been developed, and each of the three refurbishments is equal in priority. This lack of a definitive decision on the priority of the three refurbishments has caused confusion. For example, the Los Alamos National Laboratory decided in early calendar year 2002 to unilaterally transfer funds from the W-76 refurbishment to the B-61 because Los Alamos believed that the B-61 work was more important. As a result of that decision, the W-76 had to slip a research reactor test from fiscal year 2002 to fiscal year 2003. Although this test was not on the critical path for completing the W-76 refurbishment, NNSA had identified the reactor test as a fiscal year 2002 metric for measuring the refurbishment’s progress. In February 2002, NNSA questioned Los Alamos regarding its decision. In its March 2002 reply, Los Alamos indicated that it had found a mechanism to fully fund the W-76 refurbishment. However, because the reactor test had been cancelled, Los Alamos indicated that it was no longer possible to complete the test in fiscal year 2002, as planned. Therefore, Los Alamos stated that its goal was to begin this test in the first part of fiscal year 2003. In another case, the Y-12 plant decided to suspend or not initiate four projects at the beginning of fiscal year 2003 in support of the W-76 refurbishment because Y-12 believed that these projects were a lower priority than other work to be conducted. In a November 2002 memorandum, NNSA questioned this decision. NNSA indicated that these projects were integrated with another project, which was needed to ensure a complete special material manufacturing process capability in time to support the W-76 refurbishment. Accordingly, NNSA stated that it was providing $2.9 million in unallocated funds so that work on the projects could resume as soon as possible to support the refurbishment schedule. While these examples represent only two documented funding conflicts, according to each of the refurbishment program managers, additional resource and schedule conflicts exist among the three refurbishments. Specifically, the refurbishment program managers agreed that conflicts, or areas of competition, existed on many fronts, including budget resources, facilities, and testing. For example, the three refurbishments compete for certain testing facilities at Los Alamos National Laboratory and at the Sandia National Laboratories, and for the use of certain hardware at the Y-12 plant. Additional conflicts are also present that may affect only two of the three refurbishments. Those identified included such activities as campaign support, research, and development at the Los Alamos National Laboratory, and use of hardware production at the Y-12 plant. The Deputy Assistant Administrator for Military Application and Stockpile Operations confirmed that the areas of competition identified by the individual refurbishment program managers represented a fair portrayal of the conflicts that exist between the refurbishments. He indicated that while no formalized list of resource and schedule conflicts exist, the subject of refurbishment conflicts is routinely discussed at each refurbishment program review meeting. These meetings are held monthly to discuss one of the refurbishments on a rotating basis. Finally, fundamental to the success of any project is documented planning in the form of a project execution plan. With regard to the Stockpile Life Extension Program, NNSA has had difficulty preparing project plans on a timely basis. In its report on the lessons learned from the W-87 refurbishment, NNSA noted that one cause of the W-87’s problems was that the project plan was prepared too late in the development cycle and was not used as a tool to identify problems and take appropriate actions. As to the W-76, W-80, and B-61 refurbishments, we found that NNSA had not completed a project plan on time and with sufficient details, as stipulated in NNSA guidance for properly managing the reburbishments. According to NNSA’s June 2001 Life Extension Program Management Plan, a final project plan is to be completed at the end of Phase 6.2A activities (design definition and cost study). The Life Extension Program Management Plan offers numerous guidelines detailing the elements that should be included in the project plan. Those elements include, among others, team structure and the roles of each team and individual members; an integrated program schedule identifying all tasks to be accomplished for the success of the project; life cycle costs; and a documentation of the facility requirements needed to support all portions of the refurbishment. This management plan was issued as guidance, rather than as a formally approved requirements document, pending the resolution of role and responsibility issues within NNSA. Of the three refurbishments, only the B-61 has completed its project plan on schedule. According to NNSA documentation, the B-61 reached the end of phase 6.2A in October 2002. We confirmed that a project plan had been completed at that time, but the project plan did not include all life cycle costs, such as Campaign costs and Readiness in Technical Base and Facilities costs. In this regard, DOE’s project management manual defines life cycle costs as being the sum total of the direct, indirect, recurring, nonrecurring, and other related costs incurred or estimated to be incurred in the design, development, production, operation, maintenance, support, and final disposition of a project. Conversely, an assessment of the W-76 refurbishment indicates that the project plan for that refurbishment is 3 years late and also does not include all life cycle costs. According to NNSA documentation, the W-76 reached the end of phase 6.2A in March 2000. As of July 2003, a final project plan had not yet been completed. The W-76 project manager told us that he has been using a working draft of a project plan dated August 2001. He indicated that he did not finalize the project plan because the Life Extension Program Management Plan published in June 2001 had yet to be issued as a formal requirement. With the reissuance of the management plan as a requirement in January 2003, an NNSA official said that a finalized project plan should be completed by the end of fiscal year 2003. Likewise, an assessment of the W-80 refurbishment indicates that the project plan for that refurbishment is more than 2 years late and also does not include all life cycle costs. According to NNSA documentation, the W-80 reached the end of phase 6.2A in October 2000. As of July 2003, a complete project plan had not been prepared. According to the W-80 program manager, the refurbishment does not yet have an integrated project schedule as described in the Life Extension Program Management Plan. The W-80 program manager said that a finalized project plan with this integrated schedule, which shows all tasks associated with the refurbishment as well as all linkages, should be completed by mid-to-late summer 2003. The W-80 program manager added that this integrated schedule was not completed earlier because of personnel changes on this refurbishment. DOE’s portfolio of projects demands a sophisticated and adaptive management structure that can manage project risks systematically; control cost, schedule, and scope baselines; develop personnel and other resources; and transfer new technologies and practices efficiently from one project to another, even across program lines. With respect to the Stockpile Life Extension Program, NNSA does not have an adequate management structure which ensures rigor and discipline, fixes roles, responsibilities, and authority for each life extension, or develops key personnel. Specifically, NNSA has not (1) defined the life extensions as projects and managed them accordingly, (2) clearly defined the roles and responsibilities of those officials associated with the Stockpile Life Extension Program, (3) provided program managers with sufficient authority to carry out the refurbishments, or (4) given program and deputy program managers proper project/program management training. DOE projects commonly overrun their budgets and schedules, leading to pressures for cutbacks that have resulted in facilities that do not function as intended, projects that are abandoned before they are completed, or facilities that have been delayed so long that, upon completion, they no longer serve any purpose. The fundamental deficiency for these problems has been a DOE organization and culture that has failed to embrace the principles of good project management. The same can be said for NNSA’s view of the individual life extension refurbishments. Specifically, NNSA has not established that the individual refurbishments are projects and managed them accordingly. According to the DOE directive, a project is a unique effort that, among other things, supports a program mission and has defined start and end points. Examples of projects given in the DOE directive include planning and execution of construction, renovation, and modification; environmental restoration; decontamination and decommissioning efforts; information technology; and large capital equipment or technology development activities. To the extent that an effort is a project, the DOE directive dictates that the project must follow a structured acquisition process that employs a cascaded set of requirements, direction, guidance, and practices. This information helps ensure that the project is completed on schedule, within budget, and is fully capable of meeting mission performance and environmental, safety, and health standards. According to the Deputy Assistant Administrator for Military Application and Stockpile Operations, the individual life extension refurbishments are projects but have not been officially declared so. This official indicated that the primary reason for the lack of such a declaration is an organizational culture, including those working at NNSA laboratories, which often does not grasp the benefits of good project management. This official also said that the organization is moving in the direction of embracing project management but is doing so at an extremely slow pace. If NNSA declared the individual life extension refurbishments to be projects, many useful project management tools would become available to the NNSA program mangers who are overseeing the refurbishments. Those tools include, for example, conducting an independent cost estimate, which is a “bottom-up” documented, independent cost estimate that has the express purpose of serving as an analytical tool to validate, cross- check, or analyze cost estimates developed by the sponsors of the project. Another tool is the use of earned value reporting, which is a method for measuring project performance. Earned value compares the amount of work that was planned at a particular cost with what was actually accomplished within that cost to determine if the project will be completed within cost and schedule estimates. A further tool is the reporting of project status on all projects costing over $20 million to senior DOE and NNSA management using DOE’s Project Analysis Reporting System. NNSA refurbishment program managers with whom we spoke indicated that management of the refurbishments would be improved if tools such as independent cost estimates and earned value reporting were used. With respect to roles and responsibilities, clearly defining a project’s organizational structure up front is critical to the project’s success. In a traditional project management environment, the project manager is the key player in getting the project completed successfully. But other members of the organization also play important roles, and those roles must be clearly understood to avoid redundancy, miscommunication, and disharmony. With respect to the Stockpile Life Extension Program, NNSA has yet to clearly define the roles and responsibilities of all parties associated with the program. NNSA’s Life Extension Program Management Plan dated June 2001 was the controlling document for defining refurbishment roles and responsibilities from its issuance through calendar year 2002. Our review of that plan, however, found a lack of clarity regarding who should be doing what. For instance, the plan is unclear on which NNSA office is responsible for each phase of the 6.X process. Illustrating that point, refurbishment program managers with whom we spoke generally said there is confusion as to which NNSA office—either the Office of Research, Development, and Simulation or the Office of Military Application and Stockpile Operations— has the primary responsibility when the refurbishment moves to phase 6.3 (development engineering) of the 6.X process. In addition, according to the plan, the program manager and deputy program manager have identical responsibilities. The plan states that the program manager and deputy program manager shall discuss significant aspects of the refurbishment with each other and should reach consensus concerning important aspects of the scope, schedule, and cost. The plan further states that absent consensus on an issue, the program manager may decide; however, any unresolved conflicts between the two can be addressed to senior management for resolution. Further, the plan is silent on the roles and responsibilities of the NNSA program and deputy program managers versus the project manager at a laboratory or at a production plant site. What actions the laboratory or plant project managers can take on their own, without NNSA review and concurrence, are not specified in the plan. Instead, the plan simply states that laboratory and plant project managers provide overall management of life extension refurbishment activities at their facilities. In January 2003, NNSA reissued the Life Extension Program Management plan after making only minor changes to the document. The reissued management plan indicates that the program manager’s role will transition from the NNSA Office of Research, Development, and Simulation to the NNSA Office of Military Application and Stockpile Operations during phase 6.3. However, the reissued plan does not specify when, during phase 6.3, this transition will occur. In addition, the reissued plan does not further clarify the roles and responsibilities between the program and deputy program managers and the project manager at a laboratory or at a production plant site. In addition to clear roles and responsibilities, project managers must have the authority to see the project through. Regarding project management, authority is defined as the power given to a person in an organization to use resources to reach an objective and to exercise discipline. NNSA’s lessons learned report on the W-87 refurbishment noted that there was an air of confusion in resolving issues at the Kansas City plant because project leaders were not formally assigned and provided with the tools (authority, visibility, and ownership) necessary to properly manage the effort. Our report on the W-87 refurbishment prepared in calendar year 2000 found similar problems regarding the lack of authority. With respect to the Stockpile Life Extension Program, NNSA has still not yet given the program managers the authority to properly manage the refurbishments. Five of the six program or deputy program managers associated with the B-61, W-76, and W-80 refurbishments believed they had not been given the authority to properly carry out the refurbishments. For instance, one program manager said he has neither the control nor the authority associated with his refurbishment. He added that the program managers ought to be given the authority so that the laboratories report directly to them. As the situation currently stands, the laboratories will go over the heads of the program manager to senior NNSA management to get things done the laboratories’ way. According to a deputy program manager on another refurbishment, the program managers do not have enough authority and should have control of the refurbishments’ budgets. He elaborated by explaining how one laboratory unilaterally decided to take funds away from one refurbishment and give it to another without consulting with any of the program managers. In this deputy program manager’s view, if funds need to be transferred from one refurbishment to another, then the laboratories should be required to get the concurrence of NNSA management. A program manager on another refurbishment stated that he does not have sufficient authority because he lacks control of the budget. He indicated that funds for his refurbishment are allocated to the various laboratory and plant sites, but he is not included in the review and concurrence loop if the sites want to transfer funds from one activity to another. The Assistant Deputy Administrator for Military Application and Stockpile Operations said he recognized the program manager’s concerns and has advocated giving the program managers greater authority. He also indicated that greater authority might eventually be granted. However, he explained that at the moment, the Office of Defense Programs is focused on a recently completed NNSA reorganization. After that matter is sufficiently addressed, greater authority for the program managers may result. Turning to the issue of training, competent project management professionals are essential to successful projects. Other federal agencies and the private sector realized long ago that project management is a professional discipline that must be learned and practiced. To ensure that projects are well planned and properly executed, DOE created in 1995 a competency standard for project management personnel. According to this standard, it is applicable to all DOE project management personnel who are required to plan and execute projects in accordance with departmental directives regarding project management. The standard identifies four categories of competencies that all project management personnel must attain and states that attainment must be documented. The categories are (1) general technical, such as a knowledge of mechanical, electrical, and civil engineering theories, principles, and techniques; (2) regulatory, such as a knowledge of applicable DOE orders used to implement the department’s project management system; (3) administrative, such as a knowledge of the project reporting and assessment system as outlined in DOE orders; and (4) management, assessment, and oversight, such as a knowledge of DOE’s project management system management roles, responsibilities, authorities, and organizational options. Of the six program and deputy program managers assigned to the W-76, B-61, and W-80 refurbishments, NNSA records indicate that only one of the six (the program manager for the W-76) has achieved 100 percent attainment of the aforementioned standards. Regarding the other five, NNSA records indicate that the deputy program manager for the B-61 has achieved 30 percent attainment of the required competencies contained in the standard, while the remaining four are not enrolled under the qualification standards program. According to one of the three program managers with whom we spoke, the problems with the W-87 refurbishment were caused, in part, because the assigned program manager was not qualified to perform all required tasks. NNSA records confirm that that particular W-87 program manager was also not enrolled in the project management qualification program. Whereas NNSA program managers are required to meet qualifications standards to discharge their assigned responsibilities, contractor project management personnel we contacted are not required to meet any project management standards. According to W-76, B-61, and W-80 refurbishment project managers at the Sandia National Laboratories, Lawrence Livermore National Laboratory, and Los Alamos National Laboratory, their respective laboratories have no requirements that must be met before a person becomes a project manager, and none of the managers had attained project management certification through their previous work assignments and experiences. NNSA officials also acknowledge that neither DOE nor NNSA orders require contractor project management personnel to be properly trained and certified. Effective oversight of project performance is dependent on the systematic and realistic reporting of project performance data. Senior management need such data to be able to detect potentially adverse trends in project progress and to decide when intervention is necessary. With respect to the Stockpile Life Extension Program, NNSA does not have an adequate process for reporting life extension changes and progress, despite the fact that cost growth and schedule slippage are occurring. In July 2002, the Office of Defense Programs issued program review guidance to enable advance planning, provide consistency, set clearer expectations, and establish a baseline process on which to improve life extension, program reviews. Various review meeting formats were articulated including a full program review of each refurbishment to be conducted monthly on a rotating basis. The goals and objectives of the full program review were to inform management of project status, convince management that the refurbishment is well managed, gain management’s assistance in resolving issues that require its involvement, and identify management decision points and obtain authority to execute risk mitigation plans. Our review of the most recent program review reports prepared on the individual refurbishments showed that they contained limited information regarding cost growth and schedule changes against established baselines. These reports, which are prepared for senior NNSA management, show whether the respective refurbishment is on track to spend all fiscal year funding, but not whether the actual work completed has cost more or less than planned. For example: According to W-76 program review reports presented in November 2002 and February 2003, the refurbishment was on track to spend all funding allocated for fiscal year 2003. In addition, the refurbishment was slightly behind schedule but manageable and within budget. On the other hand, the presentations gave no specifics on how much the refurbishment is behind schedule or how well the refurbishment was progressing against a life cycle cost baseline. Specifically, costs associated with certain procurements, Campaign costs, Readiness in Technical Base and Facilities costs, construction costs, and transportation costs which make up the life cycle costs of the refurbishment were not included. The presentations also showed that the refurbishment had not met at least two commitments during fiscal year 2002. According to the W-80 program review report presented in December 2002, the refurbishment was on track to spend all funding allocated for fiscal year 2003. In addition, the refurbishment was within cost and within scope, but behind schedule. On the other hand, the report gave no specifics on how much the refurbishment was behind schedule or how well the refurbishment was progressing against a life cycle cost baseline. The presentation further mentioned that the refurbishment had high risks because, for instance, the Air Force was currently not funding certain work that must be performed in order to meet the established first production unit date of February 2006. As opposed to the above reports, the B-61 program review reports presented in January and March 2003 made no summary statements regarding the refurbishment’s cost and schedule status against established baselines. The presentations also indicated that the refurbishment is on schedule to spend all funding allocated for fiscal year 2003. On the other hand, the presentations showed that the refurbishment has already not met several commitments for fiscal year 2003, suggesting that the refurbishment may be behind schedule. Absent the periodic reporting of specific cost growth and schedule information to senior NNSA management, we interviewed cognizant NNSA officials to document any cost growth and schedule changes associated with the individual refurbishments. These officials recognized that certain cost growth and schedule changes had occurred for each of the refurbishments. These officials added that cost growth and schedule changes are routinely discussed during meetings on the refurbishments. According to the W-76 program manager, this refurbishment is slightly behind schedule. In particular, the W-76 did not conduct certain activities on schedule, such as deciding whether to reuse or remanufacture certain components, conduct a certain reactor test at Los Alamos National Laboratory, and construct certain facilities at the Y-12 plant. The reasons why these activities were late varied. For instance, the decision to reuse or remanufacture certain components did not occur on schedule, according to the W-76 program manager, primarily because the NNSA person assigned to do the necessary calculations neglected to perform that task. Conversely, the reactor test at the Los Alamos National Laboratory did not occur on schedule because the laboratory unilaterally transferred funds from the W-76 refurbishment to the B-61. As to cost growth, the W-76 will need about $10.75 million in additional funding in fiscal year 2004. The funding is necessary to purchase certain commercial off-the-shelf parts that were previously not authorized or budgeted for. According to NNSA field and Sandia National Laboratory officials, it is unlikely that the W-80 will meet its scheduled first production unit delivery date. Echoing those sentiments, according to the NNSA program manager, the W-80 was scheduled to enter phase 6.4 (production engineering) on October 1, 2002. Now, however, it is hoped that phase 6.4 will commence in 2003. The NNSA program manager indicated that the W-80 has been impacted by a lack of funding for the refurbishment from the Air Force. This lack of funding, the NNSA program manager said, has occurred because of a disconnect in planning between the 6.X process and the Department of Defense budget cycle. The Air Force had made no plans to allocate money for the W-80 in either its fiscal year 2001 or 2002 budgets. Therefore, several important joint NNSA and Air Force documents have not been completed. Certain ground and flight tests also lack funding and have been delayed. In addition, the W-80 will need an additional $8 million to $9 million in fiscal year 2003 to buy certain commercial off-the-shelf parts that had been planned but not budgeted for. According to the Air Force’s Lead Program Officer on the W-80, the Air Force, because of an oversight, had no money for the W-80 in its fiscal years 2001 and 2002 budgets. As a result, he anticipated that the first production unit delivery date will need to be slipped. He also indicated that he was working on a lessons learned report due in early 2003 to document the situation with the W-80 and help ensure that a similar funding problem does not occur with future refurbishments. This Air Force official added that in December 2002 the Air Force finally received the funding necessary to support the W-80 refurbishment. According to the NNSA director of the nuclear weapons stockpile, the W-80 will need to slip its first production unit date from February 2006 to April 2007. As a result, NNSA was rebaselining the W-80 refurbishment. As of July 2003, cost data submitted to NNSA headquarters from contractor laboratory and production site locations indicate that the cost to refurbish the W-80 may increase by about $288 million. NNSA officials were in the process of determining whether this cost increase was due to schedule slippage or other factors, such as the sites underestimating costs in the past. Finally, certain schedule slippage has already occurred for the B-61. According to NNSA’s June 2001 Life Extension Program Management Plan, the original first production unit delivery date was September 2004. Now, according to the B-61 program manager, the new delivery date is June 2006. The program manager indicated that this change was made because NNSA determined that the September 2004 date was not attainable. As it is, the B-61 program manager said, the June 2006 date represents an acceleration of the phase 6.X process where activities within phases 6.3 (design definition and cost study) and 6.4 (development engineering) will be conducted concurrently. Because of that, certain risks are involved. For instance, some design development will not be fully completed before production must be initiated to keep the refurbishment on schedule. The B-61 program manager indicated that the commencement date for phase 6.3 has already changed from August 2002 to December 2002 because of the Air Force’s lack of timely action in reviewing certain documentation. As to cost changes, a decision needs to be made regarding the production of a particular material. Two NNSA locations, which differ in cost, are being considered. If the location with the higher cost is selected, then an additional $10 million will be needed in fiscal year 2004 and beyond. To gauge the progress of the refurbishments within the Stockpile Life Extension Program, NNSA, like all federal agencies, uses performance measures. Performance measures, which are required by the Government Performance and Results Act of 1993, are helpful to senior agency management, the Congress, and the public. Performance measures inform senior agency management as to whether progress is being made toward accomplishing agency goals and objectives. They are also used by the Congress to allocate resources and determine appropriation levels. Performance measures are further used by American taxpayers as a means for deciding whether their tax funds are being well spent. Unfortunately, NNSA has not developed performance measures with sufficient specificity to determine the progress of the three refurbishments that we reviewed. As mentioned earlier, the agency’s current accounting system does not provide an adequate link between cost and performance measures. NNSA identifies performance measures for the W-80, B-61, and W-76 in three separate and distinct documents. One document is the narrative associated with NNSA’s fiscal year 2004 budget request for the Directed Stockpile Work account. Another is the combined program and implementation plans for the stockpile maintenance program for fiscal years 2002 through 2008. A third is the Future Years Nuclear Security Plan. Performance measures used in these documents do not identify variance from cost baselines as a basis for evaluating performance. Performance measures identified in NNSA’s fiscal year 2004 budget request are general in nature and provide no details regarding cost performance. According to that budget request, for instance, a performance measure listed for the B-61, W-76, and W-80 is to complete 100 percent of the major milestones scheduled for fiscal year 2004 to support the refurbishments’ first production unit date. None of the performance measures listed in the budget request mention adherence to cost baselines. Performance measures identified in the combined program and implementation plans for the Directed Stockpile Work maintenance program dated September 3, 2002, are equally minimal, vague, and nonspecific regarding refurbishment work. These plans identify performance measures at three levels—level 1, the Defense Program level, which is the highest level of actions/milestones/deliverables; level 2, which is the supporting level of actions/milestones/deliverables on the path toward achieving level 1 measures; and level 3, which is the site level of actions/milestones/deliverables on the site path toward achieving level 2 measures. According to these plans, there are no level 1 performance measures associated with the three refurbishments. For levels 2 and 3, the plans specify that the three refurbishments should meet all deliverables as identified in other NNSA documents. These plans, we noted, do not discuss adherence to cost baselines as a deliverable. Performance measures identified in the Future Years Nuclear Security Plan are also vague and nonspecific. This plan describes performance targets that NNSA hopes to achieve in fiscal years 2003 through 2007, but the plan does not associate funding levels with those targets. Some of the performance targets apply to the Stockpile Life Extension Program in general or to particular refurbishments. Regarding the latter, for example, in fiscal year 2003, NNSA intends to commence production engineering work (phase 6.4) for the B-61, W-76, and W-80 refurbishments, and to eliminate W-76, W-80, and W-87 surveillance backlogs. The plan, however, does not associate funding estimates with these performance targets. According to the Assistant Deputy Administrator for Military Application and Stockpile Operations, the refurbishment performance measures contained in the three aforementioned documents are admittedly not very good. He indicated that the Office of Defense Programs is moving toward linking key performance measures to appropriate NNSA goals, strategies, and strategic indicators. The Assistant Deputy Administrator stated that he hoped that the performance measures for fiscal year 2005 would provide a better basis for evaluating the refurbishments’ progress in adhering to cost baselines. While NNSA management problems are many and long-standing, so too have been NNSA attempts to effect improvement. NNSA has repeatedly studied and analyzed ways to ensure that mistakes made in the past regarding the safety of nuclear weapons, the security of nuclear facilities, and the protection of nuclear secrets are not repeated in the future. Accordingly, NNSA has various actions underway to fix its management problems. Foremost of those actions has been the December 2002 completion of a reorganizational transformation campaign. In announcing this reorganization, the NNSA administrator said the reorganization follows the principles outlined in the President’s Management Agenda, which strives to improve government through performance and results. The new reorganization will reportedly streamline NNSA by eliminating one layer of management at the field office level. It will also improve organizational discipline and efficiency by requiring that each element of the NNSA workforce will become ISO 9001 certified by December 31, 2004. ISO 9001 is a quality management standard that has been recognized around the world. The standard applies to all aspects necessary to create a quality work environment, including establishing a quality system, providing quality personnel, and monitoring and measuring quality. In concert with NNSA’s overall reorganization has been the creation of a program integration office in August 2002. This new office will be working to create better coordination and cooperation between NNSA Office of Defense Program elements. The new office is composed of three divisions: one that will be performing strategic planning and studies; one that will be looking at the strategic infrastructure; and one that will be doing planning, budgeting, and integration work. The implementation plan for this new office, as of July 2003, had not yet been approved and disseminated because of a major personnel downsizing that is underway. Nonetheless, this new office has already embarked on various initiatives. One initiative is to decide on a cost baseline for the Stockpile Life Extension Program. According to the Director of Defense Programs’ Office of Planning, Budgeting and Integration, a completion date for this work has not yet been set. A second initiative is to develop an integrated master schedule for the Stockpile Life Extension Program that will help identify and resolve schedule and resource conflicts. The director indicated that such a schedule should be available at the end of calendar year 2003. A third initiative is to develop consistent criteria for reporting schedule activities and critical milestones. The director indicated that without such criteria there is no assurance that consistent information is being reported on the individual refurbishments. The director indicated that these criteria would be developed during the summer of 2003. Of no less importance to the organizational changes, NNSA has implemented an overall planning, programming, budgeting, and evaluation process. The goal of this process is to obtain and provide the best mix of resources needed to meet national nuclear security objectives within fiscal restraints. Through planning, the process will examine alternative strategies, analyze changing conditions and trends, identify risk scenarios, assess plausible future states, define strategic requirements, and gain an understanding of the long-term implications of current choices. Through programming, the process will evaluate competing priorities and mission needs, analyze alternatives and trade-offs, and allocate the resources needed to execute the strategies. Through budgeting, the process will convert program decisions on dollars into multiyear budgets that further refine the cost of the approved 5-year program. Through evaluation, the process will apply resources to achieve program objectives and adjust requirements, based on feedback. This process was partially rolled out for the fiscal year 2004 budget cycle, with full implementation scheduled for fiscal year 2005. A separate effort has been the establishment of a project/program management reengineering team in August 2002. According to the team’s charter, NNSA does not manage all its programs effectively and efficiently. Therefore, the mission of this team was to develop a program management system, including policies, guides, procedures, roles, responsibilities, and definitions that would enable NNSA to achieve excellence in program management. The observations of the team, as of September 2002, were that the state of health of the NNSA program management processes is very poor, and this condition significantly affects the ability of NNSA to achieve its missions effectively and efficiently. In the words of the team, many essential elements of an effective program management system do not exist. Examples given included no documented roles and responsibilities and no documented overarching process for program management. According to the team leader, an implementation plan to improve NNSA program management was submitted to the administrator for approval in October 2002. As of July 2003, the implementation plan had not been approved. According to the Director of Defense Programs’ Office of Program Integration, no action has been taken on this implementation plan while NNSA has been addressing its recent reorganization. It is now hoped, according to this official, that project/program improvement actions can be identified and implemented by the start of fiscal year 2004. Extending the life of the weapons in our nation’s nuclear stockpile represents one of the major challenges facing NNSA. It will demand a budget of hundreds of millions of dollars annually for the next decade. Considerable coordination between the design laboratories and the production facilities will be necessary as the four life extensions compete for scarce resources. Where conflicts occur, trade-offs will be required— trade-offs that must be made by federal managers, contractors, and, ultimately, the Congress. All of these things cannot occur without sound budgeting. Likewise, all parties involved in the oversight of the Stockpile Life Extension Program must be able to determine the true cost to complete the life extensions throughout the refurbishment process, identify cost overruns as they develop, and decide when intervention in those cost overruns is necessary. This cannot occur without sound cost accounting. Finally, the life extensions must be properly managed because the consequences of less than proper management are too great. Those consequences, as seen on the W-87 life extension, include potential cost overruns in the hundreds of millions of dollars and refurbishment completion occurring beyond the dates required for national security purposes. To avoid these consequences, the life extensions must have adequate planning; a clear leadership structure which fixes roles, responsibilities, and authority for each life extension; and an adequate oversight process. While NNSA has begun to put in place some improved budgeting and management processes, additional action is necessary if it is to achieve the goal of a safe and reliable stockpile that is refurbished on cost and on schedule. To improve the budgeting associated with the Stockpile Life Extension Program, we recommend that the Secretary of Energy direct the NNSA Administrator to include NNSA’s stockpile life extension effort as a formal and distinct program in its budget submission and present, as part of its budget request, a clear picture of the full costs associated with this program and its individual refurbishments by including the refurbishment-related costs from Campaigns, Readiness in Technical Base and Facilities, and multiple system work, and validate the budget request in accordance with DOE directives. To improve cost accounting associated with the Stockpile Life Extension Program, we recommend that the Secretary of Energy direct the NNSA Administrator to establish a managerial cost accounting process that accumulates, tracks, and reports the full costs associated with each individual refurbishment, including the refurbishment-related costs from Campaigns, Readiness in Technical Base and Facilities, and multiple system work. To improve the management of the Stockpile Life Extension Program, we recommend that the Secretary of Energy direct the NNSA Administrator to: finalize the Office of Defense Programs’ integrated program plan and, within that plan, rank the Stockpile Life Extension Program against all other defense program priorities, establish the relative priority among the individual life extension refurbishments, and disseminate the ranking across the nuclear weapons complex so that those within that complex know the priority of the refurbishment work; develop a formalized process for identifying resource and schedule conflicts between the individual life extension efforts and resolve those conflicts in a timely and systematic manner; and finalize individual refurbishment project plans. With respect to management structure establish the individual refurbishments as projects and manage them according to DOE project management requirements; clearly define the roles and responsibilities of all parties associated with the Stockpile Life Extension Program; provide the life extension program managers with the authority and visibility within the NNSA organization to properly manage the refurbishments; and require that life extension program managers and others involved in management activities receive proper project/program management training and qualification. With respect to oversight of cost and schedule institute a formal process for periodically tracking and reporting individual refurbishment cost, schedule, and scope changes against established baselines, and develop performance measures with sufficient specificity to determine program progress. We provided NNSA with a draft of this report for review and comment. Overall, NNSA stated that it recognized the need to change the way the Stockpile Life Extension Program was managed and that it generally agreed with the report’s recommendations. For instance, NNSA stated that it had independently identified many of the same concerns, and, over the past 12 months, had made significant progress in implementing plans, programs, and processes to improve program management. NNSA indicated that full implementation of our management and budgeting recommendations will take several years; however, NNSA is committed to meeting these objectives. NNSA also provided some technical comments which it believed pointed out factual inaccuracies. We have modified our report, where appropriate, to reflect NNSA’s comments. NNSA’s comments on our draft report are presented in appendix I. We performed our work at DOE’s and NNSA’s headquarters and Sandia National Laboratories, Los Alamos National Laboratory, and the Kansas City plant from July 2002 through July 2003 in accordance with generally accepted government auditing standards. To determine the extent to which the Stockpile Life Extension Program’s budget requests for fiscal years 2003 and 2004 were comprehensive and reliable, we reviewed those requests as well as NNSA supporting documentation, such as guidance issued to develop those requests, information related to NNSA’s planning, programming, budgeting, and evaluation process, and budget validation reports. We also discussed those budget requests with DOE and NNSA budget officials and an official with the Office of Management and Budget. To determine the extent to which NNSA has a system for accumulating, tracking, and reporting program costs, we identified how cost data is tracked in DOE’s information systems and in selected contractors’ systems by interviewing key DOE, NNSA, and contractor officials responsible for the overall Stockpile Life Extension Program and the individual refurbishments and by reviewing pertinent documents. We also identified how DOE and NNSA ensure the quality and comparability of cost and performance data received from contractors by interviewing DOE and NNSA officials, DOE Office of Inspector General officials, and selected contractors’ internal auditors, and by reviewing pertinent documents including previously issued GAO and DOE Office of Inspector General reports. To determine the extent to which other management problems related to the Stockpile Life Extension Program exist at NNSA, we reviewed pertinent NNSA documentation, such as NNSA’s Strategic Plan, the Office of Defense Programs’ draft integrated plan, the Life Extension Program Management Plan, and project plans and variance reports required by the Life Extension Program Management Plan for the B-61, W-76, and W-80 refurbishments. We also interviewed key DOE, NNSA, and contractor officials involved with the Stockpile Life Extension Program, and, in particular, the program and deputy program managers of the B-61, W-76, and W-80 refurbishments. Finally, we attended the NNSA quarterly program review meetings on each of the refurbishments. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this letter. At that time, we will send copies of the report to the Secretary of Energy, the Administrator of NNSA, the Director of the Office of Management and Budget, and appropriate congressional committees. We will make copies available to others on request. In addition, the report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-3841. Major contributors to this report are listed in appendix II. In addition to the individual named above, Sally Thompson, Mark Connelly, Mike LaForge, Tram Le, Barbara House, and Stephanie Chen from our Financial Management and Assurance mission team and Robert Baney, Josephine Ballenger, and Delores Parrett from our Natural Resources and Environment mission team were key contributors 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. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | As a separately organized agency within the Department of Energy (DOE), the National Nuclear Security Administration (NNSA) administers the Stockpile Life Extension Program, whose purpose is to extend, through refurbishment, the operational lives of the weapons in the nuclear stockpile. NNSA encountered significant management problems with its first refurbishment. NNSA has begun three additional life extensions. This study was undertaken to determine the extent to which budgetary, cost accounting, and other management issues that contributed to problems with the first refurbishment have been adequately addressed. GAO found that NNSA's budget for the Stockpile Life Extension Program has not been comprehensive or reliable. For instance, the fiscal year 2003 budget for this program was not comprehensive because it did not include all activities necessary to successfully complete each of the refurbishments. As a result, neither NNSA nor the Congress was in a position to properly evaluate the budgetary tradeoffs among the refurbishments in the program. NNSA does not have a system for tracking the full costs associated with the individual refurbishments. Instead, NNSA has several mechanisms that track a portion of the refurbishment costs, but these mechanisms are used for different purposes, include different types of costs, and cannot be reconciled with one another. As a result, NNSA lacks information regarding the full cost of the refurbishment work that can help identify cost problems as they develop or when management intervention in those cost problems may be necessary. Finally, NNSA does not have an adequate planning, organization, and cost and schedule oversight process. With respect to planning, NNSA has not, for instance, consistently developed a formalized list of resource and schedule conflicts between the individual refurbishments in order to systematically resolve those conflicts. Regarding organization, NNSA has not, for example, clearly defined the roles and responsibilities of those officials associated with the refurbishments or given the refurbishments' managers proper project/program management training required by DOE standards. Finally, NNSA has not developed an adequate process for reporting cost and schedule changes or developed performance measures with sufficient specificity to determine the progress of the three refurbishments that GAO reviewed. As a result, NNSA lacks the means to help ensure that the refurbishments will not experience cost overruns potentially amounting to hundreds of millions of dollars or encounter significant schedule delays. |
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All levels of government share responsibility in the overall U.S. election system. At the federal level, Congress has authority under the Constitution to regulate presidential and congressional elections and to enforce prohibitions against specific discriminatory practices in all federal, state, and local elections. Congress has passed legislation that addresses voter registration, absentee voting, accessibility provisions for the elderly and persons with disabilities, and prohibitions against discriminatory practices. At the state level, individual states are responsible for the administration of both federal elections and their own elections. States regulate the election process, including, for example, the adoption of voluntary voting system guidelines, the state certification and acceptance testing of voting systems, ballot access, registration procedures, absentee voting requirements, the establishment of voting places, the provision of election day workers, and the counting and certification of the vote. In total, the overall U.S. election system can be seen as an assemblage of 55 distinct election systems—those of the 50 states, 4 U.S. territories, and the District of Columbia. Further, although election policy and procedures are legislated primarily at the state level, states typically have decentralized election systems, so that the details of administering elections are carried out at the city or county levels, and voting is done at the local level. As we reported in 2001, local election jurisdictions number more than 10,000, and their sizes vary enormously—from a rural county with about 200 voters to a large urban county, such as Los Angeles County, where the total number of registered voters for the 2000 elections exceeded the registered voter totals in 41 states. Further, these thousands of jurisdictions rely on many different types of voting methods that employ a wide range of voting system makes, models, and versions. Because of the prominent role played by electronic voting systems, testing these systems against national standards is critical to ensuring their security and reliability. Equally critical is ensuring that the laboratories that perform these tests are competent to carry out testing activities. In the United States today, most votes are cast and counted by electronic voting systems, and many states require use of systems that have been certified nationally or by state authorities. However, voting systems are but one facet of a multifaceted, continuous overall election system that involves the interplay of people, processes, and technology during the entire life of a system. All levels of government, as well as commercial voting system manufacturers and system testing laboratories, play key roles in ensuring that voting systems perform as intended. Electronic voting systems are typically developed by manufacturers, then purchased as commercial, off-the-shelf products and operated by state and local election administrators. Viewed at a high level, these activities make up three phases of a system life cycle: product development, acquisition, and operations. (See fig. 1.) Key processes that span these life cycle phases include managing the people, processes, and technologies within each phase and across phases, and testing the systems and components during and at the end of each phase. Additionally, voting system standards are important through all of the phases because they provide criteria for developing, testing, and acquiring voting systems, and they specify the necessary documentation for operating the systems. The product development phase includes activities such as establishing requirements for the system, designing a system architecture, developing software, and integrating components. Activities in this phase are performed by the system vendor. The acquisition phase includes activities such as publishing a solicitation, evaluating offers, choosing a voting technology and a vendor, and awarding and administering contracts. For voting systems, activities in this phase are primarily the responsibility of state and local governments but entail some responsibilities that are shared with the system vendor (e.g., entering into the contract). The operations phase consists of activities such as ballot design and programming, setup of systems before voting, pre-election testing, vote capture and counting during elections, recounts and system audits after elections, and storage of systems between elections. Responsibility for activities in this phase typically resides with local jurisdictions, whose officials may, in turn, rely on or obtain assistance from system vendors for aspects of these activities. Standards for voting systems, as will be discussed in a later section, were developed at the national level by the Federal Election Commission in 1990 and 2002 and were updated by EAC in 2005. In the product development phase, voting system standards serve as requirements to meet for developers to build systems. In the acquisition phase, they also provide a framework that state and local governments can use to evaluate systems. In the operations phase, they specify the necessary documentation for operating the systems. Testing processes are conducted throughout the life cycle of a voting system. Voting system vendors conduct product testing during development of the system and its components. Federal certification testing of products submitted by system vendors is conducted by national voting system testing laboratories (VSTL). States may conduct evaluation testing before acquiring a system to determine how well products meet their state-specific specifications, or they may conduct certification testing to ensure that a system performs its functions as specified by state laws and requirements. Once a voting system is delivered by the system vendor, states and local jurisdictions may conduct acceptance testing to ensure that the system satisfies functional requirements. Finally, local jurisdictions typically conduct logic and accuracy tests related to each election and sometimes subject portions of the system to parallel testing during each election to ensure that the system components perform accurately. Management processes ensure that each life cycle phase produces a desirable outcome. Typical management activities that span the system life cycle include planning, configuration management, system performance review and evaluation, problem tracking and correction, human capital management, and user training. These activities are conducted by the responsible parties in each life cycle phase. In 2004, we reported that the performance of electronic voting systems, like any type of automated information system, can be judged on several bases, including their security, accuracy, ease of use, efficiency, and cost. We also reported that voting system performance depends on how the system was designed, developed, and implemented. Since the passage of HAVA, the use of electronic voting systems has increased and become the predominant method of voting. However, concerns have been raised about the security and reliability of these systems. As we have previously reported, testing and certifying voting systems is one critical step in acquiring, deploying, operating, and administering voting systems, which better ensures that they perform securely and reliably. Among other things, rigorous execution and careful documentation of system testing is a proven way to help ensure that system problems are found before the systems are deployed and used in an election. To accomplish this, it is vital that the organizations that test the systems be qualified and competent to do so. For voting systems, a key testing organization is a federally accredited, national VSTL. In general, accreditation is the formal recognition that a laboratory is competent to carry out specific types of tests or calibrations. Federally accredited laboratories perform many different types of testing and related activities on various products, ranging from inspecting grain to certifying maritime cargo gear. The genesis of laboratory accreditation programs owes largely to agencies’ need to assure themselves of the competency of the organizations responsible for testing products or services that involve the use of federal funds. To provide national recognition for competent laboratories, the NIST Director established the National Voluntary Laboratory Accreditation Program (NVLAP) in 1976 at the request of the private sector. Under this program, which is based on internationally accepted standards, NIST accredits laboratories that it finds competent to perform specific types of tests or calibrations. In June 2004, NVLAP announced the establishment, in accordance with HAVA, of an accreditation program for laboratories that test voting systems using standards determined by EAC. Enacted in October 2002, HAVA affected nearly every aspect of the voting process, from voting technology to provisional ballots and from voter registration to poll worker training. In particular, the act authorized $3.86 billion in funding over several fiscal years to replace punch card and mechanical lever voting equipment, improve election administration and accessibility, train poll workers, and perform research and pilot studies. HAVA also established EAC, provided for the appointment of four commissioners, and specified the process for selecting an executive director. Generally speaking, EAC is to assist in the administration of federal elections and provide assistance in administering certain federal election laws and programs. Since the passage of HAVA in 2002, the federal government has taken steps to implement the act’s provisions. For example, after beginning operations in January 2004, EAC updated the existing federal voluntary standards for voting systems, including strengthening provisions related to security and reliability. Additionally, EAC established an interim VSTL accreditation program that leveraged a predecessor program run by the National Association of State Elections Directors, and EAC and NIST then established companion accreditation programs that replaced the interim program. Federal standards for voting systems were first issued in 1990 when the Federal Election Commission published standards. These federal standards identified minimum functional and performance requirements, which states were free to adopt in whole, in part, or not at all, for electronic voting equipment, and specified test procedures to ensure that the equipment met those requirements. In 2002, the Federal Election Commission issued its Voting System Standards (VSS), which updated the 1990 standards to reflect more modern voting system technologies. In 2005, we reported that these standards identified minimum functional and performance requirements for voting systems but were not sufficient to ensure secure and reliable voting systems. As a result, we recommended that EAC work to define specific tasks, measurable outcomes, milestones, and resource needs to improve the voting system standards. Until then, election administrators were at risk of relying on voting systems that were not developed, acquired, tested, operated, or managed in accordance with rigorous security and reliability standards— potentially affecting the reliability of future elections and voter confidence in the accuracy of the vote count. Following the enactment of HAVA in 2002 and the establishment of EAC in 2004, EAC adopted the Voluntary Voting System Guidelines (VVSG) in 2005. The VVSG specify the functional requirements, performance characteristics, documentation requirements, and test evaluation criteria for the national certification of voting systems. Accredited testing laboratories are to use the VVSG to develop test plans and procedures for the analysis and testing of systems in support of EAC’s voting system certification program. The VVSG are also used by voting system manufacturers as the basis for designing and deploying systems that can be federally certified. We reported in 2001 that the National Association of State Elections Directors was accrediting independent test authorities to test voting equipment against the Federal Election Commission standards. Under this program, three laboratories were accredited. Under HAVA, NIST is to recommend laboratories for EAC accreditation. In 2006, NIST notified EAC that its initial recommendations might not be available until sometime in 2007. As a result, EAC initiated an interim accreditation program and invited the three laboratories accredited by the state elections directors to apply. As part of the interim program, laboratories were required to attest to a set of EAC-required conditions and practices, including certifying the integrity of personnel, the absence of conflicts of interest, and the financial stability of the laboratory. In August and September 2006, EAC granted interim accreditation to two of the three laboratories invited to apply. EAC terminated its interim program in March 2007. HAVA assigned responsibilities for laboratory accreditation to both EAC and NIST. In general, to reach an accreditation decision, NIST is to focus on assessing laboratory technical qualifications, while EAC is to use those assessment results and recommendations and augment them with its own review of related laboratory capabilities. See table 1 for the two agencies’ HAVA responsibilities. The tasks that NIST is to perform addressed in an annual interagency agreement executed between the institute and EAC each year. For example, the 2008 interagency agreem states that NVLAP will continue to assess VSTLs and will coordinate with EAC to continually monitor and review the performance of the laboratories. Additionally, the agreement states that the two agencies will coordinate to maintain continuity between their respective accreditation programs. in meeting HAVA’s requirements are The NIST and EAC accreditation programs can be viewed together as forming a federal VSTL accreditation process that consists of a series o complementary steps. These steps are depicted in figure 2, where the numbers correspond to a detailed narrative description below. As of May 2008, EAC has accredited four laboratories. These laboratories are SysTest Labs, LLC; Wyle Laboratories, Inc.; iBeta Quality Assurance; and InfoGard Laboratories, Inc. A fifth laboratory, CIBER Inc., has been granted NVLAP accreditation and has been recommended to, but not yet accredited by, EAC. InfoGard Laboratories, Inc., whose NVLAP accreditation expires in June 2008, has recently notified NIST and EAC that it would not apply to renew its accreditation, citing the volatility of the voting system environment as one reason. The timeline for each of these accreditations, and other accreditation program activities, is found in figure 3. NIST’s defined approach to accrediting voting system laboratories largely reflects applicable HAVA requirements and relevant international standards, both of which are necessary to an effective program. However, this approach is continuing to evolve based on issues realized during NIST’s implementation experience to date. In particular, because NIST’s defined program does not, for example, specify the nature and extent of assessment documentation to generate or retain or specify the version of the voting system standards to be used, our analysis of NIST’s efforts in accrediting four laboratories could not confirm that the agency has consistently followed its defined accreditation program. NIST officials stated that these limitations are due in part to the relative newness of the program and that they will be addressed by updating the accreditation program handbook. However, they said that they do not have documented plans to accomplish this. Until these limitations are addressed, NIST will be challenged in accrediting voting system laboratories in a consistent and verifiable manner. NIST has defined its voting system accreditation program to address relevant HAVA requirements. According to HAVA, NIST is to conduct reviews of independent, nonfederal voting system testing laboratories and submit to EAC a list of proposed voting system testing laboratories and monitor and review the performance of those proposed laboratories that EAC accredits, including making recommendations to EAC regarding accreditation continuance and revocation. NIST’s defined voting system accreditation program satisfies both of these requirements. With respect to the first, NIST announced in June 2004 the establishment of its voting system testing laboratory accreditation program as part of NVLAP, a statutorily created program for unbiased, third parties to establish the competence of national independent laboratories. As such, NIST adopted its NVLAP handbook as the basis for its defined approach to reviewing VSTLs and has supplemented it with a handbook that is specific to voting system testing. With respect to the second HAVA requirement, the supplemental handbook cited above states that the NIST Director will recommend NVLAP-accredited VSTLs to EAC for subsequent commission accreditation. Additionally, NIST’s handbooks provide for both monitoring accredited laboratories and for making recommendations regarding a laboratory’s continued accreditation. For example, the handbook states that a monitoring visit may occur at both scheduled and unscheduled times and the scope may be limited to a few items or include a full review. It also states that a reaccreditation review shall be conducted in accordance with the procedures used to initially accredit laboratories. Further, the handbook also identifies accreditation or reaccreditation decision options, including granting, denying, or modifying the scope of an accreditation. According to NIST officials, these HAVA requirements are relevant and important to defining an effective voting system testing laboratory accreditation program. By incorporating them, NIST has reflected one key aspect of an effectively defined program. NIST’s VSTL accreditation program reflects internationally recognized standards for establishing and conducting accreditation activities. These standards are published by the International Organization for Standardization (ISO), and the two that are germane to this accreditation program are (1) ISO/IEC 17011, which establishes general requirements for accreditation bodies and (2) ISO/IEC 17025, which establishes the general requirements for reviewing the competence of laboratories. According to NIST program documentation, this allows NVLAP to both operate as an unbiased, third party accreditation body and to utilize a quality management system compliant with international standards. As a result, NIST has incorporated key aspects of an effective accreditation body into its voting system accreditation program. ISO/IEC 17011 requires that an accrediting body have, among other things, (1) a management system for accreditation activities, (2) a policy defining the types of records to be retained and how those records will be maintained, (3) a clear description of the accreditation process that covers the rights and responsibilities of those seeking accreditation, and (4) a clear description of the accreditation activities to be performed. NIST VSTL accreditation program-related documentation, including its program handbooks, satisfies each of these requirements. In fact, NIST has cross-referenced its documentation to each ISO/IEC 17011 requirement. Specifically, the first requirement is cross-referenced to the NVLAP Management System Manual, which describes the overall accreditation program’s management policies and control structure, and the second is cross-referenced to the program’s record keeping policy, which specifies what types of records should be maintained and how they should be maintained. The third and fourth requirements are cross-referenced to the accreditation process descriptions in both the Management System Manual and the general handbook. Together, these documents contain, for example, (1) the rights of laboratories applying for accreditation and (2) the scope of accreditation activities to be performed, including a preassessment review, an on-site review, and a final on-site assessment report. ISO/IEC 17025 requires that accreditation reviews cover specific topics. These include (1) laboratory personnel independence and conflicts of interest; (2) a laboratory system for quality control (i.e., a framework for producing reliable results and continuous improvement to laboratory procedures); and (3) a laboratory mechanism for collecting and responding to customer complaints. Additionally, the standard establishes basic technical requirements that a laboratory has to meet, and thus that reviews are to cover, including (1) competent laboratory personnel who are capable of executing the planned tests, (2) appropriate tests and test methods, and (3) clear and accurate test result documentation. NIST voting system testing laboratory accreditation program-related documents, including its program handbooks, satisfy these requirements. First, the general handbook defines the requirement for a laboratory to have personnel that are independent and free of any conflict of interest. Second, the handbook requires that a laboratory have a management quality control system and that this system provide for reliable results and continuous improvement to laboratory procedures. Third, the handbook requires that a laboratory have a mechanism for receiving and responding to customer complaints. Last, the handbook establishes certain technical requirements that a laboratory must meet, such as having competent laboratory personnel capable of executing the planned tests, using appropriate tests and test methods, and documenting test results in a clear and accurate manner. For several of these requirements, NIST’s voting-specific supplemental handbook augments the general handbook. For example, this supplemental handbook requires laboratories to submit a quality control manual, as well as information to demonstrate the competence of laboratory administrative and technical staff. Further, it requires that a laboratory’s training program be updated so that staff can be retrained as new versions of voting system standards are issued. NIST has reported on the importance of ensuring that those persons who perform accreditation assessments are sufficiently qualified and that the assessments themselves are based on explicitly defined criteria and are adequately documented. Nevertheless, NIST has not fully reflected key aspects of these findings in its defined approach to accrediting voting system testing laboratories. For example, it has not specified the basis for determining the qualifications of its accreditation assessors, and while a draft update to its handbook now includes the specific voting system standards to be used when performing an accreditation assessment, this handbook was only recently approved. According to NIST officials, these gaps are due to the newness of the accreditation program and will be addressed in the near future. Because these gaps have confused laboratories as to what standards they were to meet, and may have resulted in differences in how accreditations have been performed to date, it is important that the gaps be addressed. NIST has reported on the importance of having competent and qualified human resources to support accreditation programs. According to these findings, an accreditation program should, among other things, provide for having experienced and qualified assessors to perform accreditation demonstrating an assessors’ qualifications using defined documentation and explicit criteria that encompass the person’s education, experience, and training; and training (initial and continuing) for assessors. NIST’s defined approach to VSTL accreditation does not provide for all these requirements. To its credit, its program handbook identifies the need for experienced and qualified assessors in the execution of accreditation activities and provides for each assessor’s qualifications to be documented. Further, it has defined generic training that applies to all of its accreditation assessors. For example, the NVLAP Assessor Training Syllabus includes training on ISO/IEC 17011 and 17025, as well as training on the NVLAP general handbook. In addition, the VSTL accreditation program manager stated that new assessors receive training on the 2002 VSS and 2005 VVSG and that periodic training seminars are provided to assessors on changes to either the general handbook or the 2005 VVSG. In addition, the program manager told us that candidate assessors must submit some form of documentation (e.g., a resume), and that this documentation is used to evaluate, rank, and select candidates that are best qualified. The NIST VSTL assessors that we interviewed confirmed that they were required to submit such documentation at NIST’s request. However, NIST’s defined approach does not cite the explicit capabilities and qualifications that an assessor must meet or the associated documentation needed to demonstrate these capabilities and qualifications. According to the program manager, this is because the field of potential assessors in the voting system arena is small and specialized and because they focused on defining other aspects of the program that were higher priorities. Further, NIST has not defined and documented the specific training requirements needed to be a VSTL lead assessor or a technical assessor for the VSTL program. According to the program manager, this is because these assessors receive all the training they need by working on the job with more experienced assessors. Not specifying criteria governing assessor qualifications and training is of concern because differences in assessors’ capabilities could cause inconsistencies in how assessments are performed. NIST recognizes the importance of specifying explicit criteria against which all candidate laboratories will be assessed and fully documenting the assessments that are performed. Specifically, the general handbook provides the criteria and requirements that will be used to evaluate basic laboratory capabilities. It also states that technical requirements specific to a given field of accreditation are published in program-specific handbooks. To that end, NIST published a supplemental program-specific handbook in December 2005 that provided the voting-specific requirements to be used to evaluate VSTLs, additional guidance, and related interpretive information. NIST’s 2005 supplemental handbook does not contain sufficient criteria against which to evaluate VSTLs. It identifies specific requirements that laboratories are to demonstrate relative to the 2002 VSS but not the 2005 VVSG. For example, the handbook states that laboratories are expected to develop, validate, and document test methods that meet the 2002 VSS. However, it does not refer to the 2005 VVSG. In addition, the program- specific checklist that accompanies this version of the handbook does not identify all the 2005 VVSG standards against which laboratories are evaluated. Specifically, this checklist makes reference to the VVSG in relation to just a few checklist requirements. According to the NIST program manager, the 2005 handbook did not refer to the 2005 VVSG requirements because only the 2002 VSS requirements were mandatory at the time it was published. He further stated that, despite the fact that the 2005 VVSG requirements were not included in that handbook, NIST assessors were expected to use them when performing the first laboratory assessments. Representatives for two laboratories stated that because these requirements were not documented or identified in the NIST handbooks, they did not learn that they would be required to demonstrate 2005 VVSG-based capabilities until the NIST on-site assessment teams arrived. In December 2007, NIST released draft revisions of the voting program- specific handbook and checklist, stating that labs are expected to meet both 2002 VSS and 2005 VVSG. In addition, the 2007 draft handbook clearly specifies that laboratories must demonstrate how developed test methods and planned tests trace back to and satisfy both the 2002 VSS and the 2005 VVSG. Taken together, the new handbook and checklist should better identify the requirements and criteria used to evaluate a laboratory and document the results. According to NIST, the new handbook and checklist have recently been finalized, and both are now in use. NIST has found that reliable and accurate documentation provides assurance that laboratory accreditation activities have been effectively fulfilled. However, in its efforts to date in accrediting four VSTLs, documentation of the assessments does not show that NIST has fully followed its defined accreditation approach. While we could not determine whether this is due to incomplete documentation of the steps performed and the decisions made during an assessment or due to steps not being performed as defined, this absence of verifiable evidence raises questions about the consistency of the assessments and the resultant accreditations. Without adequately documenting each assessment, including all steps performed and the basis for any steps not performed, such questions may continue to be raised. To NIST’s credit, available documentation shows that it consistently followed some aspects of its defined approach in accrediting the four laboratories. For example, we verified that NIST received an application from each of the laboratories as required, and our review of completed checklists and summary reports shows that preassessment reviews and on-site assessments were performed for each laboratory, as was required. According to a lead assessor, this review usually focused on the laboratories’ quality assurance manuals. Moreover, the completed checklists identified whether the requirement was met or not for each listed requirement, and included comments, in some cases, as to how a laboratory addressed a requirement. Also as required, NIST received laboratory responses describing how unmet requirements were addressed within specified time frames, used the responses in making accreditation decisions, and notified EAC of its decisions via letters of recommendation. Furthermore, NIST has recently begun reaccreditation reviews at two laboratories, as required. However, documentation does not show that NIST has consistently followed other aspects of its defined approach. Our analysis of the checklists that are to be used to both guide and document a given assessment, including identifying unmet requirements and capturing assessor comments and observations, shows some differences. For example: One type of checklist (the supplemental handbook checklist) was prepared for only two of the four laboratory assessments. According to the program manager, this is because even though a draft revision of this checklist was actually used to assess the other two laboratories, the assessment results were recorded on a different checklist (the general handbook checklist). While this is indicated on one of the two checklists, it is not indicated on the other. On the checklist used for one laboratory, an assessor marked several sections as “TA” with no explanation as to what this means. Also, the checklist used for another laboratory did not identify whether most of the requirements were met or not met. Further, the checklist for a third laboratory had one section marked as “not applicable” but included no explanation as to why that section did not apply, while the checklist for a different laboratory marked the same section as “not applicable” but included a reason for doing so. Notwithstanding these differences, the program manager told us that each laboratory was assessed using the same requirements and all assessments to date were performed in a consistent manner. On the basis of available documentation, however, we could not verify that this is the case. As a result, it is not clear that NIST has consistently followed its defined approach. Available documentation also does not show that NIST followed other aspects of its approach. For example: The program handbook states that each laboratory is to identify the requested scope of accreditation in its application package. However, our analysis of the four application packages shows that two laboratories did not specify a requested scope of accreditation. According to the program manager, the scope of accreditation for all laboratories was the 2002 VSS and 2005 VVSG because, even though the latter standards were not yet in effect at the time, they were anticipated to be in effect in the near future. However, NIST did not have documentation that notified the laboratories of this scope of accreditation or that indicated whether this scope was established by EAC, NIST, or the laboratories. The program handbook states that after receiving a laboratory’s application package, NIST will acknowledge its receipt in writing and will inform the laboratory of the next steps in the accreditation process. However, NIST did not have documentation demonstrating that this was done. According to the program manager, this was handled via telephone conversations. However, representatives for several laboratories noted that these calls did not clearly establish expectations, adding that some expectations were not communicated until the NIST team assessors arrived to conduct the on-site assessment. The program manager stated that these deviations from the defined approach are attributable to the relative newness of the program, but despite these discrepancies, each laboratory was assessed consistently. However, we could not verify this, and thus it is not clear that NIST has consistently followed its defined approach. According to this official, future versions of the program handbook would address these limitations. However, documented plans for doing so have not been developed. EAC has recently defined its voting system laboratory accreditation approach in a draft program manual. However, this draft manual omits important content. While addressing relevant HAVA requirements, the draft manual does not adequately define key accreditation factors that NIST has identified, and a key accreditation feature that we have previously reported as being integral to an effective accreditation program. Moreover, not all factors and features that the draft manual does include have been defined to a level that would ensure thorough, consistent, and verifiable implementation. Because this manual was not available for EAC to use on the four laboratory accreditations that it has completed, the accreditations were performed using a largely undocumented series of steps. As a result, the thoroughness and consistency of these accreditations is not clear. According to EAC officials, these gaps are due to the agency’s limited resources being focused on other issues, and will be addressed as its accreditation program evolves. However, they said that they do not yet have documented plans to accomplish this. Until EAC fully defines a repeatable VSTL accreditation approach, it will be challenged in its ability to treat all laboratories consistently and produce verifiable results. In February 2008, EAC issued a draft version of a VSTL accreditation program manual for public comment. According to HAVA, EAC’s accreditation program is to meet certain requirements. Specifically, it is to provide for voting system hardware and software testing, certification, decertification, and recertification by accredited laboratories. Additionally, it is to base laboratory accreditation decisions, including decisions to revoke an accreditation, on a vote of the commissioners, and it is to provide for a published explanation of any commission decision to accredit any laboratory that was not first recommended for accreditation by NIST. To EAC’s credit, its draft accreditation program manual addresses each of these requirements. First, the manual defines the role that the laboratories are to play relative to voting system testing, certification, recertification and decertification, and it incorporates by reference an EAC companion voting system certification manual that defines requirements and process steps for voting system testing and certification-related activities. With respect to the remaining three HAVA requirements, the draft EAC accreditation manual also requires (1) that the commissioners vote on the accreditation of laboratories recommended by NIST for accreditation, (2) that EAC publish an explanation for the accreditation of any laboratory not recommended by NIST for accreditation, and (3) that the commissioners vote on the proposed revocation of a laboratory’s accreditation. According to EAC officials, its draft approach incorporates HAVA requirements because the commission is focused on meeting its legal obligations in all aspects of its operations, including VSTL accreditation. In doing so, EAC has addressed one important aspect of having an effective accreditation program. Beyond addressing relevant HAVA requirements, EAC’s draft accreditation manual defines an accreditation process, including program phases, requirements, and certain evaluation criteria. However, it does not do so in a manner that fully satisfies factors that NIST has reported can affect the effectiveness of accreditation programs. Moreover, it does not adequately address a set of features that our research shows are common to federal accreditation programs and that can influence a program’s effectiveness. According to EAC officials, these factors and features are not fully addressed in the draft program manual because its accreditation program is still in its early stages of development and is still evolving. Until they are fully addressed, EAC’s accreditation program’s effectiveness will be limited. According to NIST, having confidence in and ensuring appropriate use of an accredited testing laboratory requires that accreditation stakeholders have an adequate understanding of the accreditation process, scope, and related criteria. NIST further reports that confidence in the accreditation process can be traced to a number of factors that will influence the thoroughness and competence of accreditation programs, and thus these factors can be viewed as essential accreditation program characteristics. They include having published procedures governing how the accreditation program is to be executed, such as procedures for granting, maintaining, modifying, suspending, and withdrawing accreditation; specific instructions, steps, and criteria for those who conduct an accreditation assessment (assessors) to follow, such as a test methodology that is acceptable to the accreditation program; knowledgeable and experienced assessors to execute the instructions and steps and apply the related criteria; and complete records on the data collected, results found, and reports prepared relative to each assessment performed. EAC’s draft accreditation program manual addresses one of these factors but it does not fully address the other three. (See table 2.) For example, while the manual requires that EAC maintain records, it only addresses the retention of records associated with the testing of voting systems and not those associated with the accreditation of laboratories. EAC officials told us that testing records are meant to include accreditation records, although they added that this is not explicit in the manual and needs to be clarified. Further, the manual is silent on the steps to be followed and criteria to be applied in reviewing a laboratory’s application and the qualifications required for accreditation reviewers. By not fully addressing these factors, EAC increases the risk that its accreditation reviews will not be performed consistently and comprehensively. As we have previously reported, the nature and focus of federal programs for accrediting laboratories vary, but nevertheless include certain common features. In particular, these programs require laboratories to provide certain information to the accrediting body, and they provide for evaluation of this information by the accrediting body in making an accreditation determination. As we reported, the required information is to include, among other things, the laboratory’s (1) organizational information, (2) records and record-keeping policy, (3) test methods and procedures, (4) conflict of interest policy, and (5) financial stability. To its credit, EAC’s draft accreditation manual provides for laboratories to submit information relative to each of these features that are common to federal accreditation programs. For example, it provides for laboratories to submit organizational information, such as location(s), ownership, and organizational chart; a written policy for maintaining accreditation-related records for 5 years; conflict of interest policies and procedures; test- related polices and procedures, as well as system-specific test plans; and financial information needed to demonstrate stability. Moreover, for four of the five features, the manual identifies the specific types of information needed for accreditation and how the information is to be evaluated, including the criteria that are to be used in evaluating it. However, for the financial stability feature, the manual does not describe what specific documents are required from the laboratory to satisfy this requirement, nor does the manual indicate how information provided by a laboratory will be evaluated. At the time of our review, EAC’s Director of Voting System Testing and Certification told us that the draft accreditation manual was to be submitted for approval and that this draft did not address all of the limitations cited above. For example, it would not contain the information needed and the evaluation approach and criteria to be used in making determinations about financial stability because this decision is to be based on what the director referred to as a “reasonableness” test that involves EAC evaluation of the information relative to that provided by other laboratories. Further, while EAC officials said that they plan to evolve their approach to VSTL accreditation and to address these gaps, EAC does not have documented plans for accomplishing this. Without clearly defining information to be used and how it is to be used, EAC increases the risk that financial stability determinations will not be consistently and thoroughly made. As of May 2008, EAC has accredited four laboratories, but the documentation associated with each of these accreditations is not sufficient to recreate a meaningful understanding of how each evaluation was performed and how decisions were made, and thus, the bases for each accreditation were not clear. Specifically, each of the accreditations occurred before EAC had defined its approach for conducting them. Because of this, EAC performed each one using a broadly defined process outlined in a letter to each laboratory and an associated checklist that only indicated whether certain documents were received. Our analysis of these letters showed that the correspondence sent to each laboratory was all the same, identifying three basic review steps to be performed and citing a list of documents that the laboratories were to provide as part of their applications. However, the letters did not describe in any manner how EAC would review the submitted material, including the criteria to be used. According to EAC officials, the review steps were not documented. Instead, they were derived by a single reviewer using (1) the applications and accompanying documents submitted by the laboratories, (2) familiarity with the materials used by the state election directors- sponsored accreditation program, and (3) the judgment of each reviewer. Further, while the reviews were supported by a checklist that covered each of the items that was to be included in the laboratory applications and provided space for the reviewer(s) to make notes relative to each of these items, the checklists did not include any guidance or methodology, including criteria, for evaluating the submitted items. Rather, the EAC accreditation program director told us that he was the reviewer on all the accreditations and he applied his own, but undocumented, tests for reasonableness in deciding on the submissions’ adequacy and acceptability. Our analysis of the checklists for each laboratory accreditation showed that while the same checklist was used for each laboratory, the checklists did not provide a basis for evaluating and documenting the basis for the sufficiency of those documents. In some cases, additional communications occurred between the reviewer and the laboratory to obtain additional documents. However, no documentation was available to demonstrate what standards or other criteria the laboratories were held to or how their submissions were otherwise reviewed. For example, each of the checklists indicated that each laboratory provided “a copy of the laboratory’s conflict of interest policy.” However, they did not specify, for example, whether the policy adequately addressed particular requirements. Nevertheless, for three of the four accredited laboratories, documentation shows that EAC sought clarification on or modification to the policies provided, thus suggesting that some form of review was performed against more detailed requirements. Similarly, while the checklists indicate that the laboratories disclosed their respective coverage limits for general liability insurance policies, and in one case EAC communicated to the laboratory that the limits appeared to be low, no documentation specifies the expected coverage limits. According to the EAC Director of Voting System Testing and Certification, this determination was made after comparing limits among the laboratories and was not based on any predetermined threshold. Further, while the checklists indicate that each laboratory provided audited financial statements, there is no documentation indicating how these statements were reviewed. According to the EAC program director, the lack of documentation demonstrating the basis for EAC’s laboratory accreditations is due to the need at the time to move quickly in accrediting the laboratories and the fact that use of the same individual to review the accreditation evaluation negated the need for greater documentation. Without such documentation, however, we could not fully establish how the accreditations were performed, including whether there was an adequate basis for the accreditation decisions reached and whether they were performed consistently. The effectiveness of our nation’s overall election system depends on many interrelated and interdependent variables, including the security and reliability of voting systems. Both NIST and EAC play critical roles in ensuring that the laboratories that test these two variables have the capability, experience, and competence necessary to test a voting system against the relevant standards. NIST has recently established an accreditation program that largely accomplishes this, and while EAC is not as far along, it has a foundation upon which it can build. However, important elements are still missing from both programs. Specifically, the current NIST approach does not define requirements for assessor qualifications and training or ensure that assessments are fully documented. Additionally, EAC has not developed program management practices that are fully consistent with what NIST has found to be hallmarks of an effective accreditation program, nor has the agency adequately specified how evaluations are to be performed and documented. As a result, opportunities exist for NIST and EAC to further define and implement their respective programs in ways that promote greater consistency, repeatability, and transparency—and thus improve the results achieved. It is also important for NIST and EAC to follow through on their stated intentions to evolve their respective programs, building on what they have already accomplished through the development and execution of well-defined plans of action. If they do not, both will be challenged in their ability to consistently provide the American people with adequate assurance that accredited laboratories are qualified to test the voting systems that will eventually be used in U.S. elections. To help NIST in evolving its VSTL accreditation program, we recommend that the Director of NIST ensure that the accreditation program manager develops and executes plans that specify tasks, milestones, resources, and performance measures that provide for the following two actions: Establish and implement transparent requirements for the technical qualifications and training of accreditation assessors. Ensure that each laboratory accreditation review is fully and consistently documented in accordance with NIST program requirements. To help EAC in evolving its VSTL accreditation program, we recommend that the Chair of the EAC ensure that the EAC Executive Director develops and executes plans that specify tasks, milestones, resources, and performance measures that provide for the following action: Establish and implement practices for the VSTL accreditation program consistent with accreditation program management guidance published by NIST and GAO, including documentation of specific accreditation steps and criteria to guide assessors in conducting each laboratory review; transparent requirements for the qualifications of accreditation reviewers; requirements for the adequate maintenance of records related to the VSTL accreditation program; and requirements for determining laboratory financial stability. Both NIST and EAC provided written comments on a draft of this report, signed by the Deputy Director of NIST and the Executive Director of EAC, respectively. These comments are described below along with our response to them. In its comments, NIST stated that it appreciates our careful review of its VSTL program and generally concurs with our conclusions that its program must continue to evolve and improve. However, NIST also provided comments to clarify the current status of the program relative to three of our findings. With respect to our finding that NIST’s defined approach for accrediting VSTLs does not cite explicit qualifications for the persons who conduct the technical assessments, the institute stated that it does explicitly cite assessor qualifications for its overall national laboratory accreditation program, adding that this approach to specifying assessor qualifications has a proven record of success. It also stated that the overall program’s management manual requires all assessors to meet defined criteria in such areas as laboratory experience, assessment skills, and technical knowledge, and that candidate assessors must submit information addressing each of these areas as well as factors addressing technical competence in a given laboratory’s focus area (e.g., voting systems). Further, it stated that candidate assessors’ qualification ratings and rankings are captured in work sheets. In response, we do not disagree with any of these statements. However, our finding is that NIST’s defined approach for VSTL accreditation does not specify requirements for persons who assess those laboratories that specifically test voting systems. In this regard, NIST’s own written comments confirm this, stating that specific requirements for assessors are not separately documented for each of its national laboratory accreditation programs, such as the VSTL program. Therefore, we have not modified this finding or the related recommendation. Regarding our finding that NIST’s defined approach for accrediting VSTLs has not always cited the current voting system standards, the institute affirmed this in its comments by stating that the VSTL program handbook that it provided to us only cites the 2002 system standards, as these were the only standards in place when the handbook was published. However, NIST also noted that when the 2005 system guidelines were adopted in December 2005, it began the process of updating the handbook and associated assessment checklist, and that the handbook update was recently finalized for publication and is now being used. In response, we stand by our finding that NIST’s defined approach has not always cited the current voting system standards, which NIST acknowledges in its comments. However, we also recognize that NIST has recently addressed this inconsistency by finalizing its new handbook and the associated assessment checklist. In light of NIST’s recent actions, we have updated the report to acknowledge the finalization of the handbook and checklist, and removed the associated recommendation that was contained in our draft report for NIST to ensure that its defined approach addresses all required voting system standards. Regarding our finding that available documentation from completed accreditations does not show that NIST has consistently followed all aspects of its defined approach, the institute stated that, among other things, all required documents for its VSTL accreditation program are currently in use and reflect the recent update to its handbook and checklist, and that all these documents are securely maintained. In response, we do not question these statements; however, they are not pertinent to our finding. Specifically, our finding is that the four completed accreditations that we reviewed were not consistently documented. As we state in our report, we reviewed the documentation associated with the accreditation assessments for these four laboratories, and we found that all four were not documented in a similar manner, even though they were based on the same version of the program handbook. For example, neither the laboratory notifications of the scope of the assessment nor the next steps in the accreditation process were consistently documented. Therefore, we have not modified our finding, but have slightly modified our recommendation to make it clear that its intent is to ensure that all phases of the accreditation review are fully and consistently documented. In its comments, EAC described our review and report as being helpful to the commission as it works to fully develop and implement its VSTL program. It also stated that it agrees with the report’s conclusions that additional written internal procedures, standards, and documentation are needed to ensure more consistent and repeatable implementation of the program. The commission added that it generally accepts our recommendations and will work hard to implement them. To assist it in doing so, it sought clarification about two of our recommendations, as discussed below. EAC stated that the recommendation in our draft report for the commission to develop specific accreditation steps and criteria was broadly worded, and thus the recommendation’s intent was not clear. EAC also stated that it interpreted the recommendation to mean that it should define internal instructions to guide assessors in performing an accreditation, and that the recommendation was not intended to have any impact on its published requirements and procedures governing, for example, granting, suspending, or withdrawing an accreditation. We agree with EAC’s interpretation, as it is in line with the intent of our recommendation. To avoid the potential for any future misunderstanding, we have modified the wording of the recommendation to clarify its intent. EAC stated that the recommendation in our draft report for the commission to develop transparent technical requirements for the qualifications of its assessors may be confusing because, as we state in our report, only NIST performs a technical accreditation review, as EAC’s review is administrative, non-technical in nature. To avoid the potential for any confusion, we have modified the wording of the recommendation to eliminate any reference to technical qualification requirements. We are sending copies of this report to the Ranking Member of the House Committee on House Administration, the Chairman and Ranking Member of the Senate Committee on Rules and Administration, the Chairmen and Ranking Members of the Subcommittees on Financial Services and General Government, Senate and House Committees on Appropriations, and the Chairman and Ranking Member of the House Committee on Oversight and Government Reform. We are also sending copies to the Chair and Executive Director of EAC, the Secretary of Commerce, the Deputy Director of NIST, and other interested parties. We will also make copies available to others on request. In addition, this report will be available at no charge on the GAO Website at http://www.gao.gov. Should you or your staffs have any questions on matters discussed in this report, please contact me at (202) 512-3439 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Our objectives were to determine whether the National Institute of Standards and Technology (NIST) and the Election Assistance Commission (EAC) have defined effective voting system testing laboratory (VSTL) accreditation approaches, and whether each is following its defined approach. To determine whether NIST has defined an effective accreditation approach, we reviewed documentation from its VSTL accreditation program, such as handbooks and program manuals for the National Voluntary Laboratory Accreditation Program (NVLAP), of which the VSTL accreditation program is a part. In doing so, we compared these documents with applicable statute, guidance, and best practices, primarily the Help America Vote Act of 2002 (HAVA), internationally recognized standards from the International Organization for Standardization (ISO), and federal accreditation program management guidance published by NIST. We compared program documentation with HAVA’s NIST-specific accreditation requirements to determine the extent to which the agency was fulfilling its HAVA responsibilities. We also reviewed program documentation against ISO/IEC 17011, which establishes general requirements for accreditation bodies, and ISO/IEC 17025, which establishes the general requirements for assessing the competence of laboratories, to determine the extent to which NIST’s accreditation program was based on internationally recognized standards. We also compared the documentation against NIST publication NISTIR 6014, which contains sections that provide guidance for laboratory accreditation programs, to determine whether the VSTL accreditation program had defined other elements of effective accreditation programs. We also interviewed the voting accreditation program manager to determine how these documents were used to guide the program. To determine whether NIST has followed its defined approach, we examined artifacts from the accreditation assessments of five VSTLs, including one laboratory accredited by NVLAP, but not yet recommended to EAC. This material included completed assessment checklists derived from the accreditation program handbooks, additional documents supporting the assessments, and laboratory accreditation applications and supporting documentation. We compared artifacts from these assessments to program guidance to determine the extent to which the defined process was followed. In addition, we interviewed officials from NIST and NIST contract assessors and officials from EAC and the four EAC-accredited VSTLs to understand how the NIST process was implemented and how it related to the process managed by EAC. To determine whether EAC has defined an effective accreditation approach, we reviewed documentation from its VSTL accreditation program, such as the draft Voting System Test Laboratory Accreditation Program Manual. In doing so, we compared this document with applicable statute and best practices, primarily HAVA and federal accreditation program management guidance published by NIST. We compared the draft program manual with HAVA’s EAC-specific accreditation requirements to determine the extent to which the agency was fulfilling its HAVA responsibilities. We also compared the documentation against the accreditation guidance in NISTIR 6014 to determine whether the accreditation program had defined other elements of effective accreditation programs. We also interviewed the EAC voting program director and executive director to determine how these documents were used to guide the program and to understand EAC’s defined accreditation approach prior to the development of the draft manual. To determine whether EAC has followed its defined approach, we compared artifacts from the accreditation reviews of four VSTLs. We did not review a fifth laboratory, which had been accredited by NVLAP, but not yet recommended to EAC. The materials reviewed included checklists completed by EAC in the absence of an approved program manual. In doing so, we compared the review artifacts to accreditation program requirements, as communicated to the laboratories, to determine the extent to which the agency followed its process, as verbally described to us. We did not compare accreditation submissions or EAC review artifacts with the draft accreditation manual because agency officials stated that the draft manual had not been used in the review of any laboratory. In addition, we interviewed officials from NIST, EAC, and the four EAC- accredited VSTLs to understand how the EAC process was implemented and how it related to the process managed by NIST. To assess data reliability, we reviewed program documentation to substantiate data provided in interviews with knowledgeable agency officials. We have also made appropriate attribution indicating the data’s sources. We conducted this performance audit at EAC and NIST offices in Washington, D.C., and Gaithersburg, Maryland, respectively, from September 2007 to September 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Paula Moore, Assistant Director; Justin Booth; Timothy Case; Neil Doherty; Timothy Eagle; Nancy Glover; Dave Hinchman; Rebecca LaPaze; Freda Paintsil; Nik Rapelje; and Jeffrey Woodward made key contributions to this report. | The 2002 Help America Vote Act (HAVA) created the Election Assistance Commission (EAC) and assigned both it and the National Institute of Standards and Technology (NIST) responsibilities for accrediting laboratories that test voting systems. NIST assesses a laboratory's technical qualifications and makes recommendations to EAC, which makes a final accreditation decision. In view of the continuing concerns about voting systems and the important roles that NIST and EAC play in accrediting the laboratories that test these systems, GAO was asked to determine whether each organization has defined an effective approach for accrediting laboratories that test voting systems and whether each is following its defined approach. To accomplish this, GAO compared NIST and EAC policies, guidelines, and procedures against applicable legislation and guidance, and reviewed both agencies' efforts to implement them. NIST has largely defined and implemented an approach for accrediting voting system testing laboratories that incorporates many aspects of an effective program. In particular, its approach addresses relevant HAVA requirements and reflects relevant laboratory accreditation guidance, including standards accepted by the international standards community. However, NIST's defined approach does not, for example, cite explicit qualifications for the persons who conduct accreditation technical assessments, as called for in federal accreditation program guidance. Instead, NIST officials said that they rely on individuals who have prior experience in reviewing such laboratories. Further, even though the EAC requires that laboratory accreditation be based on demonstrated capabilities to test against the latest voting system standards, NIST's defined approach has not always cited these current standards. As a result, two of the four laboratories accredited to date were assessed using assessment tools that were not linked to the latest standards. Moreover, available documentation for the four laboratory assessments was not sufficient to determine how the checklists were applied and how decisions were reached. According to NIST officials, the four laboratories were consistently assessed. Moreover, they said that they intend to evolve NIST's accreditation approach to, for example, clearly provide for sufficient documentation of how accreditation reviews are conducted and decisions are reached. However, they had yet to develop specific plans for accomplishing this. EAC recently developed a draft laboratory accreditation program manual, but this draft manual does not adequately define all aspects of an effective approach, and it was not used in the four laboratory accreditations performed to date. Specifically, while this draft manual addresses relevant HAVA requirements, such as the requirement for the commissioners to vote on the accreditation of any laboratory that NIST recommends for accreditation, it does not include a methodology governing how laboratories are to be evaluated or criteria for granting accreditation. Because the manual was not approved at the time EAC accredited four laboratories, these accreditations were governed by a more broadly defined accreditation review process that was described in correspondence sent to each laboratory and a related document receipt checklist. As a result, these accreditations were based on review steps that were not sufficiently defined to permit them to be executed in a repeatable manner. According to EAC officials, including the official who conducted the accreditation reviews for the four laboratories, using the same person to conduct the reviews ensured that the steps performed on the first laboratory were repeated on the other three. However, given that both the steps and the results were not documented, GAO could not verify this. EAC officials stated that they intend to evolve the program manual over time and apply it to future accreditations and reaccreditations. However, they did not have specific plans for accomplishing this. Further, although EAC very recently approved an initial version of its program manual, this did not occur until after EAC provided comments, and GAO had finalized, this report. |
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The majority of Americans receive their health coverage through private health insurance, either by purchasing coverage directly or receiving coverage through their employer, and many of those with private coverage are enrolled in plans purchased from state-licensed or regulated carriers. An estimated 173 million nonelderly Americans, 65 percent, received health coverage through private insurance in 2009. The remainder of Americans either received their health coverage through government health insurance, such as Medicare and Medicaid, or were uninsured. In general, those who obtain private health insurance do so in one of three market segments: individual, small-group, and large-group. Policyholders in the individual market purchase private health insurance plans directly from a carrier—not in connection with a group health plan. In 2009 an estimated 17 million nonelderly Americans obtained individual private health insurance coverage. In the small-group market, enrollees generally obtain health insurance coverage through a group health plan offered by a small employer, and in the large-group market, enrollees generally obtain coverage through a group health plan offered by a large employer. In 2009, an estimated 156 million nonelderly Americans obtained private health insurance through employer-based group plans offered by either small or large employers. While most small-group coverage is purchased from state-licensed or regulated plans, most large- group coverage is purchased from employer self-funded plans not subject to state licensing or regulation. However, there are some fully-insured large-group plans, which are subject to state regulation. Premium rates are actuarial estimates of the cost of providing coverage over a period of time to policyholders and enrollees in a health plan. To determine rates for a specific insurance product, carriers estimate future claims costs in connection with the product and then the revenue needed to pay anticipated claims and nonclaims expenses, such as administrative expenses. Premium rates are usually filed as a formula that describes how to calculate a premium for each person or family covered, based on information such as geographic location, underwriting class, coverage and co-payments, age, gender, and number of dependents. The McCarran-Ferguson Act provides states with the authority to regulate the business of insurance, without interference from federal regulation, unless federal law specifically provides otherwise. Therefore, states are primarily responsible for overseeing private health insurance premium rates in the individual and group markets in their states. Through laws and regulations, states establish standards governing health insurance premium rates and define state insurance departments’ authority to enforce these standards. In general, the standards are used to help ensure that premium rates are adequate, not excessive, reasonable in relation to the benefits provided, and not unfairly discriminatory. In overseeing health insurance premium rates, state insurance departments may review rate filings submitted by carriers. A rate filing may include information on premium rates a carrier proposes to establish, as well as documentation justifying the proposed rates, such as actuarial or other assumptions and calculations performed to set the rate. According to the Congressional Research Service (CRS) and others, most states require carriers to submit rate filings to state departments of insurance prior to implementation of new rates or rate changes. The authority of state insurance departments to review rate filings can vary. Some insurance departments have the authority to approve or disapprove all rate filings before they go into effect, while others do not have any authority to approve or disapprove rate filings. Further, in some states, authority to approve or disapprove rate filings varies by market. According to a report published by CRS, in 2010, insurance departments in 19 states were authorized by their state to approve or disapprove proposed premium rates in all markets before they went into effect— known as prior approval authority. Officials in states with prior approval authority may review a carrier’s rate filing using the state’s standards governing health insurance premium rates. In some cases, the state officials may also consider input from the public on the proposed rate, which can be obtained, among other ways, through public hearings or public comment periods. If a proposed rate does not meet a state’s standards, officials in states with prior approval authority can, among other things, deny the proposed rate or request that the carrier submit a new rate filing that addresses the issues that the state identified during its review. If a proposed rate meets a state’s standards, the officials may approve the rate filing. However, in some states, if the officials do not review a proposed rate filing and take action within a specified time period, the carrier’s submitted rate filing is deemed approved under state law. According to CRS, insurance departments in another 10 states were authorized to disapprove rate filings in all markets in 2010, but not to approve rate filings before a carrier could begin using the premium rate or rates proposed in the filing. In 9 of these states, carriers were required to submit rate filings prior to the effective date of the proposed rate—known as file and use authority. In one state, carriers could begin using a new premium rate and then file it with the state—known as use and file authority. In departments with file and use authority or use and file authority, the state officials may review a carrier’s rate filing using the state’s standards governing health insurance rates. If a proposed rate does not meet these standards, the officials can, among other things, deny the proposed premium rate or request that the carrier submit a new rate filing that addresses the issues that the state identified during its review. However, the state officials do not have the authority to approve a rate filing before the proposed premium rate goes into effect, and unless the rate filing has been disapproved, a carrier may begin using the new premium rate as of its effective date. In six states, insurance departments were not authorized to approve or disapprove rate filings in any market in 2010, according to CRS. In three of these states, a carrier was required to submit rate filings for informational purposes only, known as information only authority. In the other three states, carriers were not required to submit rate filings with the states. In addition, in one state, carriers were not required to file rates for approval or disapproval each time the carrier proposed to change premium rates. Instead, carriers were required to file premium rates with the form that was filed when the plan was initially offered on the market— this form includes the language in the insurance contract. This is known as file with form authority. According to CRS, in the remaining 15 states, authority to approve or disapprove rate filings varied by market in 2010. For example, a state insurance department may have prior approval authority in the individual market, but have information only authority in the small-group and large- group markets subject to their regulation. PPACA, signed into law in March 2010, established a role for HHS by requiring the Secretary of HHS to work with states to establish a process for the annual review of unreasonable premium increases. PPACA also established a state grant program to be administered by HHS beginning in fiscal year 2010. HHS has taken steps to work with states to establish a process for reviewing premium rate increases each year. In December 2010, HHS published a proposed rule, and in May 2011, HHS issued a final rule that established a threshold for review of rate increases for the individual and small-group markets and outlined a process by which certain rate increases would be reviewed either by HHS or a state. The final rule also included a process by which HHS would determine if a state’s existing rate review program was effective. HHS would review rates in states determined not to have an effective rate review program; in these instances, HHS would determine if a rate increase over an applicable threshold in the individual and small-group market was unreasonable based on whether it was excessive, unjustified, or unfairly discriminatory. In developing this final rule, HHS worked with states to understand various states’ rate review authorities. HHS has also begun administering a state grant program to enhance states’ existing rate review processes and provide HHS with information on state trends in premium increases in health insurance coverage. PPACA established this 5-year, $250 million state grant program to be administered by HHS, beginning in fiscal year 2010. HHS announced the first cycle of rate review grants in June 2010, awarding $46 million ($1 million per state) to the 46 states that applied for the grants. According to HHS, grant recipients proposed to use this Cycle I grant funding in a number of ways, including seeking additional legislative authority to review premium rate filings, expanding the scope of their reviews, improving the rate review process, and developing and upgrading technology. HHS announced the second cycle of rate review grants in February 2011 with $199 million available in grant funding to states. Through our survey and interviews with state officials, we found that oversight of health insurance premium rates—primarily reviewing and approving or disapproving rate filings submitted by carriers—varied across states in 2010. In addition, the reported outcomes of rate filing reviews varied widely across states in 2010, in particular, the extent to which rate filings were disapproved, withdrawn, or resulted in lower rates than originally proposed. Nearly all—48 out of 50—of the state officials who responded to our survey reported that they reviewed rate filings in 2010. Further, respondents from 30 states—over two-thirds of the states that provided data on the number of rate filings reviewed in 2010—reported that they reviewed at least 95 percent of rate filings received in 2010. Among the survey respondents that reported reviewing less than 95 percent of rate filings in 2010, some reported that a portion of the rate filings were deemed approved without a review because they did not approve or disapprove them within a specified time period. Others reported that they did not review rate filings in certain markets. For example, respondents from 4 of these states reported that they did not review any rate filings received in the large-group market subject to their regulation in 2010. In addition, some respondents that reported reviewing rate filings in 2010 reported that they did not receive rate filings in certain markets. For example, respondents from 9 states—nearly one quarter of the states that provided information by market—reported that they did not receive rate filings in the large-group market in 2010. (See appendix II for more information on the results of our survey.) While our survey responses indicated that most states reviewed most of the rate filings they received in 2010, the responses to our survey also showed that how states reviewed the rate filings varied in 2010. Specifically, the practices reported by state insurance officials varied in terms of (1) the timing of rate filing reviews—whether rate filings were reviewed before or after the rates took effect, (2) the information considered during reviews, and (3) opportunities for consumer involvement in rate reviews. Respondents from 38 states reported that all rate filings they reviewed were reviewed before the rates took effect, while respondents from 8 states reported reviewing at least some rate filings after the rates went into effect. Some of the variation in the timing of rate filing reviews was consistent with differences across states in their reported authorities for state insurance departments to approve or disapprove rate filings. For example, survey respondents from some states reporting prior approval authority—such as Maryland and West Virginia—were among respondents from the 38 states that reported that all rate filings the state reviewed were reviewed before the rates took effect in 2010. Similarly, survey respondents from another state—Utah—reported that at least some rate filings were reviewed after the rates went into effect, because the department had file and use authority and it was not always possible to review rate filings before they went into effect. However, not all variation in states’ practices was consistent with differences in state insurance departments’ authorities to review and approve or disapprove rate filings. For example, survey respondents from California—who indicated that they did not have the authority to approve rate filings before carriers could begin using the rates—reported that all rate filings reviewed in 2010 were reviewed prior to the rates going into effect. According to our survey results and interviews with state insurance department officials, the information considered as a part of the states’ reviews of rate filings varied. For example, as shown in table 1, our survey results indicated that nearly all survey respondents reported reviewing information such as medical trend, a carrier’s rate history, and reasons for rate revisions. In contrast, fewer than half of state survey respondents reported reviewing carrier capital levels compared with states’ minimum requirements or compared with an upper threshold. (See appendix III for more detailed information about carrier capital levels.) Overall, when asked to select from a list of 13 possible types of information considered during rate filing reviews in 2010, 7 respondents reported that they reviewed fewer than 5 of the items that we listed, while 13 respondents reported reviewing more than 10 items. Some survey respondents also reported conducting relatively more comprehensive reviews and analyses of rate filings, while other respondents reported reviewing relatively little information or conducting cursory reviews of the information they received. For example, survey respondents from Texas reported that for all filings reviewed, all assumptions, including the experience underlying the assumptions, were reviewed by department actuaries for reasonableness, while respondents from Pennsylvania and Missouri reported that they did not always perform a detailed review of information provided in rate filings. Respondents from Pennsylvania reported that while they compared data submitted by carriers in rate filings to the carriers’ previous rate filings, the state’s department of insurance did not have adequate capacity to perform a detailed review of all rate filings received from carriers. Respondents from Missouri reported that they looked through the information provided by carriers in rate filings in 2010, but that they did not have the authority to do a more comprehensive review. We also found that the type of information states reported reviewing in 2010 varied by market or product type. For example, officials from Maine told us that they reviewed information such as medical trend and benefits provided when reviewing rate filings in the individual market and under certain circumstances in the small-group market. However, they told us that they conducted a more limited review in the small-group market if the carrier’s rate filing guaranteed a medical loss ratio of at least 78 percent and the plan covered more than 1,000 lives. In another example, Michigan officials reported that, in 2010, they reviewed a number of types of information for health maintenance organization (HMO) rate filings, including rating methods and charts that showed the levels of premium rate increases from the previous year. These officials told us that the state required HMO rates to be “fair, sound, and reasonable” in relation to the services provided, and that HMOs had to provide sufficient data to support this. In contrast, the officials told us that the state’s requirement for commercial carriers in the individual market was to meet a medical loss ratio of 50 to 65 percent, depending on certain characteristics of the insurance products. While state survey respondents reported a range of information that they considered during rate filing reviews, over half of the respondents reported independently verifying at least some of this information. The remaining respondents reported that they did not independently verify any information submitted by carriers in rate filings in 2010. Survey respondents that reported independently verifying information for at least some rates filings in 2010 also reported different ways in which information they received from carriers was independently verified. For example, survey respondents from Rhode Island reported that the standard of independent verification varied depending on the rate filing, and that the steps taken included making independent calculations with submitted rate filing data and comparing these calculations with external sources of data. In another example, respondents from Michigan reported that in 2010 the department of insurance had staff conduct on- site reviews of carrier billing statements in the small and large-group markets in order to verify the information submitted in rate filings. Survey respondents from 14 states reported providing opportunities for consumers to be involved in the oversight of health insurance premium rates in 2010. Our survey results indicated that these consumer opportunities varied and included opportunities to participate in rate review hearings—which allow consumers and others to present evidence for or against rate increases—public comment periods, or on consumer advisory boards. Survey respondents from six states reported conducting rate review hearings in at least one market in 2010 to provide consumers with opportunities to be involved in the oversight of premium rates. (See table 2 for information on reported opportunities for consumer involvement in states’ rate review practices in 2010.) For example, officials from Maine that we interviewed told us that the insurance department held rate hearings for two large carriers in 2010 and that the size of the rate increase and the number of people affected were among the factors considered in determining whether to hold a rate hearing. The officials explained that if there is a hearing, the Maine Bureau of Insurance issues a notice and interested parties, such as the attorney general or consumer organizations, can participate by presenting evidence for or against rate increases. Maine officials said that, before rate review hearings are held, carriers share information about the rate filing, but that additional details identified at a hearing may trigger a request for further information. Maine officials said that after the state reviews all of the information, the state either approves the rate or disapproves the rate with an explanation of what the state would approve. Survey respondents from eight states reported that they provided consumers with opportunities to participate in public comment periods for premium rates in 2010. For example, respondents from Pennsylvania reported that rate filings were posted in the Pennsylvania Bulletin—a publication that provides information on rulemaking in the state—for 30 days for public review and comment. In addition, officials from Maine told us that they did not make decisions on rate filings until consumers had an opportunity to comment on proposed rate changes. These officials added that they are required to wait at least 40 days after carriers notify policyholders of a proposed rate change before making a decision, providing consumers with an opportunity to comment. Survey respondents from six states reported providing consumers with other opportunities to be involved in the oversight process. For example, respondents from two states—Rhode Island and Washington—reported that they provided consumers with opportunities to participate in consumer advisory boards in 2010. In addition, respondents from Texas reported that rate filings were available to consumers upon request and that the Texas Department of Insurance held stakeholder meetings during which consumer representatives participated in discussions about rate review regulations. The outcomes of states’ reviews of premium rates in 2010 also varied. While survey respondents from 36 states reported that at least one rate filing was disapproved, withdrawn, or resulted in a rate lower than originally proposed in 2010, the percentage of rate reviews that resulted in these types of outcomes varied widely among these states. Specifically, survey respondents from 5 of these states—Connecticut, Iowa, New York, North Dakota, and Utah—reported that over 50 percent of the rate filings they reviewed in 2010 were disapproved, withdrawn, or resulted in rates lower than originally proposed, while survey respondents from 13 of these states reported that these outcomes occurred in less than 10 percent of rate reviews. An additional 6 survey respondents reported that they did not have any rate filings that were disapproved, withdrawn, or resulted in lower rates than originally proposed in 2010. (Fig. 1 provides information on the percentage and reported number of rate filings that were disapproved, withdrawn, or resulted in lower rates than originally proposed by state in 2010.) Some of the state survey respondents reported that at least one rate filing was disapproved, withdrawn, or resulted in rates lower than originally proposed in 2010 even though they did not have explicit authority to approve rate filings in 2010. For example, officials from the California Department of Insurance reported that even though the department did not have the authority to approve rate filings and could only disapprove rate filings if they were not compliant with certain state standards, such as compliance with a 70 percent lifetime anticipated loss ratio, the department negotiated with carriers to voluntarily reduce proposed rates in 2010. Survey respondents from California reported that 14 out of 225 rate filings in 2010 were disapproved, withdrawn, or resulted in rates lower than originally proposed. Specifically, officials from the California Department of Insurance told us that they negotiated with carriers to reduce proposed rates by 2 percentage points to 25 percentage points in 2010. These officials also told us that they negotiated with one carrier not to raise rates in 2010 although the carrier had originally proposed a 10-percent average increase in rates. In another example, although survey respondents from Alabama reported that they did not have prior approval authority, they reported that 22 rate filings were disapproved, withdrawn, or resulted in rates lower than originally proposed in 2010. States also varied in the markets in which rates were disapproved, withdrawn, or resulted in rates lower than originally proposed in 2010. For example, survey respondents from nine states—Alaska, Arkansas, Hawaii, Kansas, Kentucky, Maine, Nevada, New Jersey, and North Carolina—reported that while they reviewed rate filings in multiple markets, only reviews for the individual market resulted in rates that were disapproved, withdrawn, or resulted in rates lower than originally proposed. In other states, respondents reported that rate filings in multiple markets resulted in these types of outcomes in 2010. For example, survey respondents from 12 states reported that rate filings in all three markets resulted in these types of outcomes in 2010. Our survey of state insurance department officials found that 41 respondents from states that were awarded Cycle I HHS rate review grants have begun making three types of changes in order to enhance their states’ abilities to oversee health insurance premium rates. Specifically, respondents reported that they have taken steps in order to (1) improve their processes for reviewing premium rates, (2) increase their capacity to oversee premium rates, and (3) obtain additional legislative authority for overseeing premium rates. Improve rate review processes. More than four-fifths of the state survey respondents that reported making changes to their oversight of premium rates reported that they had taken various steps to improve the processes used for reviewing health insurance premium rates. These steps consisted primarily of the following: Examining existing rate review processes to identify areas for improvement. Twenty-two survey respondents reported taking steps to either review their existing rate review processes or develop new processes. More than two-thirds of these 22 respondents reported that their state contracted with outside actuarial or other consultants to review the states’ rate review processes and make recommendations for improvement. For example, respondents from Louisiana—who, according to officials, previously did not review most premium rate filings because they did not have the authority to approve or disapprove rates—reported that they had contracted with an actuary to help them develop a rate review process. In another example, respondents from North Carolina reported that an outside actuarial firm independently reviewed the department’s health insurance rate review process and recommended ways that the department could improve and enhance its review process. Similarly, respondents from Tennessee reported that they had obtained information from contract actuaries on how to enhance the state’s review of rate filings. In addition, four of these respondents reported taking steps to develop standardized procedures for reviewing rate filings. For example, respondents from Illinois reported that their insurance department is developing protocols for the collection, analysis, and publication of rate filings. Changing information that carriers are required to submit in rate filings. Thirteen survey respondents reported taking steps to change the rate filing information that carriers are required to submit to the state insurance department in order to improve reviews of rate filings. For example, respondents from Oregon reported that they will require carriers to provide in their rate filings a detailed breakdown of medical costs and how premiums are spent on medical procedures and services. In another example, respondents from Virginia reported that their state is expanding the information required from carriers in rate filing submissions by developing a uniform submission checklist. Incorporating additional data or analyses in rate filing reviews. Eleven survey respondents reported purchasing data or conducting additional data analyses in order to improve the quality of their states’ rate filing reviews. For example, respondents from Ohio reported taking steps to obtain national claims data on health costs which, according to the respondents, would enable the department of insurance to use a separate data source to verify the costs submitted by carriers in their rate filings. In another example, respondents from Virginia reported that their state had begun undertaking detailed analyses of premium trends in the state’s individual and small-group markets. According to the state respondents, these analyses will provide rate reviewers with benchmark industry values for various factors, such as underlying costs and benefit changes, which will help focus rate reviewers’ efforts on the drivers of a given rate increase. The respondents reported that these analyses will also allow reviewers to more easily identify potentially excessive or unreasonable rate increases. Involving consumers in the rate review process. Three survey respondents reported taking steps to increase consumer involvement in the rate review process. For example, respondents from Connecticut reported that the state’s insurance department has posted all rate filings received from carriers on its web site and created an online application that allows consumers to comment on the proposed rates. In another example, respondents from Oregon reported that the state’s insurance department has contracted with a consumer advocacy organization to provide comments on rate filings on a regular basis. Finally, respondents from Nevada reported that the state is taking steps to create a rate hearing process that will allow consumer advocates to represent the interests of consumers at the hearings. Increase capacity to oversee rates. Over two-thirds of the state survey respondents that reported making changes to rate oversight reported that they have begun to make changes to increase their capacity to oversee premium rates. These reported changes consisted primarily of hiring staff or outside actuaries, and improving the information technology systems used to collect and analyze rate filing data. Twenty survey respondents reported hiring additional staff or contracting with external actuaries and consultants to improve capacity in various ways, such as to review rates, coordinate the rate review process or provide administrative support to review staff, and train staff. For example, respondents from Oregon reported hiring staff to perform a comprehensive and timely review of the filings, and to review rate filings for completeness upon receipt. In another example, respondents from West Virginia reported that they used a portion of their HHS grant funding to obtain external actuarial support for reviewing rate filings. In addition, Illinois officials told us that they have taken steps to hire two internal actuaries, as well as other analytical staff to help with the processing of rate filings to help relieve the workload of current office staff. Seventeen respondents reported taking steps to increase their capacity to oversee premium rates by improving information technology and data systems used in the review process. Nine of these respondents reported taking steps to enhance their use of the System for Electronic Rate and Form Filing (SERFF)—a web-based electronic system developed by NAIC for states to collect electronic rate filings from carriers—such as by working with NAIC or by improving their insurance department’s information technology infrastructure to support the use of SERFF. Additionally, some respondents also reported taking steps to make other improvements, such as creating or improving additional databases in order to collect rate filing data and analyze trends in rate filings. For example, respondents from Wisconsin reported that their office contracted with an actuarial firm using HHS grant funds in part to develop a database to standardize, analyze, and monitor rates in the individual and small-group markets, which will enable the office to track historical rate change data and monitor rate changes. In another example, respondents from Illinois reported that they launched a web-based system in February 2011 for carriers to use when reporting rate changes, while continuing to work with NAIC on SERFF improvements with the intention of eventually merging the state’s data system with SERFF. Obtain additional legislative authority. More than a third of state survey respondents that reported making changes to rate oversight reported that their states have taken steps—such as introducing or passing legislation—in order to obtain additional legislative authority for overseeing health insurance premium rates. For example, respondents from Montana reported that legislation has been introduced that would give the state the authority to require carriers to submit rate filings for review. In another example, Illinois officials told us that the state has authority to require some carriers to submit rate filings, but the state does not have the authority to approve these filings before the rates take effect. The officials told us that legislation has been introduced to obtain prior approval authority. Additionally, respondents from North Carolina reported that the department has sought additional prior approval authority over small-group health insurance rates in addition to its existing prior approval authority over rates in the individual, small-group, and large-group health insurance markets. Finally, some states reported taking steps to review their current authority to determine if changes were necessary. HHS provided us with written comments on a draft version of this report. These comments are reprinted in appendix IV. HHS and NAIC also provided technical comments, which we incorporated as appropriate. In its written comments, HHS noted that health insurance premiums have doubled on average over the last 10 years, putting coverage out of reach for many Americans. Further, HHS noted that as recently as the end of 2010, fewer than half of the states and territories had the legal authority to reject a proposed increase if the increase was excessive, lacked justification, or failed to meet other state standards. In its written comments, HHS also noted the steps it is taking to improve transparency, help states improve their health insurance rate review, and assure consumers that any premium increases are being spent on medical care. Specifically, HHS noted its requirement that, starting in September 2011, certain insurers seeking rate increases of 10 percent or more in the individual and small-group markets publicly disclose the proposed increases and their justification for them. According to HHS, this requirement will help promote competition, encourage insurers to work towards controlling health care costs, and discourage insurers from charging unjustified premiums. In its comments, HHS also discussed the state grant program provided for by PPACA to help states improve their health insurance rate review. As our report notes, in addition to grants awarded in 2010, HHS announced in February 2011 that nearly $200 million in additional grant funds were available to help states establish an effective rate review program. Finally, the comments from HHS point out that their rate review regulation will work in conjunction with their medical loss ratio regulation released on November 22, 2010, which is intended to ensure that premiums are being spent on health care and quality-related costs, not administrative costs and executive salaries. 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 Health and Human Services, the Administrator for Medicare & Medicaid Services, 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 [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 V. Our objectives were to describe (1) states’ practices for overseeing health insurance premium rates in 2010, including the outcomes of premium rate reviews, and (2) changes that states that received Department of Health and Human Services (HHS) rate review grants have begun making to enhance their oversight of health insurance premium rates. To describe states’ practices for overseeing health insurance premium rates in 2010, including the outcomes of rate reviews, we analyzed data from our web-based survey sent to officials of the insurance departments of all 50 states and the District of Columbia (collectively referred to as “states”). We obtained the names, titles, phone numbers, and e-mail addresses of our state insurance department survey contacts by calling each insurance department and asking for the most appropriate contact. The survey primarily contained questions on state practices for overseeing rates during calendar year 2010, such as the number of filings received, reviewed, and outcomes of review, the timing of state review, factors considered during review, independent verification of carrier data, consumer involvement, and capacity and resources to review rates. During the development of our survey, we pretested it with insurance department officials from three states—Michigan, Tennessee, and West Virginia—to ensure that our questions and response choices were clear, appropriate, and answerable. We made changes to the content of the questionnaire based on their feedback. We conducted the survey from February 25, 2011, through April 4, 2011. Of the 51 state insurance departments, 50 completed the survey. However, not all states responded to each question in the survey. Additionally, some survey respondents reported that they did not have data that could be sorted by health insurance market. See appendix II for the complete results of the survey. Because we sent the survey of state insurance departments to the complete universe of potential respondents, it was not subject to sampling error. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in how a particular question was interpreted, in the sources of information that were available to respondents, or in how the data were entered into a database or were analyzed could introduce unwanted variability into the survey results. We encountered instances of nonsampling survey error in analyzing the survey responses. Specifically, in some instances, respondents provided conflicting, vague, or incomplete information. We generally addressed these errors by contacting the state insurance department officials involved and clarifying their responses. However, we did not independently verify the information and data provided by the state survey respondents. To obtain more in-depth information on states’ practices for overseeing rates in calendar year 2010, we interviewed state insurance department officials from a judgmental sample of five states: California, Illinois, Maine, Michigan, and Texas. To ensure that we identified a range of states for our in-depth interviews, we considered state insurance departments’ authorities in 2010 for reviewing health insurance premium rates, as reported by the National Association of Insurance Commissioners (NAIC); states’ plans to change their premium rate oversight practices, as described in their Cycle I rate review grant applications to HHS submitted in June and July of 2010; states’ population sizes; and states’ geographic locations. These criteria allowed us, in our view, to obtain information from insurance departments in a diverse mix of states, but the findings from our in-depth interviews cannot be generalized to all states because the states selected were part of a judgmental sample. We used information obtained during these interviews throughout this report. To describe changes that states have begun making to enhance their oversight of premium rates, we relied primarily on data collected in our state insurance department survey, in which we asked respondents to describe through open-ended responses steps taken to implement the changes to premium rate oversight that were proposed in states’ Cycle I rate review grant applications to HHS. We then performed a content analysis of these open-ended responses through the following process: From a preliminary analysis of the survey responses, we identified a total of 13 types of state changes such as hiring staff or consultants to review rates, involving consumers in the rate oversight process, and improving information technology. We then grouped those types of changes reported by survey respondents into three categories of reported changes. Two GAO analysts independently assigned codes to each response, and if respondents provided conflicting or vague information, we addressed these errors by contacting the state insurance department officials involved and clarifying their responses; however, we did not independently verify the information provided in the survey responses. To gain further information on state changes to rate oversight practices, we also asked about changes during our in-depth interviews with insurance department officials in five states described above. In addition, we interviewed officials from the Center for Consumer Information and Insurance Oversight within the Centers for Medicare & Medicaid Services, and reviewed portions of the states’ Cycle I rate review grant applications submitted to HHS and other relevant HHS documents. To gather additional information related to both of our research objectives, we interviewed a range of experts and organizations including NAIC, the American Academy of Actuaries, America’s Health Insurance Plans, two large carriers based on their number of covered lives, NAIC consumer representatives (individuals who represent consumer interests at meetings with NAIC), and various advocacy groups such as Families USA and Consumers Union. We conducted this performance audit from September 2010 through June 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. This appendix presents additional results from our survey of insurance department officials in all 50 states and the District of Columbia on their oversight of health insurance premium rates in 2010, and changes they have begun to make to enhance their oversight of health insurance premium rates. Table 3 presents survey responses by state on the number of rate filings that were received, reviewed, and disapproved, withdrawn, or resulted in rates lower than originally proposed in the individual, small-group, and large-group markets in 2010. Table 4 presents the number of survey respondents that reported that the state insurance department required actuarial justification for rate filings, and whether the justifications were reviewed by an actuary in 2010 in the individual, small-group, and large-group markets. Table 5 presents survey responses on states’ capacity and resources to review rate filings in 2010. Table 6 presents information on the types of changes that survey respondents that had been awarded HHS Cycle I rate review grants reported making to enhance their oversight of health insurance premium rates. State officials monitor carriers’ capital levels to help ensure that carriers can meet their financial obligations. State officials’ primary objective when monitoring capital levels has been to ensure the adequacy of carriers’ capital to make sure that consumers and health care providers are not left with unpaid claims. The focus, therefore, has been on monitoring capital levels to ensure that they exceed minimum requirements. Officials from some states have noted that they review this information when reviewing rate filings. NAIC developed a formula and model law for states to use in determining and regulating the adequacy of carriers’ capital. The risk-based capital (RBC) formula generates the minimum amount of capital that a carrier is required to maintain to avoid regulatory action by the state. The formula takes into account, among other things, the risk of medical expenses exceeding the premiums collected. According to NAIC, 37 states had adopted legislation or regulations based on NAIC’s Risk-Based Capital (RBC) for Health Organizations Model Act as of July 2010 in order to monitor carriers’ capital. However, an NAIC official told us that all states must follow the RBC model act in order to meet NAIC accreditation standards. Under NAIC’s model law, the baseline level at which a state may take regulatory action against a carrier is the authorized control level. If a carrier’s total adjusted capital—which includes shareholders’ funds and adjustments on equity, asset values, and reserves—dips below its authorized control level, the state insurance regulator can place the carrier under regulatory control. The RBC ratio is the ratio of the carrier’s total adjusted capital to its authorized control level; state officials become involved when the ratio drops below 200 percent. If the RBC ratio is 200 percent or more, no action is required. As shown in table 7 below, NAIC data show that, from 2005 through 2010, except for carriers with less than $10 million in assets, carriers’ median RBC ratios were generally higher for carriers reporting greater assets. In addition to the contact named above, Kristi Peterson, Assistant Director; George Bogart; Kelly DeMots; Krister Friday; Linda Galib; and Peter Mangano made key contributions to this report. | With premiums increasing for private health insurance, questions have been raised about the extent to which increases are justified. Oversight of the private health insurance industry is primarily the responsibility of states. In 2010, the Patient Protection and Affordable Care Act required the Department of Health and Human Services (HHS) to award grants to assist states in their oversight of premium rates. GAO was asked to provide information on state oversight of premium rates. In this report, GAO describes (1) states' practices for overseeing health insurance premium rates in 2010, including the outcomes of premium rate reviews; and (2) changes that states that received HHS rate review grants have begun making to enhance their oversight of premium rates. GAO surveyed officials from insurance departments in 50 states and the District of Columbia (referred to as states) about their practices for overseeing premium rates in 2010 and changes they have begun making to enhance their oversight. GAO received responses from all but one state. GAO also interviewed officials from California, Illinois, Maine, Michigan, and Texas to gather additional information on state practices. GAO selected these states based on differences in their authority to oversee premium rates, and proposed changes to their oversight, their size, and their geographic location. GAO also interviewed officials from advocacy groups and two large carriers to obtain contextual information. GAO found that oversight of health insurance premium rates--primarily reviewing and approving or disapproving rate filings submitted by carriers--varied across states in 2010. While nearly all--48 out of 50--of the state officials who responded to GAO's survey reported that they reviewed rate filings in 2010, the practices reported by state insurance officials varied in terms of the timing of rate filing reviews, the information considered in reviews, and opportunities for consumer involvement in rate reviews. Specifically, respondents from 38 states reported that all rate filings reviewed were reviewed before the rates took effect, while other respondents reported reviewing at least some rate filings after they went into effect. Survey respondents also varied in the types of information they reported reviewing. While nearly all survey respondents reported reviewing information such as trends in medical costs and services, fewer than half of respondents reported reviewing carrier capital levels compared with state minimums. Some survey respondents also reported conducting comprehensive reviews of rate filings, while others reported reviewing little information or conducting cursory reviews. In addition, while 14 survey respondents reported providing consumers with opportunities to be involved in premium rate oversight, such as participation in rate review hearings or public comment periods, most did not. Finally, the outcomes of states' reviews of rate filings varied across states in 2010. Specifically, survey respondents from 5 states reported that over 50 percent of the rate filings they reviewed in 2010 were disapproved, withdrawn, or resulted in rates lower than originally proposed, while survey respondents from 19 states reported that these outcomes occurred from their rate reviews less than 10 percent of the time. GAO's survey of state insurance department officials found that 41 respondents from states that were awarded HHS rate review grants reported that they have begun making changes in order to enhance their states' abilities to oversee health insurance premium rates. For example, about half of these respondents reported taking steps to either review their existing rate review processes or develop new processes. In addition, over two-thirds reported that they have begun to make changes to increase their capacity to oversee premium rates, including hiring staff or outside actuaries, and improving the information technology systems used to collect and analyze rate filing data. Finally, more than a third reported that their states have taken steps--such as introducing or passing legislation--in order to obtain additional legislative authority for overseeing health insurance premium rates. HHS and the National Association of Insurance Commissioners (NAIC) reviewed a draft of this report. In its written comments, HHS highlighted the steps it is taking to improve transparency, help states improve their health insurance rate review, and assure consumers that any premium increases are being spent on medical care. HHS and NAIC provided technical comments, which were incorporated as appropriate. |
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In Bosnia, conflict raged from 1992 through 1995 and involved the Federal Republic of Yugoslavia, Croatia, and Bosnia’s three major ethnic groups. All were fighting for control of specific territories tied to each group’s definition of its own state. During this time an estimated 2.3 million people became refugees or were internally displaced. NATO forces intervened in the conflict to support international humanitarian and peacekeeping operations beginning in 1993, culminating in a month-long bombing campaign against Bosnian-Serb forces in July 1995. This pressure and U.S.- led negotiating efforts resulted in a cease-fire and negotiation of the Dayton Peace Agreement in December 1995. About 54,000 NATO-led troops were deployed beginning in late 1995 to enforce the military aspects of the agreement and provide security for humanitarian and other assistance activities. Currently, about 12,000 international troops remain in Bosnia to provide security, including 1,800 U.S. soldiers. The conflict in and around the Serbian province of Kosovo between Yugoslav security forces and ethnic Albanian insurgents fighting for Kosovo’s independence took place from early 1998 through mid-1999. NATO initiated a bombing campaign against Yugoslavia in March 1999 to end Yugoslav aggression and subsequently deployed about 50,000 troops to enforce compliance with cease-fire and withdrawal agreements. Currently, there are about 25,000 NATO-led peacekeeping troops in Kosovo, including about 2,500 U.S. soldiers. The conflict in Afghanistan extends back to the Soviet Union’s 10-year occupation of the country that began in 1979, during which various countries, including the United States, backed Afghan resistance efforts. Three years after Soviet forces withdrew, the communist regime fell to the Afghan resistancebut unrest continued. The Taliban movement emerged in the mid 1990s, but was removed by coalition forces in late 2001 for harboring al Qaeda terrorists who attacked the United States on September 11. In December 2001, the Bonn Agreement was signed, which provided for interim governance of the country. Currently, about 4,600 International Security Assistance Force troops provide security for the city of Kabul and the surrounding area and approximately 11,000 U.S.-led coalition forces continue to fight remnants of the Taliban and al Qaeda. GAO’s work over the past 10 years on Bosnia and Kosovo, and our recent work on Afghanistan, indicate that post-conflict assistance is a broad, long-term effort that requires humanitarian, security, economic, governance, and democracy-building measures. For Bosnia and Kosovo, forces led by the North Atlantic Treaty Organization provided overall security, and the international community developed country-specific and regional frameworks for rebuilding the country and province, respectively. Bosnia’s plan included the 3- to 4-year, $5.1 billion Priority Reconstruction Program, which provided humanitarian, economic, and other assistance based on needs assessments conducted by the World Bank and other international organizations. A number of international organizations involved in the Bosnia peace operation, including the Office of the High Representative, the United Nations, and the Organization for Security and Cooperation in Europe, helped develop government institutions and supported democracy-building measures and police training. In Kosovo, a U.N. peace operation oversaw assistance through (1) the United Nations and other donors for housing winterization, refugee relief, and other short- term needs; (2) the medium-term Reconstruction and Recovery Program devised by the European Commission and the World Bank; and (3) programs to build a judiciary, a police force, and government institutions. The Bosnia- and Kosovo-specific programs were complemented in 1999 by the Stability Pact, which focused on encouraging democratization, human rights, economic reconstruction, and security throughout the region. For Afghanistan, the World Food Program’s (WFP) food assistance effort constituted the largest portion of humanitarian assistance in the post- conflict period. To determine the needs of the Afghan people, WFP conducted and continues to undertake periodic rapid food needs assessments and longer-term food and crop supply assessments. Based on the results of these reviews, WFP designs short-term emergency operations focusing on free distribution of food, as well as longer-term recovery operations including health, education, training, and infrastructure projects. Owing to the size of WFP’s effort and its years of experience in Afghanistan, WFP provided much of the logistics support for other organizations operating in Afghanistan during 2002 and 2003. A range of humanitarian and longer-term development assistance is being provided through broad assistance programs developed by the United Nations and other multilateral, bilateral, and nongovernmental organizations. These programs include infrastructure rehabilitation, education, health, agriculture, and governance projects, among others. Post-conflict assistance efforts differ in the extent of multilateral involvement. In Bosnia and Kosovo, the North Atlantic Treaty Organization is responsible for enforcing the military and security aspects of peace operations under the terms of U.N. Security Council Resolutions 1031 and 1244, respectively. The United Nations, the European Union, and other international organizations are responsible for rebuilding political and civic institutions and the region’s economies under U.N. resolutions and the Dayton Peace Agreement. In Afghanistan, the United States is one of many bilateral and multilateral donors of aid helping to implement the Bonn Agreement. In contrast, in post-conflict Iraq, the United States and Britain are occupying powers under international law and are recognized as such in U.N. Security Resolution 1483. The obligations of occupying forces as enumerated in international conventions include respecting the human rights of the local population; ensuring public order, safety, and health; protecting property; and facilitating humanitarian relief operations, among others. While the post-conflict situation in each location has varied, certain similarities are apparent, chief among them that assistance efforts continue to be provided in volatile and highly politicized environments where local parties have competing interests and differing degrees of support for the peace process. In Bosnia, the Bosnian Serb parties continue to oppose terms of the peace agreement, such as the freedom of ethnic minority refugees and internally displaced persons to return to their prewar homes. In Kosovo, groups of Kosovar Albanians and Serbs retain unauthorized weapons and commit acts of violence and intimidation against ethnic minorities in violation of the peace agreements. In Afghanistan, warlords control much of the country and foster an illegitimate economy fueled by the smuggling of arms, drugs, and other goods. They also withhold hundreds of millions of dollars in customs duties collected at border points in the regions they control, depriving the central government of revenue to fund the country’s reconstruction. Our work has consistently shown that effective reconstruction assistance cannot be provided without three essential elements: a secure environment, a strategic vision for the overall effort, and strong leadership. In Bosnia and Kosovo, humanitarian and other civilian workers were generally able to perform their tasks because they were supported by large NATO-led forces. In Bosnia, the NATO-led forces enforced the cease-fire, ensured the separation and progressive reduction of the three ethnically based armies from more than 400,000 soldiers and militia to 20,000 by 2003, and disbanded paramilitary police units. In Kosovo, the NATO-led force provided security by (1) ensuring that uniformed Yugoslav security forces withdrew from Kosovo as scheduled and remained outside the province and (2) monitoring the demilitarization and transformation of the Kosovo Liberation Army. Despite the relative security in these two locations, various paramilitaries continued to operate, and sporadic violent incidents occurred against international workers and the local population. From 1996 through 2002, eight humanitarian workers were killed in Bosnia and from 1999 to 2002, two humanitarian workers were killed in Kosovo as a result of hostile action. In contrast, throughout the post-conflict period in Afghanistan, humanitarian assistance workers have been at risk due to ongoing security problems caused by domestic terrorism, long-standing rivalries among warlords, and the national government’s lack of control over the majority of the country. The 4,600-troop International Security Assistance Force operates only in Kabul and surrounding areas, while the mission of the approximately 11,000-troop (9,000 U.S. and 2,000 non-U.S. troops), U.S.-led coalition force is to root out the remnants of the Taliban and terrorist groupsnot to provide security. In 2002 and 2003, the deteriorating security situation has been marked by terrorist attacks against the Afghan government, the Afghan people, and the international communityincluding humanitarian assistance workers. Among the incidents were attempted assassinations of the Minister of Defense and the President; rocket attacks on U.S. and international military installations; and bombings in the center of Kabul, at International Security Assistance Force headquarters, and at U.N. compounds. On June 17, 2003, the U.N. Security Council expressed its concern over the increased number of attacks against humanitarian personnel, coalition forces, International Security Assistance Forces, and Afghan Transitional Administration targets by Taliban and other rebel elements. These incidents have disrupted humanitarian assistance and the overall recovery effort. Since the signing of the Bonn Agreement in December 2001, four assistance workers and 10 International Security Assistance Force troops were killed due to hostile action. In our years of work on post-conflict situations, a key lesson learned is that a strategic vision is essential for providing assistance effectively. In Bosnia, the Dayton Agreement provided a framework for overall assistance efforts, but lacked an overall vision for the operation. This hindered both the military and civilian components of the peace operation from implementing the peace agreement. For example, the Dayton Agreement determined that the military operation in Bosnia would accomplish its security objectives and withdraw in about 1 year but did not address the security problem for the ongoing reconstruction efforts after that time. Recognizing this deficiency, NATO, supported by the President of the United States, subsequently provided an overall vision for the mission by first extending the time frame by 18 months and then tying the withdrawal of the NATO-led forces to benchmarkssuch as establishing functional national institutions and implementing democratic reforms. In Afghanistan, the Bonn Agreement sets out a framework for establishing a new government. In addition, multilateral, bilateral, and nongovernmental organizations providing humanitarian assistance and longer-term development assistance have each developed independent strategies, which have resulted in a highly fragmented reconstruction effort. To bring coherence to the effort, the Afghan government developed a National Development Framework and Budget. The framework ’provides a vision for a reconstructed Afghanistan and broadly establishes national goals and policy directions. The budget articulates development projects intended to achieve national goals. However, despite the development of these documents, donor governments and assistance agencies have continued to develop their own strategies, as well as fund and implement projects outside the Afghan government’s national budget. Our work also highlights the need for strong leadership in post-conflict assistance. In Bosnia, for example, the international community created the Office of the High Representative to assist the parties in implementing the Dayton Agreement and coordinate international assistance efforts, but initially limited the High Representative to an advisory role. Frustrated by the slow pace of the agreement’s implementation, the international community later strengthened the High Representative’s authority, which allowed him to annul laws that impeded the peace process and to remove Bosnian officials who were hindering progress. In Afghanistan, WFP recognized the need for strong leadership and created the position of Special Envoy of the Executive Director for the Afghan Region. The special envoy led and directed all WFP operations in Afghanistan and neighboring countries during the winter of 2001–2002, when the combination of weather and conflict was expected to increase the need for food assistance. WFP was thus able to consolidate control of all resources in the region, streamline its operations, and accelerate movement of assistance. WFP points to creation of the special envoy as one of the main reasons it was able to move record amounts of food into Afghanistan from November 2001 through January 2002. In December 2001 alone, WFP delivered 116,000 metric tons of food, the single largest monthly food delivery within a complex emergency operation in WFP’s history. Among the challenges to implementing post-conflict assistance operations that we have identified are ensuring sustained political and financial commitment, adequate human resources and funds to carry out operations, coordinated assistance efforts, and local support. Ensuring sustained political and financial commitment for post-conflict assistance efforts is a key challenge because these efforts take longer, are more complicated, and are more expensive than envisioned. In Bosnia, reconstruction continues after 8 years, and there is no end date for withdrawing international troops, despite the initial intent to withdraw them in 1 year. Corruption is difficult to overcome and threatens successful implementation of the Dayton Peace Agreement. In Kosovo, after 4 years, there is still no agreement on the final status of the territory—whether it will be a relatively autonomous province of Serbia or a sovereign entity. This makes it impossible to establish a time frame for a transition in assistance efforts. Moreover, providing this assistance costs more than anticipated. Total U.S. military, civilian, humanitarian, and reconstruction assistance in Bosnia and Kosovo from 1996 through 2002 was approximately $19.7 billiona figure that significantly exceeded initial expectations. In Afghanistan, the preliminary needs assessment prepared by the international community estimated that between $11.4 billion and $18.1 billion in long-term development assistance would be needed over 10 years to rebuild infrastructure and the institutions of a stable Afghan state. Others have estimated that much more is required. For January 2002 through March 2003, donors pledged $2.1 billion. However, only 27 percent, or $499 million, was spent on major development projects such as roads and bridges; the remainder was spent on humanitarian assistance. Consequently, more than a year and a half of the 10-year reconstruction period has passed and little in the way of reconstruction has begun. For fiscal year 2002, U.S. assistance in Afghanistan totaled approximately $717 million. The Department of Defense estimates that military costs in Afghanistan are currently about $900 million per month, or $10.8 billion annually. Another challenge to effectively implementing assistance efforts is ensuring sufficient personnel to carry out operations and follow-through on pledged funds. In Bosnia and Kosovo, the international community has had difficulties providing civilian staff and the specialized police for security in the volatile post-conflict environment. For example, operations in Bosnia had a 40 percent shortfall in multinational special police trained to deal with civil disturbances from returns of refugees or from efforts to install elected officials. These shortfalls sometimes threatened security in potentially violent situations. In Kosovo, U.N. efforts to establish a civil administration, create municipal administrative structures, and foster democracy were hindered by the lack of qualified international administrators and staff. Delays in getting these staff on the ground and working allowed the Kosovo Liberation Army to temporarily run government institutions in an autocratic manner and made it difficult to regain international control. In Afghanistan, inadequate and untimely donor support disrupted WFP’s food assistance efforts. When the operation began in April 2002, WFP had received only $63.9 million, or 22 percent, of required resources. From April through June—the preharvest period when Afghan food supplies are traditionally at their lowest point—WFP was able to meet only 51 percent of the planned requirement for assistance. WFP’s actual deliveries were, on average, 33 percent below actual requirements for the April 2002 through January 2003 period. Lack of timely donor contributions forced WFP to reduce rations to returning refugees and internally displaced persons from 150 kilograms to 50 kilograms. Lack of donor support also forced WFP and its implementing partners to delay, in some cases for up to 10 weeks, compensation promised to Afghans who participated in the food-for-work and food-for-asset-creation projects. WFP lost credibility with Afghans and nongovernmental organizations as a result. Similarly, resource shortages forced WFP to delay for up to 8 weeks in-kind payments of food in its civil service support program, which aimed to help the new government establish itself. Coordinating and directing assistance activities between and among multiple international donors and military components has been a challenge. In Bosnia, 59 donor nations and international organizationsincluding NATO, the United Nations, the Organization for Security and Cooperation in Europe, the European Union, the World Bank, and nongovernmental organizationshad a role in assistance activities but did not always coordinate their actions. For example, the United Nations and NATO initially could not agree on who would control and reform the Bosnian special or paramilitary police units. For the first year of post-conflict operations, these special police forces impeded assistance activities. The NATO-led force finally agreed to define these special police forces as military units and disbanded them in 1997. In Kosovo, the need for overall coordination was recognized and addressed by giving the United Nations a central role in providing overall coordination for humanitarian affairs, civil administration activities, and institution building. In Afghanistan, coordination of international assistance in general, and agricultural assistance in particular, was weak in 2002. From the beginning of the assistance effort, donors were urged to defer to the Afghan government regarding coordination. According to the United Nations, Afghan government authorities were responsible for coordination, and the international community was to operate and relate to the Afghan government in a coherent manner rather than through a series of disparate relationships. The Afghan government’s attempt to exert leadership over the reconstruction process in 2002 was largely ineffective primarily because the bilateral, multilateral, and nongovernmental assistance agenciesincluding the United Nations, the Food and Agriculture Organization, the Asian Development Bank, the World Bank, the U.S. Agency for International Development (USAID), and othersprepared individual reconstruction strategies, had their own mandate and funding sources, and pursued development efforts in Afghanistan independently. In addition, according to the international community, the Afghan government lacked the capacity and resources to be an effective coordinator, and thus these responsibilities could not be delegated to it. In December 2002, the Afghan government instituted a new coordination mechanism, but this mechanism has not surmounted conditions that prevented effective coordination throughout 2002. Another challenge is ensuring that local political leaders and influential groups support and participate in assistance activities. In Bosnia, the Bosnian-Serb leaders and their political parties opposed the Dayton Peace Agreement and blocked assistance efforts at every turn. For example, they tried to block the creation of a state border service to help all Bosnians move freely and obstructed efforts to combat crime and corruption, thus solidifying hard-line opposition and extremist views. In mid-1997, when donor nations and organizations started linking their economic assistance to compliance with the Dayton Agreement, some Bosnian-Serb leaders began implementing some of the agreement’s key provisions. Although Afghanistan’s central government is working in partnership with the international community to implement the Bonn Agreement and rebuild the country, warlords control much of the country and foster an illegitimate economy. They control private armies of tens of thousands of armed men, while the international communityled by the U.S. militarystruggles to train a new Afghan national army. Meanwhile, the Taliban regime was not party to the Bonn Agreement, and remnants of the regime continue to engage in guerilla attacks against the government and the international community. Over the course of our work, we found that the international community and the United States provide a number of mechanisms for accountability in and oversight of assistance operations. First, the international community has monitored the extent to which post- conflict assistance achieved its objectives through reports from the United Nations and the international coordinating mechanisms. Individual donors and agencies also have monitored their respective on-the-ground operations. For example, the United States monitors aid through the U.S. Agency for International Development and USAID’s inspector general. In Bosnia, the Peace Implementation Council (PIC)—a group of 59 countries and international organizations that sponsors and directs the peace implementation process—oversaw humanitarian and reconstruction programs, set objectives for the operation, monitored progress toward those goals, and established mission reconstruction and other benchmarks in the spring of 1998. The High Representative in Bosnia, whose many responsibilities include monitoring implementation of the Dayton Agreement, reports to the Peace Implementation Council on progress and obstacles in this area. In Kosovo, the High-Level Steering Group (comprised of Canada, France, Germany, Italy, Japan, the United Kingdom, the United States, the European Union, the United Nations, the World Bank, the International Monetary Fund, and the European Bank for Reconstruction and Development) performed a similar guidance and oversight role. It set priorities for an action plan to rebuild Kosovo and to repair the economies of the neighboring countries through the Stability Pact. Moreover, the U.N. interim administration in Kosovo was responsible for monitoring and reporting on all aspects of the peace operation, including humanitarian and economic reconstruction efforts. In Afghanistan, WFP has used a number of real-time monitoring mechanisms to track the distribution of commodities. Our review of WFP data suggested that food distributions have been effective and losses minimal. WFP data indicated that in Afghanistan, on average, 2.4 monitoring visits were conducted on food aid projects implemented between April 2002 and November 2003. In addition to WFP monitors, private voluntary organization implementing partners who distribute food at the local beneficiary level make monitoring visits in areas where WFP staff cannot travel due to security concerns. During our visits to project and warehouse sites in Afghanistan, we observed orderly and efficient storage, handing, and distribution of food assistance. (Because of security restrictions, we were able to conduct only limited site visits in Afghanistan.) WFP’s internal auditor reviewed its monitoring operations in Afghanistan in August 2002 and found no material weaknesses. USAID has also conducted periodic monitoring of WFP activities and has not found any major flaws in its operations. Over the past 10 years, GAO has evaluated assistance efforts in 16 post- conflict emergencies, including those in Haiti, Cambodia, Bosnia, Kosovo, and Afghanistan. Specifically, these evaluations have focused on governance, democracy-building, rule of law, anticorruption, economic, military, food, agriculture, demining, refugee, and internally displaced person assistance projects. In broader terms, our work has examined the progress toward achieving the goals of the Dayton Peace Agreement and the military and political settlements for Kosovo, as well as the obstacles to achieving U.S. policy goals in Bosnia, Kosovo, and Afghanistan. Mr. Chairman, this concludes my prepared statement. I will be happy to respond to any questions you or other members may have. For future contacts regarding this testimony, please call Susan Westin at (202) 512-4128. Key contributors to this testimony were Phillip J. Thomas, David M. Bruno, Janey Cohen, B. Patrick Hickey, Judy McCloskey, Tetsuo Miyabara, and Alexandre Tiersky. Foreign Assistance: Lack of Strategic Focus and Obstacles to Agricultural Recovery Threaten Afghanistan’s Stability. GAO-03-607. Washington, D.C.: June 30, 2003. Rebuilding Iraq. GAO-03-792R. Washington, D.C.: May 15, 2003. Cambodia: Governance Reform Progressing, But Key Efforts Are Lagging. GAO-02-569. Washington, D.C.: June 13, 2002. Issues in Implementing International Peace Operations. GAO-02-707R. Washington, D.C.: May 24, 2002. U.N. Peacekeeping: Estimated U.S. Contributions, Fiscal Years 1996-2001. GAO-02-294. Washington, D.C.: February 11, 2002. Bosnia: Crime and Corruption Threaten Successful Implementation of the Dayton Peace Agreement. T-NSIAD-00-219. Washington, D.C.: July 19, 2000. Bosnia Peace Operation: Crime and Corruption Threaten Successful Implementation of the Dayton Peace Agreement. GAO/NSIAD-00-156. Washington, D.C.: July 7, 2000. Balkans Security: Current and Projected Factors Affecting Regional Stability. NSIAD-00-125BR. Washington, D.C.: April 24, 2000. Bosnia Peace Operation: Mission, Structure, and Transition Strategy of NATO's Stabilization Force. GAO/NSIAD-99-19. Washington, D.C.: October 8, 1998. Bosnia Peace Operation: Pace of Implementing Dayton Accelerated as International Involvement Increased. GAO/NSIAD-98-138. Washington, D.C.: June 5, 1998. Former Yugoslavia: War Crimes Tribunal’s Workload Exceeds Capacity. GAO/NSIAD-98-134. Washington, D.C.: June 2, 1998. | The circumstances of armed conflicts in Bosnia, Kosovo, and Afghanistan differed in many respects, but in all three cases the United States and the international community became involved in the wars and post-conflict assistance because of important national and international interests. Over the past 10 years, GAO has done extensive work assessing post-conflict assistance in Bosnia and Kosovo and, more recently, has evaluated such assistance to Afghanistan. GAO was asked to provide observations on assistance efforts in these countries that may be applicable to ongoing assistance in Iraq. Specifically, GAO assessed (1) the nature and extent of post-conflict assistance in Bosnia, Kosovo, and Afghanistan; (2) essential components for carrying out assistance effectively; (3) challenges to implementation; and (4) mechanisms used for accountability and oversight. Humanitarian assistance following armed conflict in Bosnia, Kosovo, and Afghanistan--as well as in Iraq--is part of a broader, long-term assistance effort comprising humanitarian, military, economic, governance, and democracy-building measures. While the post-conflict situations in these countries have varied, they have certain conditions in common--most notably the volatile and highly politicized environment in which assistance operations take place. During years of work on post-conflict situations, GAO found that three key components are needed for effective implementation of assistance efforts: a secure environment where humanitarian and other civilian workers are able to perform their tasks; a strategic vision that looks beyond the immediate situation and plans for ongoing efforts; and strong leadership with the authority to direct assistance operations. GAO also observed a number of challenges to implementing assistance operations, including the need for sustained political and financial commitment, adequate resources, coordinated assistance efforts, and support of the host government and civil society. Finally, GAO found that the international community and the United States provide a number of mechanisms for accountability in and oversight of assistance operations. |
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Over the past 50 years, as a result of producing tens of thousands of nuclear weapons, DOE’s facilities have also produced radioactive and other toxic substances that pose potential health threats to DOE’s workers and the communities located nearby. These substances include the radionuclides uranium, plutonium, and cesium; toxic metals; organic solvents; and chlorinated hydrocarbons. Epidemiological research—research on the incidence, distribution, and control of disease in a population—provides a scientific evaluation of the health effects of exposing workers and the public to such potentially harmful materials. Such research uses health, exposure, environmental monitoring, and personnel records to analyze health effects and evaluate methods to protect people and prevent harm. As such, epidemiological research is essential to a comprehensive occupational and environmental health program. DOE and its predecessor agencies have a long history in epidemiological research, starting with studies of the survivors of the atom bomb. In the past, much of this research was conducted by DOE or its contractors in secret and concentrated on the correlation between the rates of cancer-related deaths of workers at DOE’s nuclear weapons complex and their exposure to ionizing radiation. A number of separate mortality studies—studies of death rates—have been conducted on approximately 420,000 workers over the past 30 years. However, because the records that researchers needed to study the health effects of working in DOE’s facilities were maintained differently at each facility and were difficult to locate, the types and quality of epidemiological research that could be conducted were limited. To alleviate these problems and facilitate epidemiological research on the health effects of exposure to radiation and other hazards, the Secretarial Panel recommended that DOE continue developing CEDR as a comprehensive repository of data on its workers. In addition, to break down what was perceived as “a wall of secrecy” and to help establish the credibility of and maintain independence in the conduct of DOE’s epidemiological research, the Secretarial Panel recommended opening this research and its supporting data to external investigation and scrutiny. Among other things, the Secretarial Panel recommended that DOE execute a memorandum of understanding with the Department of Health and Human Services (HHS), making HHS responsible for long-range, analytic epidemiological studies, while DOE remained responsible for descriptive epidemiology. As a result, much of the epidemiological research on DOE’s facilities is now managed by HHS. Within HHS’ Centers for Disease Control and Prevention, which implemented this memorandum of understanding, the National Institute for Occupational Safety and Health was made responsible for occupational health research (i.e., research on workers employed by DOE and its contractors), while the National Center for Environmental Health was made responsible for research involving the environment, including communities near DOE’s facilities. The Secretarial Panel also called for greater outside scrutiny by recommending that the National Academy of Sciences (NAS) play a key role in overseeing and monitoring the development of CEDR. In response to the Secretarial Panel, as well as a concurrent request from DOE to provide general scientific advice on the status and direction of DOE’s epidemiological programs, NAS established a Committee on DOE Radiation Epidemiological Research Programs. In 1990, this committee issued a report making a number of recommendations about access to data for researchers outside DOE, the types of data to be included in CEDR, and its future development. The report also noted that use of CEDR will depend on ease of access to the information it contains and researchers’ perception of its value. Beginning in 1990, a DOE contractor facility, the Lawrence Berkeley Laboratory, in Berkeley, California, constructed a prototype, known as preCEDR, to serve as the basis of CEDR. In 1992, DOE made data available through this system. In August 1993, DOE published a catalog of data available in CEDR to assist current and potential users in identifying data sets for potential use and to provide instructions on how to obtain access to these data. Through fiscal year 1994, DOE had received $14.35 million in appropriations for CEDR, of which it had spent $9.45 million for CEDR and related expenses and redirected the remaining $4.9 million to other activities. CEDR is budgeted at $1 million for fiscal year 1995, of which $500,000 was funded as of February 1995. DOE does not have available the uniform demographic, exposure, medical, and environmental data that would make CEDR a comprehensive and valuable epidemiological resource for independent researchers. The Secretarial Panel recommended in 1990 that DOE define a minimum set of data necessary for epidemiological research and routinely maintain and collect these data at all DOE facilities. As part of this effort, in May 1992 DOE requested that each of its facilities, within 3 years, complete an inventory of 123 specific types of records that the Department believed were important for conducting epidemiological studies. We reported on this and other DOE efforts to manage records in a May 1992 report. DOE officials told us that when completed, this records inventory would be included in CEDR and would more easily identify for researchers where these specific types of records are located. Meanwhile, DOE is waiting for its facilities to complete their records inventories, which may take until 1996, before it takes steps to routinely collect and maintain the types of records it has already identified as important. In addition, the NAS committee stated that CEDR should be capable of supporting many kinds of epidemiological studies, including long- and short-term health surveillance, monitoring studies, screening programs, and long-term mortality studies. However, as we reported in December 1993, DOE probably will not establish a comprehensive health surveillance program until at least 1998. Such a program would standardize the documentation of workers’ occupational exposures to radiation and other industrial hazards—such as chemicals, gases, metals, and noise—and could identify trends in workers’ illnesses and injuries that might be related to these exposures. Until such a program is in place, the comprehensive data on health effects and exposure needed for important epidemiological research will not be available for placement in CEDR. Moreover, DOE’s Assistant Secretary for Environment, Safety, and Health told us in October 1994 that standardization of data at DOE’s facilities was a problem that would take several years to resolve. Without the important data necessary to support many types of epidemiological research, CEDR today mainly contains the limited data from DOE-sponsored mortality studies of workers at DOE’s facilities at Oak Ridge, Tennessee; Rocky Flats, Colorado; Hanford, Washington; and elsewhere. Of the 37 data sets in CEDR, 36 contain the retrospective information—data on past incidents—used to conduct these studies. (See app. I.) Some new data will be included when certain ongoing studies are completed. These studies include mortality studies of DOE’s workers at the Idaho National Engineering Laboratory and the Portsmouth Gaseous Diffusion Plant in Ohio; a study of cancer incidence among workers at Rocky Flats by the National Institute for Occupational Safety and Health; and studies from the National Center for Environmental Health, including estimates of the effect of the radiation from Hanford on the air and water in the surrounding area. While adding the results of these studies will make some of the data in CEDR more current, the system will still lack the comprehensive data discussed above that would make it the valuable resource that the Secretarial Panel and NAS recommended. According to many NAS committee members and CEDR users we spoke with, the current lack of comprehensive epidemiological data limits CEDR’s value for research. The Secretarial Panel cautioned DOE that retrospective data would have limited value for future research. Also, members of the NAS committee told us that the data on mortality that CEDR currently contains limit the types of studies that can be done and have minimal value for future research on health effects. NAS noted in its 1994 report that the scope of the data currently in CEDR limits the type of research that can be conducted. The data restrict researchers by defining the groups that can be studied, the variables that can be examined, and the analytic methods that can be applied. Officials at the National Institute for Occupational Safety and Health and the National Center for Environmental Health also stated that CEDR would be of greater value if it contained data on chemical exposures and health effects. These data will not be available until DOE’s health surveillance program is completed. Since CEDR contains only limited retrospective data, researchers who need more information must still locate records at DOE’s facilities, where the records are not consistently maintained. However, despite CEDR’s limited value for health effects research, several NAS experts, current users, and DOE officials believe that it has significant value as a teaching tool for students of epidemiology. DOE has made data from its mortality studies easy for outside researchers to access through CEDR, and thousands of people have accessed the system to see what basic data are available. However, few researchers have used the data for original studies on health effects. In addition, some members of the NAS Committee on Epidemiological Research and some researchers we interviewed noted problems that impair the usability of the data. Difficulties include a lack of data that have not been previously modified by other researchers to meet their specific research needs, data that are hard to work with because they have been edited to protect the privacy of the workers, and data that are not current. In addition, some researchers have encountered problems with the quality of the data, including missing and inconsistent data and inadequate documentation of the studies included. For these reasons, some CEDR users need to review original records at DOE’s facilities but find the records difficult to obtain. For the first time in its history, DOE has made the data used to support its epidemiological research accessible. DOE has created a system that allows researchers easy access to the epidemiological data that were used to conduct its mortality studies, as recommended by both the Secretarial Panel and NAS. In addition to data from past studies, CEDR contains summary information, such as the 1992 annual summary of epidemiological surveillance data from Brookhaven National Laboratory. Potential users of CEDR can obtain basic information about the system’s contents and file structure (but cannot access the actual data) through DOE’s published catalog of available data or via a computer link with CEDR directly or through the Internet. The summaries, which do not provide detailed research data, are available to all Internet users. We were able to access CEDR directly from personal computers using communication software and found the instructions relatively easy to follow. According to the CEDR staff at the Lawrence Berkeley Laboratory, computer logs show that thousands of people have accessed CEDR to find out what basic data are available. To view or obtain the actual data on DOE’s workers, a user must receive authorization from DOE. Getting such authorization is a relatively simple process. The required forms, including confidentiality agreements, are provided in the CEDR catalog. Authorization generally takes about a month. Approved users can obtain data from the Lawrence Berkeley Laboratory via electronic tape or diskette, or through direct transmission if they have specialized equipment. Users we talked with reported no major problems in obtaining data from CEDR. Despite the system’s accessibility, few independent researchers have sought approval from DOE to become authorized CEDR users. In addition, some authorized users have never obtained data from CEDR. DOE provided us with a list of 22 primary users as of September 1994. Some of the users listed, however, were not independent researchers but worked for DOE or its contractors. Some of these users were involved only in loading, testing, and maintaining the system. We identified 13 independent researchers who were primary users and may have obtained data from CEDR. (See table 1.) We confirmed that nine independent researchers had obtained data from CEDR. Three of these users worked on studies funded by the National Institute for Occupational Safety and Health, three worked on university research projects, two conducted research for public health institutes, and one was a private consultant. Researchers using CEDR have encountered a number of problems with the data in the system, limiting the value of these data for their research. Although four of the nine researchers we spoke with found the quality of the data satisfactory for their research purposes, the other five researchers reported the following problems: Original data, not previously edited by other researchers, are not available through CEDR. To protect workers’ privacy, key data elements important for certain research have been removed. The data in the mortality studies are frequently old and have not been updated. Research is hindered by problems with the quality of the data, including missing and inconsistent data and inadequate documentation of studies by prior researchers. It is difficult to conduct research beyond DOE’s initial studies or to fully validate the results, according to many of the researchers we spoke with, because CEDR may not contain data as they were originally recorded at DOE’s facilities. Instead, it generally contains data that have been assembled and edited by prior researchers to answer specific research questions. Some independent researchers using data in CEDR stated that they need the original records to conduct their studies. Two CEDR users conducting studies under contracts with the National Institute for Occupational Safety and Health stated that their research was hampered because the working data sets available in the data base were not original data but had already been edited by prior researchers. Answering new research questions would require obtaining the original records directly from DOE’s facilities. Another CEDR user conducting research for a public health institute told us that the best data for research are the original records found at DOE’s facilities. An official of the National Institute for Occupational Safety and Health, as well as a member of the NAS committee, stated similar views. The extent to which some personal identifiers have been removed from the data in CEDR to protect the privacy of workers has made it difficult for some CEDR users to do more precise calculations or compare records. For example, DOE replaced identifying data elements, such as names and social security numbers, with pseudo-identifiers. DOE also rounded some key dates in workers’ files, such as birth date, hiring date, and death date, if applicable. In contrast, an official from the National Institute for Occupational Safety and Health stated that while the Institute replaces identifying data elements, such as the name and social security number, in data that it releases to the public, it does not truncate dates. Researchers funded by the National Institute for Occupational Safety and Health noted that truncating key dates makes it difficult to do precise calculations of exposure, for which it is necessary to know the exact numbers of days a worker is exposed to a hazard. In addition, replacing identifying data elements makes it difficult to compare various records on workers by, for example, consulting a state or national cancer registry. Consulting such registries is often necessary to obtain a worker’s complete health history. Several NAS committee members and current CEDR users told us that CEDR would be more useful for follow-up studies if mortality data were updated, especially data on those exposed to radiation. The mortality studies included in CEDR were conducted on various workers who were employed between 1942 and 1988 at different DOE facilities. In many of these studies, the most recent mortality data are more than 10 years old. Researchers are unable to follow up on the results of the mortality studies without significant additional work. Researchers we spoke with explained that because the chronic effects of exposure to low doses of radiation may not occur until decades afterwards, workers who have been exposed to radiation should be studied over lengthy periods. One epidemiologist, a member of the NAS committee, stated that unless the workers in a study are monitored until the cause of death has been determined, the results of the study are not conclusive. Other epidemiologists and health physicists from the Centers for Disease Control and some DOE contractors also agreed that the data in CEDR would be more useful if the information on mortality were updated. DOE’s Assistant Secretary for Environment, Safety, and Health said that while she considers it the responsibility of the Department to update these radiation studies, she is not sure that the funding necessary to do this will be available, given the current emphasis on funding research on the occupational health effects of hazardous chemicals rather than radiation. Some researchers working with CEDR have encountered additional problems with the quality of the data. Five primary users we interviewed had encountered missing, inconsistent, or inaccurate data. Measuring exposure was a major problem for these users. Examples provided by the data base manager of a research project sponsored by the National Institute for Occupational Safety and Health included the following: In one file, the researchers identified data on 115 workers that conflicted with other information in the file about the amount of radiation to which these workers had been exposed. The researchers could not determine which data were correct. In another file, researchers found 1,000 people listed as never having been monitored for plutonium exposure. Nevertheless, a date was entered in the field for “first date monitored for plutonium exposure.” The researchers could not tell which information was correct. One CEDR user, who had served on the NAS committee, expressed concern that inexperienced researchers could draw erroneous conclusions on the basis of the data currently in CEDR. In her opinion, DOE should not widely publicize access to CEDR for research until some of the problems with its data have been addressed. In an attempt to identify problems with the quality of the data, DOE is setting up a computer bulletin board for CEDR users to communicate with each other and point out problems they have uncovered. DOE cannot be sure, however, that users will take the time to point out these problems. The Secretarial Panel noted that an important element of epidemiological studies is documentation from the original researcher explaining the study’s methodology, assumptions made, and limitations of the data. While both the Secretarial Panel and the NAS committee recommended that all studies provided to CEDR should be supported with documentation, some researchers using CEDR have found insufficient documentation, making the studies difficult to reconstruct. In one case, a university researcher had to go to the facility that was the subject of the study to resolve problems with the documentation. Researchers using CEDR for the two studies sponsored by the National Institute for Occupational Safety and Health also noted problems caused by inadequate documentation. The staff at the Lawrence Berkeley Laboratory responsible for developing CEDR told us that the researchers who provided the studies often did not comply with documentation guidelines. DOE has recently issued revised guidelines in an attempt to improve compliance. However, this measure will not correct inadequate documentation of those studies already in CEDR, and it is unknown whether future data providers will be more responsive to this revised guidance. Because of the limitations of the data in CEDR, some researchers seek to obtain original records from DOE’s facilities, but they report encountering difficulties. Researchers using CEDR for the two studies sponsored by the National Institute for Occupational Safety and Health reported that difficulties in obtaining original records are inhibiting their research. The two researchers told us that when requesting such records from DOE sites, they encountered either uncooperative contractor staff or a lack of adequate staff resources to service their requests. According to DOE’s Assistant Secretary for Environment, Safety, and Health, CEDR is not really intended to be the sole source of data for epidemiological researchers from the National Institute for Occupational Safety and Health, who are likely to require the original records from DOE’s facilities. She was aware that these researchers and others have had difficulties obtaining records from some DOE sites, and she was attempting to work with the contractors to resolve specific problems on a case-by-case basis. Although DOE is adding to the contents of CEDR, doubt remains whether the data base will become the system that NAS and the Secretarial Panel envisioned, containing uniform and useful demographic, exposure, medical, and environmental data. The DOE Assistant Secretary responsible for the CEDR program acknowledged the system’s current limitations and told us CEDR may not become this comprehensive data base. Moreover, DOE has not attempted the long-range planning needed to achieve this vision. The Secretarial Panel had recommended that DOE, under the guidance of NAS, establish a clear statement of CEDR’s intended goals and uses and an orderly plan for implementing the system. Such a plan would define the steps to be accomplished, milestones for completing the work, and resources needed. NAS committee members told us they were not aware of any long-range planning for CEDR. DOE officials with the Office of Epidemiology and Health Surveillance told us they did not have any long-range plans that identified the specific tasks, priorities, time frames, or resources necessary to develop CEDR into a comprehensive data base containing the types of data that NAS had recommended. DOE currently does not know when comprehensive epidemiological data will be available to put into CEDR, how much it will cost to place these data in CEDR, or how many researchers will potentially use these data. DOE is making progress toward standardizing and maintaining data on the exposure of its current laboratory workers to radiation and other hazards that might affect their health. Rather than develop CEDR into a comprehensive data base, the DOE Assistant Secretary said DOE may consider that the data base’s current function of providing the public with access to its existing epidemiological research data is sufficient. In addition, the Assistant Secretary told us in October 1994 that the budget for CEDR—$1 million in fiscal year 1995—will be reevaluated if usage does not increase substantially. Even with increased usage, however, it is not clear whether CEDR is the most cost-effective and practical means of accomplishing the more limited objective of providing access to DOE’s epidemiological data and data gathered under the memorandum of understanding with HHS. Some researchers and others we spoke with suggested that a far less expensive clearinghouse arrangement might meet this need just as effectively. For example, a clearinghouse might simply list the name of the study, the type of data it contained, and the location of the data. These data would remain at the facility where they were collected. CEDR was originally intended both to help dispel public fears about secretive research at DOE and to be a valuable resource for independent researchers studying the long-term epidemiological and other health effects of working at or living near DOE’s facilities. The current system has removed the “wall of secrecy” surrounding DOE’s epidemiological research by making some of the data available to outside researchers. However, as it now stands, CEDR has limited utility as a research data base. DOE is years away from routinely collecting and maintaining the epidemiological data on its workers that are needed to help make CEDR a comprehensive resource. Consequently, CEDR appears to be at a crossroad, and an overall assessment of the system would help DOE better ensure that it is spending its limited funds wisely. If DOE decides to pursue the original vision for CEDR, it cannot be assured of an orderly implementation without a long-range plan that sets forth the required time frames, resources, and costs and takes into account the ongoing efforts to uniformly collect and maintain epidemiological data throughout DOE’s facilities. If DOE decides not to develop a comprehensive epidemiological data base, it could either maintain or abandon the current system. However, maintaining the current system may not be the most practical and cost-effective means of providing the epidemiological data used in DOE’s past studies and those currently being conducted by HHS. Resolving the problems impairing the usefulness of the data in the current system could cost DOE still more. Finally, if DOE decides to abandon the system, continued openness and public access to its health effects research cannot be ensured without identifying alternative means of collecting and disseminating epidemiological data. We recommend that the Secretary of Energy, in consultation with the Secretary of Health and Human Services, the National Academy of Sciences committee, and representatives of the research community, determine whether the Comprehensive Epidemiologic Data Resource is the most practical and cost-effective means of providing epidemiological data for research on health effects. The assessment should cover the costs, benefits, and time frames for including more comprehensive data on health effects in the data base, as well as alternative means of making these data available to outside researchers. If the Secretary determines that the Comprehensive Epidemiologic Data Resource is not the most practical and cost-effective means of compiling epidemiological data, DOE should determine whether continued funding is appropriate. As requested, we provided a draft of this report to DOE for comment. Although DOE did not provide a written response, the Acting Director of the Office of Epidemiology and Health Surveillance did express her views on the report. Overall, she agreed with the problems we identified with the data. However, she maintained that such limitations are inherent in data collected from historical studies and that these data on former workers are nevertheless important and useful. She noted that DOE is making efforts to update and review these data to resolve inconsistencies. She further noted that DOE is required to remove personal identifiers to protect the identities of individual workers. We fully agree that workers’ privacy must be protected. Nevertheless, as we stated in our report, unlike the National Institute for Occupational Safety and Health, DOE truncates (abbreviates or shortens) key dates, an action that can limit the usefulness of the data. Regarding the need to include data on current workers and residents in CEDR, the Acting Director agreed that the information is vital and will be included as new studies are completed. However, while adding the results of these studies will make some of the data more current, the system will still lack the comprehensive data—such as uniform health, exposure, environmental monitoring, and personnel data—that would make it the valuable resource for new research on health effects that the Secretarial Panel and NAS recommended. The Acting Director also expressed concern about our recommendation that the cost-effectiveness of CEDR be evaluated, noting that most of the costs for CEDR have already been incurred. However, these costs are the costs of the present data base, which contains historical information. DOE does not know what it will cost to include the types of health surveillance data in CEDR that the Secretarial Panel and NAS recommended. If CEDR will not include these data, even the costs of maintaining the current system may not be justified. Finally, the Acting Director told us that DOE has added five primary users of the data base since we completed our audit work and has added over 100 files in the last year. We did not verify or evaluate this information. We also discussed the facts presented in this report with CEDR program officials at the Lawrence Berkeley Laboratory, who generally agreed that these facts were accurate. They provided updated information on users of CEDR and data sets in the system, which we incorporated into the report. We performed our review between February 1994 and May 1995 in accordance with generally accepted government auditing standards. In performing this review, we interviewed officials at DOE headquarters, including the Assistant Secretary for Environment, Safety, and Health. We also interviewed the personnel at the Lawrence Berkeley Laboratory, Berkeley, California, responsible for designing and operating CEDR. We spoke with eight of the nine members of the NAS committee responsible for monitoring progress on CEDR, officials at the National Institute for Occupational Safety and Health and the National Center for Environmental Health, and all authorized CEDR users we were able to contact. (See app. II for details of our scope and methodology.) As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to the Secretary of Energy and other interested parties. We will also make the report available to others on request. Please call me at (202) 512-3841 if you or your staff have any questions. Major contributors to this report are listed in appendix III. The Comprehensive Epidemiologic Data Resource (CEDR) provides a repository of data that have been used to support epidemiological studies conducted on workers at Department of Energy (DOE) facilities. DOE has funded studies on various groups of workers of DOE or its contractors from the 1940s through the 1990s at facilities involved in the production of nuclear weapons. (See table I.1.) More than one study has been included in CEDR for several of these facilities. As of November 1994, CEDR contained a total of 37 data sets, or logically related data files. Table I.1 lists the 36 data sets covering DOE-sponsored studies on workers; an additional data set covers a 1990 study of atom bomb survivors. Of the 36 data sets in CEDR as of that date, 29 are analytic data sets from past studies at DOE’s facilities and 7 are working data sets. Of the 29 analytic data sets from DOE sites or facilities, 28 are from mortality studies. The remaining set came from a morbidity study that examined the incidence and cause of respiratory disease among workers. Table I.1: Data From DOE-Sponsored Studies on Workers Available Through CEDR as of November 1994 The Linde plant and the uranium facility at Mallinckrodt Chemical Works are no longer operational. We analyzed the contents of CEDR as of November 10, 1994. During our review, DOE was adding new data sets and updating others already in the system. For example, DOE added new analytic data sets from 1994 studies on workers at Fernald, Oak Ridge, Mallinckrodt, Savannah River, and other facilities and updated several working data sets, including data on workers at the Mound plant. In addition to the 36 data sets shown in table I.1, seven new analytical data sets, including two from multiple-site studies, were added. A total of 44 data sets were available through CEDR as of December 31, 1994. More additions and updates are planned for 1995. DOE intends to make all the studies that it funds on exposures in or near DOE’s facilities available through CEDR. DOE officials told us that during 1995 they plan to add new data sets to CEDR and update some of the existing data. Among the new data DOE plans to add are analytic data sets from additional studies of workers at several DOE facilities, a summary data set of epidemiological surveillance data for one or more sites, a data set on workers who painted radium dials, and data on exposures at DOE’s Nevada Test Site. Updates are planned to the working data sets for at least two sites and the dosimetry data for several others. To determine how well CEDR meets its intended objective of being a comprehensive resource, we (1) reviewed recommendations from reports by the Secretarial Panel for the Evaluation of Epidemiologic Research Activities and National Academy of Sciences (NAS) on designing and implementing CEDR; (2) interviewed officials at DOE headquarters—including the Assistant Secretary for Environment, Safety, and Health; the Acting Director of the Office of Epidemiology and Health Surveillance; and the CEDR Program Coordinator—and contractor staff at the Lawrence Berkeley Laboratory concerning the current status of CEDR; (3) reviewed relevant DOE directives, program plans, progress reports, and documentation on CEDR; (4) interviewed eight of the nine members (attempts to contact the ninth member were unsuccessful) of the NAS committee responsible for monitoring and reporting on DOE’s progress on CEDR; and (5) interviewed the officials from the National Institute for Occupational Safety and Health and the National Center for Environmental Health who were responsible for the studies conducted under the memorandum of understanding between DOE and the Department of Health and Human Services (HHS). To determine how accessible and usable CEDR is for outside researchers we also (1) obtained authorization from DOE to become CEDR users and accessed and reviewed various files in the system and (2) interviewed CEDR users about their experiences with the system. We also discussed these issues with the officials on the NAS committee and at HHS mentioned above. We performed our review between February 1994 and May 1995 in accordance with generally accepted government auditing standards. We discussed the facts presented in this report with CEDR program officials at the Lawrence Berkeley Laboratory and officials at DOE headquarters and incorporated their views where appropriate. As requested, we also provided a draft of this report to DOE for comment. Although DOE did not formally respond within the 15 days allowed, the views expressed by the Acting Director of the Office of Epidemiology and Health Surveillance and our evaluation of them are presented in the Agency Comments section of this report. Margie K. Shields, Regional Management Representative Randolph D. Jones, Evaluator-in-Charge Daniel F. Alspaugh, Evaluator Jonathan M. Silverman, Communications Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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. | Pursuant to a congressional request, GAO reviewed the Department of Energy's (DOE) epidemiological database, focusing on: (1) whether the database functions as a comprehensive repository of epidemiological data about DOE workers and the communities surrounding DOE facilities; (2) whether the system is accessible to outside researchers; and (3) DOE future plans for the system. GAO found that: (1) the current DOE epidemiological database is not as comprehensive as originally envisioned because it lacks uniform data on laboratory workers' exposure to radiation and other hazardous substances and the health of these workers and residents near DOE facilities; (2) although DOE is trying to standardize its data and develop a more comprehensive employee health surveillance program, it will be at least three years before these goals are reached; (3) although the database is easily accessible, few independent researchers have used it because the data are of limited value for new research; (4) data problems include the lack of raw or updated data, missing and inconsistent data elements, and inadequate research documentation; (5) researchers often have to examine original records, which may be difficult to obtain, to get complete information; (6) DOE is uncertain whether the database will ever be as comprehensive as originally envisioned and it has not undertaken specific long-range plans to make it a comprehensive system; and (7) DOE has not assessed whether the current database or an alternative system would be the most cost-effective and practical means of providing researchers with needed data. |
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Congress passed LDA and IRC sections 4911 and 162(e) at different times and for different purposes. LDA, which was enacted in 1995 and became effective on January 1, 1996, requires organizations that lobby certain federal officials in the legislative and executive branches to register with the Secretary of the Senate and the Clerk of the House of Representatives. It also requires lobbying organizations that register to semiannually report expenditures and certain other information related to their lobbying efforts. Congress intended LDA’s registration and reporting requirements to provide greater public disclosure of attempts by paid lobbyists to influence decisions made by various federal legislative and executive branch officials. Unlike LDA, neither IRC section 162(e) nor section 4911 was intended to facilitate the public disclosure of lobbying. IRC section 4911, which was enacted in 1976, provides for a limit on the amount of lobbying by 501(c)(3) organizations and thereby helps clarify the extent to which these public charities can lobby without jeopardizing their tax-exempt status. Section 162(e), as amended in 1993, denies the federal income tax deductibility of certain lobbying expenses for businesses. It does not otherwise place restrictions on lobbying activities. LDA requires lobbying organizations, such as lobbying firms, to register with the Secretary of the Senate and the Clerk of the House of Representatives no later than 45 days after they first make a lobbying contact on behalf of a client. Also, organizations that have employees who lobby on behalf of the organizations—the organizations on which this report focuses—must register under LDA. The lobbying registration includes such information as the registering organization’s name and address; the client’s name and address; the names of all individuals acting as lobbyists for the client; the general and specific issues to be addressed by lobbying; and organizations substantially affiliated with the client, including foreign organizations. An organization that has employees who lobby on the organization’s behalf must identify itself as both the registering organization and the client, because the organization’s own employees represent the organization. LDA includes minimum dollar thresholds in its registration requirements. Specifically, an organization with employees who lobby on the organization’s behalf does not have to register under LDA unless its total lobbying expenses exceed or are expected to exceed $20,500 during the 6 month reporting period (i. e., January through June and July through December of each year). LDA also includes minimum thresholds for determining which employees must be listed as lobbyists in the lobbying registration. Under LDA, to be listed as a lobbyist, an individual must make more than one lobbying contact and must spend at least 20 percent of his or her time engaged in lobbying activities on behalf of the client or employing organization during the 6 month reporting period. An organization must have both $20,500 in lobbying expenses and an employee who makes more than one lobbying contact and spends at least 20 percent of his or her time lobbying before it is required to register under LDA. All organizations that register under LDA must file lobbying reports with the Secretary of the Senate and Clerk of the House of Representatives for every 6 month reporting period. The lobbying reports filed under LDA by organizations that lobby on their own behalf must include the following disclosures: total estimated expenses relating to lobbying activities (total expenses are reported either by checking a box to indicate that expenses were less than $10,000 or by including an amount, rounded to the nearest $20,000, for expenses of $10,000 or more); a three-digit code for each general issue area (such as AGR for Agriculture and TOB for Tobacco) addressed during lobbyists’ contacts with federal government officials; specific issues, such as bill numbers and references to specific executive branch actions that are addressed during lobbyists’ contacts with federal government officials; the House of Congress and federal agencies contacted; the name of each individual who acted as a lobbyist; and the interest of the reporting organization’s foreign owners or affiliates in each specific lobbying issue. Unless it terminates its registration, once a lobbying organization registers, it must file reports semiannually, regardless of whether it has lobbied during the period. Under LDA, lobbying firms that are hired to represent clients are required to use the LDA lobbying definition. However, LDA gives organizations that lobby on their own behalf and that already use an IRC lobbying definition for tax purposes the option of using the applicable IRC lobbying definition (IRC sections 4911 or 162(e)), instead of the LDA lobbying definition, for determining whether the LDA registration threshold of $20,500 in semiannual lobbying expenses is met and calculating the lobbying expenses to meet the LDA reporting requirement. For all other purposes of the act, including reporting issues addressed during contacts with federal government officials and the House of Congress and federal agencies contacted, LDA provides that organizations using an IRC definition must (1) use the IRC definition for executive branch lobbying and (2) use the LDA definition for legislative branch lobbying. By allowing certain organizations to use an IRC definition to calculate lobbying expenses, LDA helps those organizations avoid having to calculate their lobbying expenses under two different lobbying definitions—the LDA definition for reporting under LDA and the applicable IRC definition for calculating those expenses for tax purposes. An organization that chooses to use the applicable IRC definition, instead of the LDA definition to calculate its lobbying expenses, must use the IRC definition for both lobbying reports filed during a calendar year. However, from one year to the next, the organization can switch between using the LDA definition and using the applicable IRC definition. Under LDA, we are required to report to Congress on (1) the differences among the definitions of certain lobbying-related terms found in LDA and the IRC, (2) the impact that any differences among these definitions may have on filing and reporting under the act, and (3) any changes to LDA or to the appropriate sections of the IRC that the Comptroller General may recommend to harmonize the definitions. As agreed with your offices, our objectives for this report were to describe the differences between the LDA and IRC section 4911 and 162(e) determine the impact that differences in the definitions may have on registration and reporting under LDA, including information on the number of organizations using each definition and the expenses they have reported; and identify and analyze options, including harmonizing the three definitions, that may better ensure that the public disclosure purposes of LDA are realized. To identify the differences among the LDA and IRC lobbying definitions, we reviewed the relevant statutory provisions. We also reviewed related regulations and guidance, including guidance issued by the Secretary of the Senate and the Clerk of the House of Representatives. We also reviewed journal articles and an analysis of the definitions of lobbying and met with registered lobbyists, representatives of nonprofit and business organizations, and other parties who were knowledgeable about the different statutory definitions and their effect on lobbying registrations. To determine the differences among the LDA and IRC lobbying definitions regarding the number of federal executive branch officials covered for contacts dealing with nonlegislative matters, we reviewed the LDA and IRC statutory definitions of covered executive branch officials that apply for lobbying contacts on nonlegislative matters. To determine the number of officials covered by these definitions, we counted the number of Executive Schedule Levels I through V positions listed in sections 5312 through 5316 of Title 5 of the United States Code. In several cases, these sections of Title 5 list federal boards and commissions as having Executive Schedule positions but do not specify the number of such positions. In these cases, we did not attempt to determine the number of positions and counted only one position for each such listed board or commission. Thus, our estimate of the number of Executive Schedule Levels I through V positions is understated. Further, to determine the number of officials covered, we obtained data from The United States Government Manual 1998/1999 on cabinet-level officials and the number of offices in the Executive Office of the President; the Department of Defense (DOD) on military personnel ranked 0-7 and above as of September 30, 1997; the U.S. Coast Guard, the Public Health Service, and the National Oceanic and Atmospheric Administration (NOAA) on the number of commissioned corps ranked 0-7 and above as of February 1999; the Office of Personnel Management’s (OPM) Central Personnel Data File on the number of Schedule C officials as of September 30, 1997; and Budget of the United States Government, Appendix, Fiscal Year 1999 on the actual full-time-equivalent employment for fiscal year 1997 in each office of the Executive Office of the President. To determine the impact that differences in the definitions may have on registration and reporting under LDA, we first had to define how we would measure impact. We defined impact as (1) the way differences among the definitions can affect who must register with the Secretary of the Senate and the Clerk of the House of Representatives and what lobbying expenses and related information must be included in those reports; (2) the number of organizations that reported using the LDA and IRC section 4911 and 162(e) definitions when reporting lobbying expenses and related information for July through December 1997; and (3) the lobbying expenses reported under each of the three definitions for this period. To determine the way differences among the definitions can affect who must register and what they must report, we reviewed, analyzed, and categorized the general effects of the differences that we found among the definitions under our first objective. We also looked for possible effects during our reviews of statutes, regulations, guidance, and journal articles. Finally, we discussed the possible effects of the differences among the definitions with registered lobbyists, representatives of nonprofit and business organizations, and other knowledgeable parties. To identify the number of organizations that reported using the definitions of lobbying in LDA or IRC to calculate their lobbying expenses for July through December 1997 and to determine the lobbying expenses reported under LDA that were calculated using one of the three definitions, we obtained data on all lobbying reports filed with the Secretary of the Senate during this period from the new lobbying database of the Senate Office of Public Records. Only the lobbying reports for one semiannual period—July through December 1997—were available from the new database when we began our analysis in October 1998. Using the database, we identified the number of organizations that lobbied on their own behalf and filed reports for the period July through December 1997. We also analyzed the reported expenses of these organizations and determined the mean and median expenses reported under each of the three definitions. Because lobbyists did not round their lobbying expenses to the nearest $20,000 in some cases, as required by LDA, we rounded all reported expenses to the nearest $20,000 before conducting our analysis. Officials from the Senate Office of Public Records said that they had not verified the data in the database, and we did not perform a reliability assessment of the data contained in this database. However, we reviewed the lobbying reports of all organizations whose lobbying expenses were recorded in the database as being less than $10,000, which is the minimum amount required to be recorded on the lobbying form, but had erroneous Senate Office of Public Records codes. We corrected any errors we found before conducting our analysis. To identify and analyze options that may better ensure that the public disclosure purposes of LDA are realized, we relied on (1) information we collected from our review of the relevant literature on lobbying, including statutory provisions, regulations, and guidance; and (2) our findings for our first two objectives. We did our work during two periods. From November 1996 through April 1997, we reviewed the differences in the LDA and IRC definitions of lobbying-related terms. As agreed by the Senate Committee on Governmental Affairs and the House Subcommittee on the Constitution, Committee on the Judiciary, we postponed completing our review until data on lobbying expenses became available. The second period of our review was from October 1998 through January 1999, after we obtained data on lobbying expenses from the new lobbying database of the Senate Office of Public Records. We did our work in Washington, D.C., and in accordance with generally accepted government auditing standards. We obtained technical comments on a draft of this report from the Internal Revenue Service and incorporated changes in the report as appropriate. The Clerk of the House of Representatives, the Secretary of the Senate, and the Department of the Treasury had no comments on the report. The contacts, activities, and expenses that are considered to be lobbying under the LDA lobbying definition differ in many ways from those covered by the IRC definitions. Most significantly, LDA covers contacts only with federal officials; the IRC definitions cover contacts with officials in other levels of government as well as attempts to influence the public through grassroots lobbying. Also, the definitions differ in their coverage of contacts with federal officials depending on whether the contact was on a legislative or nonlegislative matter. Table 1 and the following sections present some of the key differences in coverage under the different definitions. Appendix I discusses these differences in more detail; and appendix II provides a detailed table of the differences among the definitions concerning coverage of the federal, state, and local levels of government. LDA covers only the lobbying of federal government officials, so organizations using the LDA definition would not include any information in their lobbying reports about lobbying state and local officials. But both IRC lobbying definitions cover contacts with state government officials to influence state legislation. In addition, both IRC definitions cover contacts with local government officials to influence local government legislation, but IRC section 162(e) provides an exception for contacts with local legislative officials regarding legislation of direct interest to the organization. The LDA lobbying definition covers only lobbying of federal government officials, so organizations using the LDA definition would not include in their lobbying reports any information related to attempts to influence legislation by affecting the opinions of the public—that is, grassroots lobbying. Both IRC lobbying definitions cover grassroots lobbying, such as television commercials; newspaper advertisements; and direct mail campaigns to influence federal, state, and local legislation, including referenda and ballot initiatives. To determine if a lobbyist’s contact with a federal government official is covered by one of the three lobbying definitions, one must (1) have certain information about the government official, such as whether the official is in the legislative or executive branch; and (2) know whether a legislative or nonlegislative subject was addressed during the contact. The three definitions differ in many ways regarding the officials and subjects they cover. The LDA definition does not distinguish between covered legislative and executive branch officials on the basis of whether the subject of the lobbyist’s contact is legislative or nonlegislative in nature. The IRC definitions define covered officials differently, depending on whether the subject of the lobbying contact was legislative or nonlegislative in nature. When the subject of a lobbyist’s contact concerns a nonlegislative matter, such as a regulation, grant, or contract, LDA covers more officials than the IRC definitions cover. When the subject of a lobbyist’s contact is a legislative matter, both IRC definitions potentially cover more levels of executive branch officials than the LDA definition does. Under LDA, lobbying organizations’ contacts with all Members of Congress and employees of Congress and approximately 4,600 executive branch officials are covered for either legislative or nonlegislative subjects. In contrast, under IRC section 4911, contacts with legislative or executive branch officials, including Members of Congress and the President, about any nonlegislative subject do not count as lobbying. Also, under IRC section 162(e), contacts with Members of Congress and other legislative branch officials do not count as lobbying if they deal with a nonlegislative subject; and very few executive branch officials are covered if contacts are about nonlegislative matters. As table 2 shows, LDA covers 10 times the number of executive branch officials that IRC section 162(e) covers for nonlegislative matters; it also contrasts with IRC section 4911, which does not cover federal officials for nonlegislative contacts. For contacts on legislation, LDA covers contacts with Members of Congress, employees of Congress and the approximately 4,600 executive branch officials shown in table 2. In contrast, for contacts on legislation, the IRC definitions cover Members of Congress, employees of Congress, and any executive branch officials who may participate in the formulation of the legislation. Therefore, for contacts addressing legislation, the IRC definitions potentially cover more levels of executive branch officials than the LDA definition does. LDA contains 19 exceptions to the definition of lobbying; however, for the most part, these exceptions make technical clarifications in the law and do not provide special exceptions for particular groups. The IRC section 162(e) definition has one exception in the statute, which is for contacts with local government legislative branch officials on legislation of direct interest to the organization. In addition, IRC section 162(e) has seven exceptions, which are provided for by Treasury Regulations and which are technical clarifications of the statutory provisions. IRC section 4911 has five exceptions, and two of these could allow a significant amount of lobbying expenses to be excluded from IRC section 4911 coverage. The first is an exception for making available the results of nonpartisan analysis, study, or research. Due to this exception, IRC section 4911 does not cover 501(c)(3) organizations’ advocacy on legislation as long as the organization provides a full and fair exposition of the pertinent facts that would enable the public or an individual to form an independent opinion or conclusion. The second significant exception under IRC section 4911 is referred to as the self-defense exception. This exception excludes from coverage lobbying expenses related to appearances before, or communications to, any legislative body with respect to a possible decision of such body that might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization. According to IRS officials, this exception provides that a 501(c)(3) nonprofit tax-exempt organization can lobby legislative branch officials on matters that might affect its tax-exempt status or the activities it can engage in without losing its tax-exempt status, and such lobbying will not be counted under the IRC section 4911 definition. According to IRS officials, this exception does not cover lobbying on state or federal funding. For those organizations that lobby on their own behalf, the choice of using either the LDA definition or the applicable IRC definition can significantly affect whether they must register with the Secretary of the Senate and the Clerk of the House of Representatives. In addition, the lobbying definition an organization uses can materially affect the information, such as federal- level lobbying, it must disclose on its semiannual lobbying report. Allowing organizations to use an IRC definition for LDA reporting can result in organizations disclosing information that may not be comparable, is unrelated to LDA’s purpose, or that falls short of what LDA envisions. However, of the 1,824 organizations that lobbied on their own behalf and filed reports under LDA from July through December 1997, most reported using the LDA definition. Those organizations that used the IRC section 162(e) definition had the highest mean and median expenses reported. The lobbying definition an organization uses, which governs how it calculates lobbying expenses, can affect whether the organization is required to register under LDA. If (1) the actual or expected expenses of an organization lobbying on its own behalf exceed or are expected to exceed the $20,500 LDA threshold for a 6-month period, and (2) the organization has an employee that makes more than one lobbying contact and spends at least 20 percent of his or her time lobbying during the same 6-month period, then the organization must register. Lobbying activities and contacts that count toward the $20,500 and 20 percent thresholds depend on which lobbying definition—LDA, IRC section 4911, or IRC section 162(e)—an organization uses. If an activity is not covered under a particular definition, then the expenses related to that activity do not count toward the lobbying expenses of an organization using that definition. In some cases, allowing organizations to use an IRC definition instead of the LDA definition could result in the organization having covered lobbying expenses below the $20,500 threshold and no employees who spend 20 percent of their time lobbying; however, if the organization used the LDA definition, its lobbying expenses and activities could be above the LDA registration thresholds. For example, for an organization that primarily focuses its lobbying efforts on lobbying federal officials about nonlegislative matters, using an IRC definition is likely to result in lower covered lobbying expenses than using the LDA definition and, therefore, could result in an organization not meeting the $20,500 registration threshold. This could occur because any contacts with legislative branch officials about nonlegislative matters are not covered under either IRC sections 4911 or 162(e). Also, for contacts on nonlegislative matters, IRC section 4911 does not cover executive branch officials, and IRC section 162(e) covers only about one-tenth of the executive branch officials that LDA covers. Thus, an organization could spend over $20,500 lobbying federal officials who are covered by LDA for nonlegislative matters, with the possibility that none of these expenses would count toward the registration requirement if the organization used an IRC definition. It is also possible that an organization could have over $20,500 in lobbying expenses and one or more employees spending 20 percent of their time lobbying by using an IRC definition, when using an LDA definition would put its covered expenses below $20,500 and put its lobbying employees under the 20-percent threshold. For example, the IRC definitions potentially cover contacts with more executive branch officials than LDA covers when those contacts are about legislation. So, if an organization lobbies executive branch officials not covered under LDA in order to influence legislation, those contacts would count as lobbying under the IRC definitions but not under the LDA definition. This could result in the organization’s covered lobbying expenses being above the $20,500 threshold and in an employee’s time spent on lobbying being above the 20 percent threshold. However, no data exist to determine the number of organizations (1) that are not registered under LDA as a result of using an IRC definition or (2) that met the thresholds under an IRC definition but not under the LDA definition. Similarly, the individuals who must be listed as lobbyists on an organization’s lobbying registration can be affected by the choice of definition. Individuals must be listed as lobbyists on the registration if they make more than one lobbying contact and spend at least 20 percent of their time engaged in lobbying activities for their employers during the 6 month reporting period. Using an IRC definition instead of the LDA definition could result in an individual not being listed as a lobbyist on his or her organization’s registration or subsequent semiannual report. For example, this could occur if a lobbyist spends most of his or her time lobbying high-level officials at independent federal agencies about regulations, contracts, or other nonlegislative matters, because the IRC definitions do not consider such contacts as lobbying. Just as the choice of definition affects whether an organization must register under LDA with the Secretary of the Senate and the Clerk of the House of Representatives, the choice of definition also can materially affect the information that is reported semiannually. Because an organization can switch from using the LDA definition one year to using the applicable IRC definition another year and vice versa, organizations can use the definitions that enable them to minimize what they must disclose on their lobbying reports. The three definitions were written at different times for different purposes, so what they cover differs in many ways, both subtle and substantial. These differences result in organizations that use one definition reporting expenses and related information that organizations using another definition would not report. The reported expenses and other information may provide less disclosure and may be unrelated to what is needed to fulfill LDA’s purpose of publicly disclosing the efforts of lobbyists to influence federal officials’ decisionmaking. Whether an organization uses the LDA definition or the applicable IRC definition, it is required to disclose on its lobbying report its total estimated expenses for all activities covered by the definition. Thus, organizations using the LDA definition must report all expenses for lobbying covered federal government officials about subject matters covered by LDA. Similarly, organizations using an IRC definition must disclose on their lobbying reports all expenses for activities that are covered by the applicable IRC definition, including federal, state, and local government lobbying and grassroots lobbying. However, organizations report only their total expenses, so the lobbying reports do not reveal how much of the reported expenses were for individual activities and for what level of government. Thus, even if an organization using the LDA definition reported the same total lobbying expenses as an organization using an IRC definition, it would be impossible to tell from the lobbying reports how similar the two organizations’ federal lobbying efforts may have been. In addition, an organization reporting under an IRC definition would be, in all likelihood, including expenses that are not related to LDA’s focus on federal lobbying because the IRC definitions go beyond lobbying at the federal level. An organization reporting under an IRC definition could also be reporting less information on federal level lobbying than would be provided under the LDA definition, which Congress wrote to carry out the public disclosure purpose of LDA. For example, the IRC definitions include far fewer federal officials in their definitions for lobbying on nonlegislative matters. Also, an organization using the IRC section 4911 definition could exclude considerable lobbying expenses from its lobbying report, if its lobbying fell under the IRC section 4911 exception for nonpartisan analysis or the self- defense exception. For example, in 1995, a 501(c)(3) tax-exempt nonprofit organization lobbied against legislation that would have sharply curtailed certain activities of charities. On its 1995 tax return, the organization, which used the IRC section 4911 definition to calculate its lobbying expenses for tax purposes, reported about $106,000 in lobbying expenses. However, in a letter to a congressional committee, the organization stated that its 1995 lobbying expenses totaled over $700,000; it cited the self- defense exception as a reason for excluding about $594,000 in lobbying expenses from its tax return. In contrast to reporting expenses, when reporting information other than expenses on the LDA lobbying reports, organizations are required to report only information related to federal lobbying. This information includes issues addressed during lobbying contacts with federal government officials and the House of Congress and federal agencies contacted. Therefore, if an organization uses an IRC definition and includes expenses for state lobbying and grassroots lobbying in its total lobbying expenses, it is not required to report any issues or other information related to those nonfederal expenses. Further, LDA provides that for reporting information other than expenses for contacts with federal executive branch officials, organizations using an IRC definition to calculate their expenses must use the IRC definition for reporting other information. But for contacts with federal legislative branch officials, organizations using an IRC definition to calculate their lobbying expenses must use the LDA definition in determining what other information, such as the issues addressed during lobbyists’ contacts and the House of Congress contacted, must be disclosed on their reports. Because of this latter provision, organizations that use an IRC definition and lobby legislative branch officials about nonlegislative matters are required to disclose the issues addressed and the House of Congress contacted, even though they are not required to report the expenses related to this lobbying. For the July through December 1997 reporting period, lobbying firms that had to use the LDA definition to calculate lobbying income filed reports for 9,008 clients. In addition, for this reporting period, 1,824 organizations that lobbied on their own behalf and were able to elect which definition to use in calculating their lobbying expenses filed lobbying reports. Of the 1,824 organizations, 1,306 (71 percent) used the LDA definition to calculate their lobbying expenses. Another 157 organizations (9 percent) elected to use the IRC 4911 definition. Finally, 361 organizations (20 percent) used the IRC 162(e) definition to calculate their lobbying expenses. (See table 3.) Data do not exist that would enable us to estimate the number of organizations that may not be registered because they used an IRC definition but would have had to register had they used the LDA definition. Because computerized registration data were available only for one 6- month period when we did our analysis, we did not analyze changes in registrations over time. Thus, we do not know whether, or to what extent, organizations switch between definitions from year to year as allowed by LDA. Organizations that lobbied on their own behalf and reported using the IRC section 162(e) definition had the highest mean and median expenses reported. These organizations had 87 percent higher mean lobbying expenses than organizations that reported using the LDA definition and 58 percent higher mean lobbying expenses than those using the IRC section 4911 definition. Organizations that reported using the IRC section 162(e) definition had $180,000 in median expenses; organizations that reported using the LDA definition and those that reported using the IRC section 4911 definition each had median expenses of $80,000. Organizations that lobby on their own behalf do not have to register if their lobbying expenses for the 6 month reporting period are below $20,500. However, until a registered organization terminates its registration, it must file lobbying reports, even if its lobbying expenses are below the $20,500 registration threshold. activities. Therefore, data do not exist that would help explain the reasons for the differences. Table 4 shows the total, mean, and median expenses for organizations using each of the three lobbying definitions that reported having $10,000 or more in lobbying expenses from July to December 1997. Table 4 includes only data on organizations reporting lobbying expenses of $10,000 or more, because organizations with less than $10,000 in expenses check a box on the LDA reporting form and do not include an amount for their expenses. Because, as shown in table 3, many more of these organizations used the LDA definition than used either of the IRC definitions, it follows that the largest total amount of all expenses reported was under the LDA definition. Because the differences among the three lobbying definitions can significantly affect who registers and what they report under LDA, the current statutory provisions do not always complement LDA’s purpose. As discussed earlier, allowing organizations to use an IRC definition for LDA purposes can result in organizations (1) not registering under LDA, (2) disclosing information that may not be comparable, and (3) disclosing information that is unrelated to LDA’s purpose or that falls short of what LDA envisions. Options for revising the statutory framework exist; LDA requires us to consider one option, harmonizing the definitions; and we identified two other options on the basis of our analysis. Those options are eliminating the current authorization for businesses and tax-exempt organizations to use the IRC lobbying definitions for LDA reporting and requiring organizations that use an IRC lobbying definition to include only expenses related to federal lobbying covered by that IRC definition when the organizations register and report under LDA. The options address, in varying degrees, the effects of the differences on registration and reporting, but all have countervailing effects that must be balanced in determining what, if any, change should be made. In addition to charging us with analyzing the differences among the three lobbying definitions and the impact of those differences on organizations’ registration and reporting of their lobbying efforts, LDA charges us with reporting any changes that we may recommend to harmonize those definitions. Harmonization implies the adoption of a common definition that would be used for LDA’s registration and reporting purposes and for the tax reporting purposes currently served by the IRC definitions. Harmonizing the three lobbying definitions would ensure that organizations would not have the burden of keeping track of their lobbying expenses and activities under two different definitions–one for tax purposes and another for LDA registration and reporting purposes. Requiring the use of a common definition would also mean that no alternative definitions could be used to possibly avoid LDA’s registration requirement and that all data reported under the common definition would be comparable. However, developing a lobbying definition that could be used for the purposes of LDA, IRC section 4911, and IRC section 162(e) would require Congress to revisit fundamental decisions it made when it enacted each definition. For example, if a common definition included state lobbying expenses that are included under the current IRC definitions, then the current objective of LDA to shed light on efforts to influence federal decisionmaking would essentially be rewritten and expanded. On the other hand, if a common definition did not include state lobbying expenses, fundamental decisions that were made when the statutes containing the IRC definitions were written would be similarly modified. Adopting a harmonized definition of lobbying could result in organizations disclosing less information on lobbying reports, if the new definition covered less than what is covered by the current LDA definition. In addition, a new definition would not be used only by organizations lobbying on their own behalf, which currently have the option of using an IRC definition for LDA reporting, but also by lobbying firms, which currently must use the LDA definition for their clients’ lobbying reports. Eliminating the current authorization for using the IRC lobbying definitions for LDA purposes would mean that consistent registration and reporting requirements would exist for all lobbyists, and the requirements would be those developed by Congress specifically for LDA. This would result in all organizations following the LDA definition for LDA purposes; thus, only the data that Congress determined were related to LDA’s purposes would be reported. However, this option could increase the reporting burden of the relatively small number of organizations currently using the IRC definitions under LDA, because it would require them to track their lobbying activities as defined by LDA while also tracking the activities covered under the applicable IRC lobbying definition. The last option we identified would require organizations that elected to use an IRC definition for LDA to use only expenses related to federal lobbying efforts as defined under the IRC definitions when they determine whether they should register and what they should report under LDA. This would improve the alignment of registrations and the comparability of lobbying information that organizations reported, because organizations that elected to use the IRC definitions would no longer be reporting to Congress on their state, local, or grassroots lobbying. The reporting of expenses under this option would be similar to the reporting of all other information required under LDA, such as issues addressed and agencies contacted, which are based on contacts with federal officials. However, this option would only partially improve the comparability of data being reported by organizations using different definitions. Differences in the reported data would remain because the LDA and IRC definitions do not define lobbying of federal officials identically. LDA requires tracking contacts with a much broader set of federal officials than do the IRC definitions when lobbying contacts are made about nonlegislative matters. In addition, because differences would remain between the LDA and IRC definitions of lobbying at the federal level under this option, organizations might still avoid registering under LDA and might still report information that would differ from that reported by organizations using the LDA definition. For example, because the IRC lobbying definitions include fewer federal executive branch officials when a contact is about a nonlegislative matter, organizations using an IRC definition might still have expenses under the $20,500 threshold for lobbying; whereas, under the LDA definition they might exceed the threshold. Finally, this option could impose some additional reporting burden for the relatively small number of organizations currently using IRC definitions for LDA purposes. Reporting only federal lobbying when they use an IRC definition could result in some increased recordkeeping burden if these organizations do not currently segregate such data in their recordkeeping systems. The three lobbying definitions we reviewed were adopted at different times to achieve different purposes. What they cover differs in many subtle and substantial ways. LDA was enacted to help shed light on the identity of, and extent of effort by, lobbyists who are paid to influence decisionmaking in the federal government. IRC section 4911 was enacted to help clarify the extent to which 501(c)(3) organizations could lobby without jeopardizing their tax-exempt status, and IRC section 162(e) was enacted to prevent businesses from deducting lobbying expenses from their federal income tax. Because the IRC definitions were not enacted to enhance public disclosure concerning federal lobbying, as was the LDA definition, allowing organizations to use the IRC definitions for reporting under LDA may not be consistent with achieving the level and type of public disclosure that LDA was enacted to provide. Allowing organizations to use an IRC definition instead of the LDA definition for calculating lobbying expenses under LDA can result in some organizations not filing lobbying registrations, because the use of the IRC definition could keep their federal lobbying below the LDA registration thresholds. On the other hand, under certain circumstances, organizations could meet the thresholds when using the IRC definition but would not do so if they used the LDA definition. We do not know how many, if any, organizations are not registered under LDA that would have met the registration thresholds under LDA but not under the applicable IRC definition. Giving organizations a choice of definitions to use each year can undermine LDA’s purpose of disclosing the extent of lobbying activity that is intended to influence federal decisionmaking, because organizations may disclose very different information on lobbying reports, depending on which definition they use. When an organization can choose which definition to use each year, it can choose the definition that discloses the least lobbying activity. Further, if an organization uses an IRC definition for its lobbying report, the report can include expenses for state, local, and grassroots lobbying that are unrelated to the other information on the report that only relates to federal lobbying. Also, if an organization uses an IRC definition, its lobbying report can exclude expenses and/or other information about lobbying that is not covered under the selected IRC definition (e.g., contacts about nonlegislative matters) but that nevertheless constitutes an effort to influence federal decisionmaking. In this situation, less information would be disclosed than LDA intended. Because the differences among the LDA and IRC lobbying definitions can significantly affect who registers and what they report under LDA, the use of the IRC definitions can conflict with LDA’s purpose of disclosing paid lobbyists’ efforts to influence federal decisionmaking. Options for reducing or eliminating these conflicts exist. These options include (1) harmonizing the definitions, (2) eliminating organizations’ authorization to use an IRC definition for LDA purposes, or (3) requiring those that use an IRC definition to include only expenses related to federal lobbying under the IRC definition when they register and report under LDA. The options, to varying degrees, could improve the alignment of registrations and the comparability of reporting with Congress’ purpose of increasing public disclosure of federal lobbying efforts. However, each option includes trade-offs between better ensuring LDA’s purposes and other public policy objectives and could result in additional reporting burden in some cases. In our opinion, the trade-offs involved in the option of harmonizing the definitions are disproportionate to the problem of LDA registrations and reporting not being aligned with LDA’s purpose. Harmonizing the definitions would best align registrations and reporting with LDA’s purposes if LDA’s definition is imposed for tax purposes as well, which would significantly alter previous congressional decisions about how best to define lobbying for tax purposes. Adopting a common lobbying definition that includes activities, such as state lobbying, that are covered under the current IRC definitions would require a rewrite and expansion of LDA’s objective of shedding light on efforts to influence federal decisionmaking. Such major changes in established federal policies that would be required to harmonize the definitions appear to be unwarranted when only a small portion of those reporting under LDA use the IRC definitions. The trade-offs for the other two options are less severe. Eliminating organizations’ authorization to use a tax definition for LDA purposes would ensure that all lobbyists register and report under the definition that Congress wrote to carry out LDA’s purpose. However, eliminating the authorization likely would impose some additional burden on the relatively small number of organizations currently using IRC definitions for LDA. Requiring that only expenses related to federal-level lobbying under the IRC definitions be used for LDA purposes would not align reporting with LDA’s purposes as thoroughly as eliminating the authorization to use an IRC definition for LDA would. Under this option organizations could still avoid registering under LDA when the use of an IRC definition results in total expenses falling below the LDA registration threshold. The option also could impose some additional recordkeeping burden for the relatively small number of organizations currently using the IRC definitions. If Congress believes that the inclusion of nonfederal lobbying expenses and the underreporting of lobbying efforts at the federal level due to the optional use of the IRC lobbying definitions seriously detract from LDA’s purpose of public disclosure, then it should consider adopting one of two options. Congress could remove the authorization for organizations to use an IRC definition for reporting purposes. In this case, data reported to the Senate and House would adhere to the LDA definition, which Congress enacted specifically to achieve LDA’s public reporting purpose. Alternatively, Congress could allow organizations to continue using the IRC definitions but require that they use only the expenses related to federal-level lobbying that those definitions yield when they register and report under LDA. The data reported would be more closely aligned with LDA’s purpose of disclosing federal level lobbying efforts, but some differences would remain between the data so reported and the data that would result from applying only the LDA definition. If either of these options were considered, Congress would need to weigh the benefit of reporting that would be more closely aligned with LDA’s public disclosure purpose against the additional reporting burden that some organizations would likely bear. On February 11, 1999, we sent a draft of this report for review and comment to the Clerk of the House of Representatives, the Secretary of the Senate, the Secretary of the Treasury, and the Commissioner of the Internal Revenue Service. Representatives of the Clerk of the House of Representatives, the Secretary of the Senate, and the Secretary of the Treasury told us that no comments would be forthcoming. On February 17, 1999, we met with officials from the Internal Revenue Service, and they provided technical comments on a draft of this report. On the basis of their comments, we made changes to the report as appropriate. In a letter dated March 5, 1999, the Chief Operations Officer of the Internal Revenue Service stated that IRS had reached general consensus with us on the technical matters in the report. We are sending copies of this report to Senator Carl Levin; Senator Ted Stevens; Senator William V. Roth, Jr., Chairman, and Senator Daniel P. Moynihan, Ranking Minority Member, Senate Committee on Finance; Representative Bill Archer, Chairman, and Representative Charles B. Rangel, Ranking Minority member, House Committee on Ways and Means; the Honorable Gary Sisco, Secretary of the Senate; the Honorable Jeff Trandahl, Clerk of the House of Representatives; the Honorable Robert E. Rubin, Secretary of the Treasury; and the Honorable Charles O. Rossotti, Commissioner of Internal Revenue. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix IV. Please call me on (202) 512-8676 if you have any questions. The types of activities and contacts that are covered by the Lobbying Disclosure Act of 1995 (LDA) lobbying definition are significantly different from those covered under the Internal Revenue Code (IRC) definitions. First, LDA does not cover grassroots lobbying. The IRC lobbying definitions cover grassroots lobbying, such as television advertisements and direct mail campaigns, that are intended to influence legislation at the federal, state, or local levels. Second, LDA covers lobbying only at the federal level. However, both IRC definitions cover lobbying of federal officials, as well as state and local government officials. The IRC definitions potentially cover contacts with more levels of executive branch officials than LDA covers when those contacts are about legislation. However, when contacts are about nonlegislative subject matters, such as regulations or policies, LDA covers contacts with a broader range of federal officials than the IRC definitions. Further, LDA’s definition of lobbying includes legislative matters and an extensive list of nonlegislative matters. IRC section 4911 only covers lobbying contacts that address specific legislative proposals. IRC section 162(e) covers lobbying contacts on legislative and nonlegislative subjects, but its coverage of legislative subjects is somewhat more limited than LDA’s coverage, and its coverage of nonlegislative subjects is not clearly defined. Grassroots lobbying—efforts to influence legislation by influencing the public’s view of that legislation—is covered under the IRC definitions but not under the LDA definition. Grassroots lobbying campaigns can use such means as direct mailings and television, radio, and newspaper advertisements and can be very expensive. Both IRC section 4911 and IRC section 162(e) cover grassroots lobbying at the federal, state, and local levels. However, IRC section 4911 has a narrower definition of grassroots lobbying than IRC section 162(e) does. Under IRC section 4911, grassroots lobbying is defined as any attempt to influence legislation through an attempt to affect the opinions of the general public or any segment thereof. To be considered grassroots lobbying under IRC section 4911, a communication with the public must refer to a specific legislative proposal, reflect a view on such legislative proposal, and encourage the recipient of the communication to take action with respect to such legislative proposal. IRC section 162(e) does not have the same stringent tests that IRC section 4911 has for determining if a communication with the public is grassroots lobbying. Under IRC section 162(e), communications with the public that attempt to develop a grassroots point of view by influencing the general public to propose, support, or oppose legislation are considered to be grassroots lobbying. To be considered as grassroots lobbying under IRC section 162(e), a communication with the public does not have to encourage the public to take action with respect to a specific legislative proposal. Therefore, the IRC section 162(e) grassroots lobbying provision is likely to encompass more lobbying campaigns than IRC section 4911 does. The LDA lobbying definition covers only contacts with federal government officials and does not require lobbyists to report any expenses for contacts with state and local government officials. This is consistent with LDA’s overall purpose of increasing public disclosure of the efforts of lobbyists paid to influence federal decisionmaking. The IRC lobbying definitions also cover contacts with federal government officials. However, in contrast to LDA, the IRC lobbying definitions require that expenses for contacts with state officials to influence state legislation be included in lobbying expenses. Further, both IRC lobbying definitions cover contacts with local government officials to influence local government legislation; but coverage of local government contacts is limited under IRC section 162(e), because that section has an exception for contacts with local councils on legislation of direct interest to the organization. (Contacts with state and local government officials to influence something other than legislation, such as a state or local policy or regulation, are not covered by either of the IRC definitions.) The amounts spent lobbying state governments can be significant. For example, in 1997, under state lobbying disclosure laws, reported spending on lobbying state government officials was $144 million in California, $23 million in Washington, and $23 million in Wisconsin. Whether a lobbyist’s contact with a federal government official counts as lobbying under any of the three lobbying definitions depends, in part, on whether the contact is with a covered official. Covered officials are defined by several factors, such as their branch of government, the office they work in, and their rank. All three definitions include as lobbying lobbyists’ contacts with legislative branch officials—Members and employees of Congress—to influence legislation. However, for contacts with executive branch officials to influence legislation and contacts with either legislative branch or executive branch officials on legislative matters, such as regulations and contracts, the definitions of what is counted as lobbying differ significantly. Under LDA, contacts with any covered government officials about any legislative or nonlegislative matters covered by LDA are considered lobbying contacts, and their associated expenses must be reported. However, under the IRC definitions, whether the contact is on legislative or nonlegislative matters determines which officials are covered. For contacts to influence legislation, any executive branch officials who may participate in the formulation of legislation are covered under both IRC definitions. But, for nonlegislative matters, IRC section 4911 covers no executive branch officials, and IRC section 162(e) covers very few executive branch officials. Many of the executive branch officials covered by LDA for contacts on any lobbying subject are not covered by IRC section 162(e) when contacts are intended to influence nonlegislative matters. Also, none of the executive branch officials covered by LDA are covered by IRC section 4911 for contacts on nonlegislative matters, because IRC section 4911 covers only contacts to influence legislation. For contacts to influence the official actions or positions of an executive branch official on nonlegislative matters, IRC section 162(e) provides a list of covered executive branch officials. LDA’s list of covered executive branch officials includes all the officials on the IRC section 162(e) list, plus several more categories of officials. LDA’s list applies to contacts on any matter covered by LDA—legislative or nonlegislative. Table I.1 shows that LDA covers about 10 times the number of officials that IRC section 162(e) covers for nonlegislative matters. As shown in table I.1, LDA and IRC section 162(e) include contacts with the President and Vice President and Cabinet Members and similar high- ranking officials and their immediate deputies. In the Executive Office of the President, LDA includes all contacts with all offices; IRC section 162(e) includes only all officials in the White House Office and the two most senior level officers in the other agencies of the Executive Office of the President. Further, LDA includes contacts with officials in levels II through V of the Executive Schedule, which includes agency heads and deputy and assistant secretaries; IRC section 162(e) does not. Also, LDA includes contacts with officials at levels O-7 and above, such as Generals and Admirals, in the uniformed services. Finally, LDA includes contacts with all Schedule C appointees, who are political appointees (graded GS/GM-15 and below) in positions that involve determining policy or require a close, confidential relationship with the agency head or other key officials of the agency. The narrow scope of IRC section 162(e)’s list of covered executive branch officials can result in organizations not including on their lobbying reports expenses or other information, such as issues addressed, relating to contacts with very high-ranking officials. For example, if an organization made contacts to influence an official action or position with the top official at most independent agencies, including the National Aeronautics and Space Administration, the General Services Administration, the Export-Import Bank, and the Federal Communications Commission, these contacts would not be considered as contacts with covered executive branch officials and therefore would not be covered by the IRC section 162(e) definition. Similarly, contacts on nonlegislative matters with the heads of agencies within cabinet departments, such as the heads of the Internal Revenue Service, the Occupational Safety and Health Administration, the Bureau of Export Administration, and the Food and Drug Administration, would not be considered as contacts with officials at a high enough level for the list of covered executive branch officials under the IRC section 162(e) definition. However, contacts with all of these officials would be covered under the LDA definition of lobbying. The two IRC definitions generally provide the same coverage of contacts with executive branch officials for influencing legislation. The two definitions provide that a contact with “any government official or employee who may participate in the formulation of legislation” made to influence legislation must be counted as a lobbying expense. Thus, these definitions potentially cover many more levels of executive branch officials than are included on LDA’s list of covered executive branch officials. LDA’s list of covered officials is shown in table I.1 and applies to both legislative and nonlegislative matters. Therefore, contacts with officials in the Senior Executive Service or in grades GS/GM-15 or below who are not Schedule C appointees would generally count as lobbying contacts under the IRC definitions if such contacts were for the purpose of influencing legislation and those officials participated in the formulation of legislation. But such contacts would not count as lobbying contacts under the LDA definition, because LDA does not include these officials as covered executive branch officials. Neither IRC section 162(e) nor IRC section 4911 covers contacts with legislative branch officials on nonlegislative matters. The two IRC definitions cover only legislative branch officials in regard to contacts to influence legislation. However, LDA counts as lobbying any contacts with Members of Congress and congressional employees on any subject matter covered by LDA. Therefore, a lobbyist who contacts Members of Congress to influence a proposed federal regulation would be required to count these contacts in lobbying expenses calculated under the LDA definition and to disclose the issues addressed and the House of Congress contacted. LDA and the two IRC definitions cover the same federal legislative branch officials for contacts made to influence legislation. LDA covers contacts with any Member or employee of Congress for contacts on any legislative or nonlegislative subject matter covered by the act. Both IRC definitions cover contacts with any Member or employee of Congress for contacts made to influence legislation. The subject matters for which contacts with officials count as lobbying are different under the three lobbying definitions. LDA provides a comprehensive list of subjects about which contacts with a covered official are considered to be lobbying. For example, for nonlegislative matters, the list includes, in part, “the formulation, modification, or adoption of a federal rule, regulation, Executive order, or any other program, policy, or position of the United States Government.” Under IRC section 4911, the only subject covered by lobbying contacts is “influencing legislation.” Under IRC section 162(e), the subjects covered are “influencing legislation” and “influencing official actions or positions” of executive branch officials. The phrase “official actions or positions” applies to contacts on nonlegislative matters. Further, more specific information about what was covered in a lobbyist’s contact is needed under IRC sections 4911 and 162(e) than is needed under LDA to determine if the contact should count as lobbying. For legislative matters, LDA covers “the formulation, modification, or adoption of Federal legislation (including legislative proposals).” In contrast, for legislative matters, the IRC lobbying definitions list only “influencing legislation,” which, according to the Treasury Regulations, refers to contacts that address either specific legislation that has been introduced or a specific legislative proposal that the organization supports or opposes. Under both IRC definitions, a contact to influence legislation is a contact that refers to specific legislation and reflects a view on that legislation. Therefore, a lobbyist’s contact with a legislative branch official in which the lobbyist provides information or a general suggestion for improving a situation but in which the lobbyist does not reflect a view on specific legislation would not be considered to be a lobbying contact under the IRC definitions. For example, the Treasury regulations for IRC section 162(e) provide an example of a lobbying contact in which a lobbyist tells a legislator to take action to improve the availability of new capital. In this example, the lobbyist is not referring to a specific legislative proposal, so the contact does not count as lobbying. However, according to the Treasury Regulations, a lobbyist’s contact with a Member of Congress in which the lobbyist urges a reduction in the capital gains tax rate to increase the availability of new capital does count as lobbying, because the contact refers to a specific legislative proposal. In contrast, because LDA covers legislation from its formulation to adoption, the fact that a specific legislative proposal was not addressed during a lobbyist’s contact with a government official does not prevent the contact from being counted as a lobbying contact. LDA’s list of nonlegislative matters under its definition of “lobbying contact” seems to include most activities of the federal government. The list includes the formulation, modification, or adoption of a federal rule, regulation, executive order, or any other program, policy, or position of the United States Government; the administration or execution of a federal program or policy (including the negotiation, award, or administration of a federal contract, grant, loan, or permit, or license); and the nomination or confirmation of a person for a position subject to confirmation by the Senate. IRC section 4911 does not include any nonlegislative matters in its lobbying definition. The only nonlegislative matter included under the IRC section 162(e) lobbying definition is “any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official.” However, neither IRC section 162(e) nor its regulations define what is meant by “official actions or positions,” thus leaving the interpretation of what activities to count up to the lobbyist. Some lobbyists might consider an official action to be almost anything a federal official does while at work, while others might consider that official actions must be more formal actions, such as those requiring the signing of official documents. LDA contains 19 exceptions to the definition of lobbying and IRC sections 4911 and 162(e) contain 5 and 7 exceptions, respectively. These exceptions are listed in appendix III. Although LDA includes an extensive list of exceptions, for the most part these exceptions make technical clarifications in the law and do not provide special exceptions for particular groups. Many of the LDA exceptions are for contacts made during the participation in routine government business, and some of these are for contacts that would be part of the public record. For example, these include (1) contacts made in response to a notice in the Federal Register soliciting communications from the public and (2) a petition for agency action made in writing and required to be a matter of public record pursuant to established agency procedures. Other exceptions are for contacts dealing with confidential information, such as contacts “not possible to report without disclosing information, the unauthorized disclosure of which is prohibited by law.” LDA includes four exceptions for particular groups, including an exception for contacts made by public officials acting in an official capacity; an exception for representatives of the media making contacts for news purposes; an exception for any contacts made by certain tax-exempt religious organizations; and an exception for contacts made with an individual’s elected Member of Congress or the Member’s staff regarding the individual’s benefits, employment, or other personal matters. Of the five exceptions to the IRC section 4911 lobbying definition, two could allow a significant amount of lobbying expenses to be excluded from IRC section 4911 coverage. The first is an exception for making available the results of nonpartisan analysis, study, or research. Due to this exception, IRC section 4911 does not cover 501(c)(3) organizations’ advocacy on legislation as long as the organization provides a full and fair exposition of the pertinent facts that would enable the public or an individual to form an independent opinion or conclusion. The second significant exception under IRC section 4911 is referred to as the self-defense exception. This exception excludes from coverage lobbying expenses related to appearances before, or communications to, any legislative body with respect to a possible decision of such body that might affect the existence of the organization, its powers and duties, tax- exempt status, or the deduction of contributions to the organization. According to IRS officials, this exception provides that a 501(c)(3) nonprofit tax-exempt organization can lobby legislative branch officials on matters that might affect its tax-exempt status or the activities it can engage in without losing its tax exempt status, and such lobbying will not be counted under the IRC section 4911 definition. According to IRS officials, this exception does not cover lobbying on state or federal funding. The IRC section 162(e) definition has one exception in the statute, which is for contacts with local government legislative branch officials on legislation of direct interest to the organization. In addition, IRC section 162(e) has seven exceptions, which are provided for by Treasury Regulations. These seven exceptions provide technical clarifications to the statutory provisions and do not appear to exclude a significant amount of expenses that would be counted as lobbying expenses under the other lobbying definitions. For example, the IRC section 162(e) exceptions include (1) any communication compelled by subpoena, or otherwise compelled by federal or state law; and (2) performing an activity for purposes of complying with the requirements of any law. This appendix contains detailed information about which contacts, activities, and expenses are covered under the definitions of lobbying for LDA, IRC section 4911, and IRC section 162(e). Table II.1 shows the coverage of federal lobbying. Table II.2 shows the coverage of state lobbying, and table II.3 shows the coverage of local lobbying. IRC section 162(e) Yes 2 U.S.C. 1602 (7) Yes Treas. Reg. § 56.4911-3(a) Yes 26 U.S.C. 162(e)(5)(C) Yes 2 U.S.C. 1602(8)(A)(i) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(i) & (4)(C) & (D) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 162(e)(1)(A) & (4)(A) Yes 26 U.S.C. 162(e)(1)(A) & (4)(A) President, Vice President; Executive Schedule level I, cabinet-level officials, and their immediate deputies Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes 2 U.S.C. 1602(8) (A)(i) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8) (A)(i) & (3)(D) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(i) & (3)(C) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) Yes26 U.S.C. 162(e)(1)(A) & (4)(A) IRC section 162(e) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 162(e)(1)(A) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(ii) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(ii) & (4)(C) & (D) President, Vice President; Executive Schedule level I, cabinet-level officials, and their immediate deputies Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(D) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(ii) & (3)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Yes 2 U.S.C. 1602(8)(A)(iii) & 4(A) IRC section 162(e) Yes 2 U.S.C. 1602(8)(A)(iii) & (4)(C) & (D) President, Vice President; Executive Schedule level I, cabinet-level officials, and their immediate deputies Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(D) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iii) & (3)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Maybe26 U.S.C. 162(e)(1)(D) & (6)(C) Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes2 U.S.C. 1602(8)(A) & (3)(A), (B) & (D) Yes2 U.S.C. 1602(8)(A) & (3)(D) Yes2 U.S.C. 1602(8)(A) & (3)(E) Yes2 U.S.C. 1602(8)(A) & (3)(F) IRC section 162(e) Yes2 U.S.C. 1602(8)(A) & (3)(C) Yes2 U.S.C. 1602(8)(A) & (3)(C) Yes2 U.S.C. 1602(8)(A) & (3)(C) Yes 26 U.S.C. 162(e)(1)(D) & (6)(C) Yes 26 U.S.C. 162(e)(1)(D) & (6)(C) Yes 2 U.S.C. 1602(8)(A)(iv) & (4)(A) Yes 2 U.S.C. 1602(8)(A)(iv) &(4)(C) & (D) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 162(e)(1)(A)& (4)(A) Yes 26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 4911(d)(1)(B) Executive Schedule levels II, III, IV, and V (excluding cabinet-level officials and their immediate deputies) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 4911(d)(1)(B) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(A), (B) & (D) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(D) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(E) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(F) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(C) Yes 2 U.S.C. 1602(8)(A)(iv) & (3)(C) Yes26 U.S.C. 4911(d)(1)(B) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) Yes26 U.S.C. 162(e)(1)(A)& (4)(A) IRC section 162(e) Yes 26 U.S.C. 4911(d)(1)(A) & (e)(2) Yes 26 U.S.C. 162(e)(1)(C) & (4)(B) 26 U.S.C. 4911(e)(2) IRC section 162(e) Yes Treas. Reg. § 56.4911-3(a) Yes 26 U.S.C. 162(e)(5)(C) Yes 26 U.S.C. 4911(d)(1)(A) & (e)(2) Yes 26 U.S.C. 162(e)(1)(C ) & (4)(B) 26 U.S.C. 4911(e)(2) IRC section 162(e) Yes Treas. Reg. § 56.4911-3(a) Yes 26 U.S.C. 162(e)(5)(C) Yes 26 U.S.C. 4911(d)(1)(B) & (e)(2) Yes 26 U.S.C. 4911(d)(1)(B) & (e)(2) Yes 26 U.S.C. 4911(d)(1)(B) & (e)(2) Yes 26 U.S.C. 4911(d)(1)(B) Yes 26 U.S.C. 4911(d)(1)(A) & (e)(2) Yes 26 U.S.C. 162(e)(1)(C)& (e)(4)(B) 26 U.S.C. 4911 (e)(2) Title 2 of the United States Code contains 19 exceptions to LDA’s lobbying definition. Under Title 2, the term “lobbying contact” does not include a communication that is: 1. made by a public official acting in the public official’s official capacity; 2. made by a representative of a media organization if the purpose of the communication is gathering and disseminating news and information to the public; 3. made in a speech, article, publication, or other material that is distributed and made available to the public, or through radio, television, cable television, or other medium of mass communication; 4. made on behalf of a government of a foreign country or a foreign political party and disclosed under the Foreign Agents Registration Act of 1938;5. a request for a meeting, a request for the status of an action, or any other similar administrative request, if the request does not include an attempt to influence a covered executive branch official or a covered legislative branch official; 6. made in the course of participation in an advisory committee subject to the Federal Advisory Committee Act; 7. testimony given before a committee, subcommittee, or task force of Congress, or submitted for inclusion in the public record of a hearing conducted by such committee, subcommittee, or task force; 8. information provided in writing in response to an oral or written request by a covered executive branch official or a covered legislative branch official for specific information; 9. required by subpoena, civil investigative demand, or otherwise compelled by statute, regulation, or other action of Congress or an agency, including any communication compelled by a federal contract, grant, loan, permit, or license; 10. made in response to a notice in the Federal Register, Commerce Business Daily, or other similar publication soliciting communications from the public and directed to the agency official specifically designated in the notice to receive such communications; 11. not possible to report without disclosing information, the unauthorized disclosure of which is prohibited by law; 12. made to an official in an agency with regard to—(1) a judicial proceeding or a criminal or civil law enforcement inquiry, investigation, or proceeding; or (2) a filing or proceeding that the government is specifically required by statute or regulation to maintain or conduct on a confidential basis–if that agency is charged with responsibility for such proceeding, inquiry, investigation, or filing; 13. made in compliance with written agency procedures regarding an adjudication conducted by the agency under section 554 of Title 5 or substantially similar provisions; 14. a written comment filed in the course of a public proceeding or any other communication that is made on the record in a public proceeding; 15. a petition for agency action made in writing and required to be a matter of public record pursuant to established agency procedures; 16. made on behalf of an individual with regard to that individual’s benefits, employment, or other personal matters involving only that individual, except that this clause does not apply to any communication with—(1) a covered executive branch official, or (2) a covered legislative branch official (other than the individual’s elected Members of Congress or employees who work under such Member’s direct supervision)–with respect to the formulation, modification, or adoption of private legislation for the relief of that individual; 17. a disclosure by an individual that is protected under the amendments made by the Whistleblower Protection Act of 1989 under the Inspector General Act of 1978 or under another provision of law; 18. made by (1) a church, its integrated auxiliary, or a convention or association of churches that is exempt from filing a federal income tax return under paragraph (2)(A)(i) of such section 6033(a) of Title 26, or (2) a religious order that is exempt from filing a federal income tax return under paragraph (2)(A)(iii) of such section 6033(a); and 19. between (1) officials of a self-regulatory organization (as defined in section 3(a)(26) of the Securities Exchange Act) that is registered with or established by the Securities and Exchange Commission as required by that act or a similar organization that is designated by or registered with the Commodities Future Trading Commission as provided under the Commodity Exchange Act; and (2) the Securities and Exchange Commission or the Commodities Future Trading Commission, respectively, relating to the regulatory responsibilities of such organization under the act. Title 26 of the United States Code contains five exceptions to the lobbying definition in IRC section 4911. Under IRC section 4911, the term “influencing legislation”, with respect to an organization, does not include: 1. making available the results of nonpartisan analysis, study, or research; 2. providing technical advice or assistance (where such advice would otherwise constitute influencing of legislation) to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be; 3. appearances before, or communications to, any legislative body with respect to a possible decision of such body that might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization; 4. communications between the organization and its bona fide members with respect to legislation or proposed legislation of direct interest to the organization and such members, other than communications that directly encourage the members to take action to influence legislation; 5. any communication with a government official or employee, other than (1) a communication with a member or employee of a legislative body (where such communication would otherwise constitute the influencing of legislation), or (2) a communication the principal purpose of which is to influence legislation. Title 26 of the United States Code contains a single exception to the lobbying definition in IRC section 162(e): 1. appearances before, submission of statements to, or sending communications to the committees, or individual members, of local councils or similar governing bodies with respect to legislation or proposed legislation of direct interest to the taxpayer. In addition, the Treasury Regulations contain eight exceptions: 2. any communication compelled by subpoena, or otherwise compelled by federal or state law;3. expenditures for institutional or “good will” advertising which keeps the taxpayer’s name before the public or which presents views on economic, financial, social, or other subjects of a general nature but which do not attempt to influence the public with respect to legislative matters;4. before evidencing a purpose to influence any specific legislation— determining the existence or procedural status of specific legislation, or the time, place, and subject of any hearing to be held by a legislative body with respect to specific legislation;5. before evidencing a purpose to influence any specific legislation— preparing routine, brief summaries of the provisions of specific legislation; 6. performing an activity for purposes of complying with the requirements of any law; 7. reading any publications available to the general public or viewing or listening to other mass media communications; and 8. merely attending a widely attended speech. Alan N. Belkin, Assistant General Counsel Rachel DeMarcus, Assistant General Counsel Jessica A. Botsford, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the reporting of lobbying activities by organizations that have employees who lobby on the organizations' behalf and have the option to report their lobbying expenses under the Lobbying Disclosure Act (LDA) of 1995 or applicable Internal Revenue Code (IRC) provisions that they use for tax purposes, focusing on: (1) the differences between the LDA and IRC section 4911 and 162(e) definitions of lobbying; (2) the impact that differences in the definitions may have on registration and reporting under LDA, including information on the number of organizations using each definition and the expenses they have reported; and (3) identifying and analyzing options, including harmonizing the three definitions, that may better ensure that the public disclosure purposes of LDA are realized. GAO noted that: (1) the LDA definition covers only contacts with federal officials; (2) the IRC definitions cover contacts with federal, state, and local officials as well as attempts to influence the public through grassroots lobbying; (3) the definitions differ in their coverage of contacts with federal officials, depending on whether the contact concerns a legislative or nonlegislative matter; (4) the differences in the lobbying definitions can affect whether organizations register under LDA; (5) an organization that engages or expects to engage in certain lobbying activities during a 6-month period, including incurring at least $20,500 in lobbying expenses, is required to register under LDA; (6) the definition an organization uses in calculating its lobbying expenses determines the expenses it counts toward the $20,500 threshold; (7) when using the LDA definition would result in expenses of more than $20,500, an organization may be able to use the applicable IRC definition to keep its lobbying expenses below $20,500 or vice versa; (8) the lobbying definition an organization uses affects the information it must disclose on its semiannual lobbying report; (9) when using an IRC definition, an organization must report its total lobbying expenses for all activities covered by that definition; (10) however, all of these expenses are reported in one total amount, so the lobbying reports do not indicate the amount related to different levels of government and types of lobbying activities; (11) when organizations report information other than expenses, they are required to report only information related to federal government lobbying, regardless of whether they use the LDA definition or one of the IRC definitions to calculate expenses; (12) because of the differences in definitions, information disclosed on lobbying reports filed by organizations using the IRC definitions is not comparable to information on reports filed by organizations using the LDA definition; (13) under the IRC definitions, organizations can disclose less information than under the LDA definition; (14) of the organizations that lobbied on their own behalf and had the option of using an IRC definition for reporting expenses under LDA, most used the LDA definition; (15) the organizations that reported using the IRC section 162(e) definition had the highest mean and median expenses; and (16) because the differences among the three lobbying definitions can significantly affect who registers and what they report under LDA, the use of the IRC definitions can conflict with LDA's public disclosure purpose. |
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Pursuant to the Federal Property and Administrative Services Act of 1949, the General Services Administration (GSA) was created to manage and acquire federal government space and administrative and operating supplies in order to eliminate duplicative functions within government and to establish a professional resource that would maximize the government’s effectiveness in obtaining supplies and services. Today, GSA’s Federal Supply Service is responsible for supplying and procuring goods and services through three major programs—the special order, stock, and schedules programs. In the special order program, agencies order items from GSA; GSA places the agencies’ orders with vendors; and the vendors deliver the items to the agencies. In the stock program, GSA orders items from vendors who deliver the items to GSA’s warehouses. Agencies order the items from GSA and receive the items from the warehouses. In the schedules program, agencies place orders directly with vendors holding GSA contracts, who deliver the items directly to the agencies. The Federal Acquisition Streamlining Act of 1994 (FASA) revised and streamlined the procurement laws of the federal government. Section 1555 of FASA (40 U.S.C. 481 (b) (2)) gives GSA the authority to establish a cooperative purchasing program through which state, local, Indian tribal, and the Puerto Rican governments could use GSA’s federal supply schedules program to purchase needed goods and services. Under section 1555, eligible governments, upon their request, could purchase items directly from supply schedule vendors under the same terms and conditions that GSA has established for federal agency purchases. The conference report on FASA indicated that individual supply schedule vendors would not have to make the products or services on the supply schedules available to nonfederal users, such as state and local governments, unless the terms of the schedule contract would so provide. FASA explicitly precludes GSA from authorizing any state, local, Indian tribal, or the Puerto Rican government to order existing stock or inventory from federally owned and operated, or federally owned and contractor operated, supply depots, warehouses, or similar facilities. Thus, FASA excludes these governments from purchasing goods and services from GSA’s federal stock program. The federal supply schedules program is one of GSA’s largest programs for providing goods and services to federal agencies. In fiscal year 1996, GSA’s sales through the schedules program accounted for about 72 percent, or about $4.8 billion, of the approximately $6.6 billion in agency purchases through GSA’s schedules, stock, and special order programs. As shown in figure 1.1, fiscal year 1996 stock program sales of about $579 million accounted for only about 9 percent of GSA’s sales, while fiscal year 1996 special order program sales of about $1.3 billion accounted for only about 19 percent of GSA’s sales. Products from the supply schedules program are available on single-award schedules, multiple-award schedules, and new introductory product schedules, depending on the commodity. Single-award schedules consist of contracts with one vendor for the delivery of a particular product or service to a specified geographic area. Prospective vendors compete for the GSA contract to provide the product or service to government agencies, normally at the lowest price. Multiple-award schedules consist of contracts awarded to more than one vendor for comparable (but not necessarily identical) commercial supplies or services for delivery within the same geographic area. New introductory product schedules provide the means for new or improved products to enter the federal supply system. Once a vendor’s product is accepted for inclusion on a new introductory product schedule, if sufficient demand for that item is generated after a 3-year period, the item is to be transferred to one of GSA’s other supply programs. GSA’s Federal Supply Service negotiates and awards contracts for products and services available through the majority of federal supply schedules. The Service issues solicitations, receives offers from prospective vendors, negotiates with them on product and service prices as well as terms and conditions of sale, and awards the contracts. The contracts are indefinite-delivery contracts that give vendors the right to sell goods and services to the government during the period of time that the contract is in effect. Contracts commonly are in effect for more than a 1-year period. Federal agencies order products and services directly from a vendor and pay the vendor directly. In fiscal year 1996, there were 146 schedules. GSA has responsibility for managing 133 schedules, and it has given the Department of Veterans Affairs (VA) responsibility for managing 13 schedules, including the schedule for pharmaceuticals and 12 schedules for medical equipment, devices, and supplies and certain food items, such as cookies and cereals. Fiscal year 1996 sales through VA’s schedules totaled about $1.9 billion. A large number of vendors negotiate contracts with the Federal Supply Service or VA in order to provide products to federal agencies. Vendors include businesses that manufacture products as well as dealers or distributors that sell and service products. In fiscal year 1996, GSA had about 5,300 contracts with vendors that supply goods or services either through its single-award or multiple-award schedules, while VA had about 1,257 contracts. About 74 percent of these contracts were with small businesses. (See app. I for a listing of the 146 schedules as well as sales made through the schedules to large and small vendors.) The supply schedules program provides several advantages to both federal agencies and vendors. For example, agencies have the option of ordering small quantities of commonly used goods and services without using the traditional procurement process. Also, agencies know that GSA is responsible for ensuring that all procurement regulations have been followed in awarding the schedules contracts and making items available. For example, multiple-award schedules conform to the requirements of the Competition in Contracting Act and are competitive in that participation has been open to all responsible sources. In addition, prices negotiated by the Federal Supply Service and the vendors are to be based on each vendor’s best discounts within certain categories of customers and sales information on top-selling items within product or service groups. Vendors also benefit because their commercial products are exposed to a large number of potential customers. Also, the vendors expend less effort to sell products to federal agencies if their items are available through the schedules program because of the reduced paperwork. For example, a business would not have to prepare a separate offer in response to agency solicitations for every federal agency it wants to supply. Since 1994, GSA has taken several actions that were intended to make it easier for federal agencies to obtain commercial goods and services through its supply schedules program. For example, GSA has simplified ordering procedures to reduce the amount of paperwork involved. In addition, agencies have the option of placing orders of $2,500 or less with any schedule vendor of their choice. Also, when placing orders of more than $2,500, agencies are no longer required to fully justify when an item is not purchased at the lowest price. Instead, agencies are to review at least three price lists or consider other alternatives on the schedules. To further simplify ordering through the schedules program, GSA is in the process of deploying an electronic ordering system for customer access to the full range of GSA supplies and services. GSA plans to have this system, which is to be available through the Internet, fully operational by the end of fiscal year 1997. GSA is also making the use of the supply schedules program optional on the part of all executive branch agencies and is eliminating mandatory use provisions in its contracts. In addition, GSA is requesting that vendors be as expeditious as possible and identify items that can be delivered faster than both normal and expedited delivery times. Vendors are also requested to identify items that can be delivered overnight or within 2 days. Maximum order limitations are also being removed, and GSA has developed new procedures allowing vendors to accept “any size” order. In addition, customers are encouraged to request price decreases from vendors before placing orders exceeding a certain size. Also, vendors are allowed to offer individual agencies price reductions without passing these reductions on to all other federal agencies. The federal supply programs were initially for use primarily by federal agencies and the District of Columbia. However, since 1949, Congress has authorized a variety of other entities to use GSA’s procurement services, including the federal supply schedules. For example, the Foreign Assistance Act of 1961 provides that the president may authorize certain countries, international organizations, the American Red Cross, and voluntary nonprofit relief agencies to use GSA’s sources of supply. Many Indian tribal governments also have been authorized to make purchases from GSA under the Indian Self-Determination and Education Assistance Act of 1975. In 1978, Gallaudet College, Howard University, and certain other charitable institutions or nonprofit organizations; as well as fire fighting organizations cooperating with the Forest Service, were authorized to make purchases through GSA. In 1992, Congress provided the governments of American Samoa, Guam, the Northern Mariana Islands, the Trust Territory of the Pacific Islands, and the Virgin Islands the authority to make purchases through GSA. In 1993, Congress authorized law enforcement agencies involved in counter-drug activities to make purchases through GSA. The 1993 report of the National Performance Review (NPR) recommended that state and local governments, grantees, and certain nonprofit agencies be allowed to use federal supply sources. In addition, NPR recommended that federal agencies be allowed to enter into cooperative agreements to share state and local government supply sources. The basis for the recommendation was the belief that consolidated government procurement actions tend to maximize the economic advantage of volume buying with lower costs to the taxpayer. The concept of cooperative purchasing was not unique to NPR. Cooperative purchasing has existed in varying forms since at least the 1930s when various governments started joining forces for the purposes of making intergovernmental cooperative purchases. In addition to the tangible benefit associated with cost savings, other benefits cited by members of such cooperative purchasing groups include the exchange of procurement information. NPR’s report noted that even though federal agencies, the District of Columbia, and some other organizations were authorized by law to use federal supply sources, state and local governments generally were not authorized to use them. The report concluded that allowing governments to enter into agreements to use one another’s contracts would reduce administrative staffs and costs and that all levels of government would be able to negotiate better prices as a result of the increased volume of sales under the contracts. A cooperative purchasing program that would allow state, local, the Puerto Rican, or Indian tribal governments to use the federal supply schedules was enacted as section 1555 of FASA, which amended the Federal Property and Administrative Services Act. The section provided GSA with considerable discretion on the way the program is to operate and the specific federal supply schedules it may authorize these governments to use. The section also allowed GSA to charge state, local, Indian tribal, or Puerto Rican governments a fee for any administrative costs it incurs by allowing these governments to use the schedules. FASA stipulated, however, that these governments are not authorized to use GSA’s stock program. At the time that the provision was being considered by Congress, little debate occurred over any possible adverse effects of allowing state and local governments the use of GSA’s schedules program. On April 7, 1995, GSA published a Federal Register notice that presented and requested comments on its proposed implementation plan for section 1555. As proposed, GSA planned to make the schedules available to the authorized governments upon their requests unless a determination was made by the GSA contracting officers responsible for specific schedules that it would not be appropriate to do so. For example, schedules would not be made available to nonfederal users if doing so would raise prices that federal agencies pay for items on those schedules. Under GSA’s proposal, individual schedule vendors would be able to elect whether or not to make the products or services they sell through the schedules available to authorized nonfederal users. If vendors elect to make products available to nonfederal users, GSA officials said that this could be accomplished by modifications to their existing contracts. GSA planned that these nonfederal users would place orders directly with supply schedule vendors. As authorized by FASA, GSA also planned on charging the governments an administrative fee for the use of the schedules as GSA converts the supply schedules program from a federally appropriated program to an operation funded by fees charged for services. The administrative fee was to be included in the vendors’ prices for each schedule item. Vendors, in turn, would transfer fees collected to either GSA or VA. GSA does not envision that the supply schedules program, or items available through that program, would change significantly as a result of the cooperative purchasing program. In its April 1995 Federal Register notice, GSA cautioned that schedule contracts would be established only to meet the needs of federal agencies, and only to the extent that nonfederal users had a need for the same items or services would they be authorized to use the schedule contracts. GSA officials subsequently told us that GSA would determine, on a case-by-case basis, which schedules should be available to nonfederal users, taking into consideration the potential effect that opening up the schedule may have on the federal government. According to these officials, if allowing state or local governments the option of using a schedule could result in increased prices to federal agencies, GSA would not make the schedule available to nonfederal users. In its Federal Register notice, GSA announced that it had determined that two schedules—one for drugs and pharmaceutical products and one for medical equipment and supplies (in vitro diagnostic substances, reagents, test kits and sets)—should not be made available for use by nonfederal users because it would not be in the interest of the federal government. GSA based its determination on VA’s recommendation that these schedules not be made available because of unique statutory requirements imposed by the Veterans Health Care Act of 1992, which, according to GSA’s Federal Register notice, would result in increased prices for products on these two schedules. The potential effects of opening the pharmaceutical schedule on drug prices will be discussed in a separate GAO report. Following enactment of FASA, concerns emerged from several industries that because of either their market structure or other factors, they would be subject to adverse effects, such as lost sales, from cooperative purchasing. The Clinger-Cohen Act of 1996 suspended GSA’s authority to implement the cooperative purchasing provision of FASA. The 1996 act also mandates that we report on the implementation and effects of cooperative purchasing and that we submit a report to both GSA and Congress within 1 year of enactment. The 1996 act further requires GSA to submit comments to Congress on our report within 30 days. GSA’s authority to implement the cooperative purchasing program under section 1555 of FASA is suspended by the 1996 act until 18 months after the act’s enactment or until 30 days after GSA’s comments on our report are submitted to Congress, whichever is later. The objectives of this report were to assess: the potential effects of cooperative purchasing on state and local governments, the government of the Commonwealth of Puerto Rico, Indian tribal governments, and federal agencies; the potential effects of cooperative purchasing on industry, including small businesses and local dealers; and GSA’s plans to implement the cooperative purchasing program. The Clinger-Cohen Act of 1996 mandated that our report include assessments of the potential effect of the cooperative purchasing program on (1) state and local governments, the government of the Commonwealth of Puerto Rico, and Indian tribal governments; and (2) industry, including small businesses and local dealers. The Conference Report accompanying the 1996 act further directed that we include an assessment of the effects on costs to federal agencies of state and local governments’ use of the federal supply schedules. To assess the potential effect of the cooperative purchasing program on state, local, and Indian tribal governments and on federal agencies, we collected and reviewed data that described the procurements and procurement methods that each level of government used. To assess the potential effect on state governments, we conducted a September 1996 nationwide survey of states and territories to obtain information on state laws or practices that would encourage or inhibit states’ use of the federal cooperative purchasing program and the extent to which they would use the program and for what purposes. Responses were obtained from 48 states and 2 territories. We did not attempt to verify the responses made by state officials or the reasons given for their responses about their potential use of the federal supply schedules program. (App. II provides the results of this survey.) We also contacted associations that represent state and/or local governments, including the National Association of State Purchasing Officials, to obtain their members’ views on the cooperative purchasing program and to obtain any relevant data these associations had on the potential effect of the program. We obtained and reviewed available data from a nationwide survey conducted by the National Association of State Purchasing Officials in 1992 that asked whether the laws in the individual states would allow the use of the federal supply schedules; whether state purchasing officials expected to use the cooperative purchasing program; and what, if any, advantages and disadvantages these officials saw in the program. (App. III provides a listing of all associations whose views we obtained.) In addition, we reviewed comments made by state and local governments in response to GSA’s April 1995 Federal Register notice. To more fully understand factors that may influence state and local governments’ decisions on whether to make purchases through the federal cooperative purchasing program, we contacted 29 purchasing officials in California, Montana, New York, West Virginia, and Puerto Rico to obtain information on procurement practices. We selected these states with a view to obtaining diversity in geographic location and size, as well as in size of population. In addition to obtaining information from each state’s and Puerto Rico’s central purchasing offices, we selected 24 program agencies in the 4 states. These agencies included each state’s transportation department, a state university or university system, plus an agency suggested by the state procurement agency from which to obtain information. These program agencies also included three local government agencies so that we could provide similar information on those local agencies’ purchasing requirements and practices. We selected the program agencies to ensure a range of potential users of a cooperative purchasing program. We selected the local government program agencies, in consultation with state purchasing officials, to include both large and small local government entities. Our selection was not designed to produce a statistically valid sample of state and local government agencies that would be eligible to participate in a cooperative purchasing program. The purpose was to supplement our other information and provide an indication of the factors that would influence state and local agencies’ decisions on whether to use the federal cooperative purchasing program. In addition, we asked state and local officials in these four case study states if their procurement laws or policies would allow them to use the federal cooperative purchasing program and, if not, the nature of their procurement laws or policies that would prohibit or limit their use of the program. Although we did not attempt to determine if the views of the state and local officials regarding these laws and policies in these four states were necessarily correct, we did review the laws to understand the basis for their positions. We also obtained their views on whether they wanted access to the federal supply schedules and the reasons for their views. Further, we contacted the Puerto Rican Government’s central purchasing office to obtain Puerto Rico’s views on the cooperative purchasing program and information on its laws that may affect its use of the program. To determine the extent that state or local governments could or would be likely to use the program, we conducted case studies in the four states. We asked the 24 selected program agencies to provide procurement documentation (i.e., invitations for bids, contracts, purchase orders, invoices, etc.) used to make recent purchases. We asked that these purchases reflect items that the agencies were interested in purchasing through GSA, because the items were (1) routinely purchased (i.e., high volume); (2) consumed a large portion of the procurement budget (i.e., high-dollar volume); (3) difficult to procure; or (4) available through GSA’s schedule program, and the state or local agency believed the GSA vendor may be a better source. We received procurement documentation from 16 of the 24 agencies. We did not determine why the agencies selected the purchases for which they provided us documentation. We provided the procurement documentation to GSA, which had its contracting officers determine whether the same or comparable items were available through GSA’s supply schedules program and, if so, how GSA’s contract terms and conditions of sale, including price, compared to the terms and conditions of sale obtained by state and local agencies. We did not verify GSA’s determinations. (App. IV presents the results of this comparison.) Although the items represented by the procurement documentation obtained from state and local agencies do not comprehensively represent the types of goods or services these agencies could or would purchase through the federal cooperative purchasing program, they do provide an indication of the experience state and local agencies may encounter when considering making such purchases. Neither we nor GSA determined if the quantity of items purchased by individual state or local agencies was more than or less than vendors’ maximum order limits, and hence potentially eligible for additional discounts from the vendors’ list prices, or whether actual prices paid by federal agencies were less than schedule prices. To better understand how state and local law enforcement agencies have used a similar program that has given them access to federal supply schedules to support state and local drug enforcement activities, we contacted state officials in seven states. We selected them either because they participated in GSA’s pilot for this program or because of their geographic location. We asked these officials to describe their use of the program, including their experiences with the availability and prices of products on the federal supply schedules. In addition, to obtain similar information we contacted a purchasing official in the Virgin Islands, who already had access to federal supply schedules, and representatives of several cooperative purchasing arrangements under which state or local governments have agreed to pool their purchases of certain products. We also used the Input-Output Accounts for the U. S. economy provided by the Department of Commerce’s Bureau of Economic Analysis to provide data on the types of goods and services that state and local governments purchase and to compare their purchases with nondefense federal purchases. The Input-Output Accounts show the relationship among all industries in the economy (including the various levels of government) and all the commodities that they produce and use. We used these data to indicate the pattern of industry purchases made by the federal, state, and local governments and to determine the extent to which these governments’ patterns of purchases are similar or different. We also used these data to indicate the extent to which state and local governments purchase items from industries whose products might be available on federal supply schedules. We used these national data at an aggregate level to get a general indication rather than a precise measure of the pattern of federal, state, and local purchases among industry groups. We did not use these data to provide a precise measure of the relationship between the various levels of government and the industries that might be affected. First, the Input-Output accounts are organized along industry classifications that differ from those of GSA’s supply schedules. Second, as the Bureau of Economic Analysis notes, the most recent data in the Input-Output accounts are for 1987 and the patterns of purchases could have changed since that time. Our use of these data entails an assumption that there have not been major changes in interindustry relationships (including those between state and local governments and industries that supply these governments). We believe this to be a reasonable assumption given our use of the data for describing, in general terms, state and local purchases and comparing them with federal purchases. To assess the potential effect of the cooperative purchasing program on Indian tribal governments, we discussed the use of the federal supply schedules by Indian tribal governments with Bureau of Indian Affairs (BIA) officials in the Department of the Interior and with GSA officials. We also contacted three Indian tribal governments that have entered into agreements with the federal government to assume responsibility for programs that would otherwise be the responsibility of the federal government to determine whether these tribal governments have used their existing authority to use GSA as a source of supplies and services. We selected tribal governments on the basis of a BIA official’s recommendation that, as large tribes, these were likely to be among the heaviest users of GSA’s supply programs and thus the most knowledgeable about GSA’s programs. Although the tribal governments sampled do not represent all Indian tribal governments, they do provide an indication of Indian tribal procurement procedures and practices by Indian tribal governments that have entered into such agreements. To assess the potential effect of the cooperative purchasing program on costs to the federal government, we obtained information from the Departments of Defense, Health and Human Services, the Interior, Justice, and VA to determine whether they had conducted any assessments of the program and what effects they identified as likely. These departments were selected on the basis of their being among the largest users of GSA’s schedules program. In addition, we obtained the views of GSA’s Acquisition Management Center and VA on the effect of opening up the supply schedules on schedule vendors and federal agencies purchasing through the schedules program. To assess the potential effect of the cooperative purchasing program on industry, including small businesses and local dealers, we analyzed data from the Department of Commerce’s Input-Output Accounts (discussed previously) to estimate the government share of total sales for industry groups. We used these data to provide an indication of the extent to which various broadly defined industry groups rely on sales to the federal, state, or local governments rather than as a precise measure. We also obtained information from industry associations, including those that represent small business, to identify factors that may affect those industries; these associations included the American Small Business Association, the Environmental Industry Association, the Health Industry Manufacturers Association, and the National Retail Federation. (See app. III.) In addition, we selected vendors from selected GSA schedules to obtain vendors’ views on the potential effect of allowing nonfederal agencies to purchase through the federal cooperative purchasing program. We selected schedules on the basis of GSA officials’ views that nonfederal governments would have high interest in procuring products on them. These schedules included the computer schedules (including the telecommunications equipment schedule and the microcomputers schedule); special industry machinery schedule (copying equipment, supplies, and services); and furniture systems schedule. We also selected schedules and vendors in industries where associations representing the industry have informed GSA or us that they would or could be negatively affected should specific schedules be made available to nonfederal agencies. We also reviewed public comments GSA received from industry in response to its April 1995 Federal Register notice and contacted several businesses and trade associations that expressed concern over GSA’s proposed plan for implementing the program. This group included dealers and distributors of heavy equipment. We also contacted those companies that supplied items to state and local governments, which were identified through procurement documentation provided by state and local agencies (as described above), to obtain their views on how the program could affect sales their companies made to state and local agencies. Even though the industry groups and the companies contacted do not represent all industry groups or all companies, these groups and companies do provide an indication of possible effects that businesses expect from the federal cooperative purchasing program. To assess GSA’s plans for implementing the cooperative purchasing program, we held discussions with GSA’s Deputy Associate Administrator, Office of Acquisition Policy; the Director, GSA’s Acquisition Policy Division; the Assistant Commissioner, Federal Supply Service, Office of Acquisition; the Assistant Commissioner, Federal Supply Service; the Director, Acquisition Management Center, Federal Supply Service; as well as the director of GSA’s automotive center and contracting officers for the selected schedules mentioned previously. In addition, we contacted contracting officers for several schedules, including those schedules for which companies informed GSA that they would be negatively affected should specific schedules be made available to nonfederal agencies. We also talked with representatives of VA’s National Acquisition Center, which has primary responsibility for the pharmaceutical and medical equipment, supplies, and devices schedules, including Division Chiefs for 13 schedules. We recognize that there are limits to our ability to predict the effects of opening the supply schedules on state and local governments or on industry. Part of the limitations stem from the unavailability of data. For example, except for VA’s Pharmacy Prime Vendor programs, the various agencies generally do not have the detailed expenditure data that readily indicate what and how goods and services are purchased, and we do not have access to nonfederal contractors’ records. However, even with these data, we would not be able to predict how state and local governments would choose to utilize these schedules, how industry would respond to any changes in state and local purchasing arrangements, or how contract terms would change. We requested comments on a draft of this report from the Acting Administrator of GSA and the Secretary of the Department of Veterans Affairs; the Coalition for Government Procurement, which represents businesses supplying about 75 percent of federal purchases through the schedules program; and the National Association of State Purchasing Officials, which serves the purchasing administrators in the 50 states and U.S. territories. The Acting Administrator of GSA, VA’s Deputy Assistant Secretary for Acquisition and Materiel Management, and the Chair and Co-chair of the National Association of State Purchasing Officials’ Federal/State Relations Committee provided written comments, which are included as appendices V, VI, and VII of this report, respectively. The Executive Director and other representatives of the Coalition provided oral comments to us on January 9, 1997. Comments from these agencies and organizations are discussed at the end of chapters 2, 3, 4, and 5, as appropriate. We conducted our work from July to December 1996 in accordance with generally accepted government auditing standards. Many state and local governments we contacted want access to the federal supply schedules because they perceive potential benefits from the use of cooperative purchasing. However, these potential benefits may be limited because of (1) state or local laws, ordinances, or policies that direct how or where state or local purchases can be made; (2) the unavailability of needed goods or services through the schedules program; (3) higher costs or unattractive sales conditions for goods or services through the program; and (4) the need for nonfederal governments to maintain capacity to purchase items they do not buy from the schedules program. The federal cooperative purchasing program is not likely to have a substantial effect on Indian tribal governments because many tribes already have access to GSA’s federal supply schedules for many of their programs. Although GSA believes the cooperative purchasing program has the potential to result in lower schedule prices because of the increased sales that GSA vendors may be able to make through the program, the extent to which this will happen is unclear because of many factors, including those that may limit nonfederal government agencies’ use of the program and uncertainty over how many businesses will react. Given GSA’s plan to not open schedules when adverse effects on federal agencies are anticipated, there appears to be little risk that federal agencies will be adversely affected if GSA effectively implements the program. Most state and local governments we contacted indicated that they want the option of using the GSA supply schedules. State and local government officials we contacted said that such an option would provide several potential benefits, including the ability to obtain more competitive prices, a wider selection of goods and services, reduced purchasing turnaround times and administrative time and costs, and additional negotiating leverage with their traditional suppliers. The results of our nationwide survey of state purchasing officials, as well as discussions with 26 state, local, and Puerto Rican government purchasing officials, indicate that these state and local governments are generally in favor of having GSA supply schedules available for their use because of perceived benefits. Similarly, in its January 1997 report, GSA found that state and local governments want access to the federal supply schedules because of perceived benefits. In response to our survey, 34 of the 48 states and two territories that responded to our survey, including Puerto Rico, indicated that they would use the federal schedules program for making purchases. Even if the program were not used for making purchases, of the 50 respondents, 38 said they would use the schedules for price comparisons; 24 said they would use the schedules for benchmarking; and 15 said they would use the schedules to negotiate with vendors. It is important to note that many states may already have access to schedules information, including through the Internet, and may already be using the schedules for these three purposes. In addition to our nationwide survey, we contacted purchasing officials in 29 agencies in California, Montana, New York, Puerto Rico, and West Virginia to obtain their views on the federal cooperative purchasing program. We also reviewed comments GSA received from state or local agencies in response to its Federal Register notice. Of the 26 agencies’ purchasing officials who responded to our information requests, all 26 said they favored having access to the federal supply schedules. Purchasing officials from seven of the agencies said that the supply schedules offer the potential for obtaining lower prices on popular items they purchase, such as computers, furniture, and office equipment. For example, the Assistant Director of Facilities for the West Virginia Office of Higher Education stated that the supply schedules would complement what state colleges and universities are already doing by providing them an additional source of potentially lower prices that could result in better use of state funds. The Business Service Officer for the California Highway Patrol said the agency would benefit because some of GSA’s prices would be lower than those the agency can obtain, and knowing that it has access to GSA vendors will force the agency’s current contractors to be more competitive and possibly lower their prices. In comments on GSA’s Federal Register notice, the Purchasing and Material Manager for the City of Chandler, Arizona, stated that the federal cooperative purchasing program would benefit cities such as Chandler because it cannot obtain prices as favorable as GSA’s prices because of the smaller quantities it orders. In addition, several state and local government officials said that having the schedules available to them could provide them a greater selection of items. For example, in comments to GSA, the Executive Director of the Lexington-Fayette Urban County Housing Authority in Kentucky said that it had a high interest in using the supply schedules to purchase commonly used goods and services because small purchases could be simplified and the choice of items increased because of the large number of GSA vendors. He said his agency could benefit from the wide range of items available on the schedules because virtually every GSA schedule other than medical, dental, or laboratory contained items the housing authority used on a regular basis. A purchasing official from the New York State Office of General Services said state agencies can benefit from using the schedules because they provide greater choice of products, brand names, and sizes. Several state and local government procurement officials also said that they could realize administrative savings of both time and money by ordering through the federal supply schedules. For example, procurement officials from Albany, New York, and Missoula, Montana, said that the administrative functions and their associated costs could be reduced. These functions and costs include the time and cost necessary to develop formal solicitation packages; time and personnel costs to evaluate, negotiate, administer, and award contracts; and, in some instances, inventory costs to stock items. The Director of Purchasing for Puerto Rico’s territorial purchasing agency said that the agency would not have to spend as much time and money developing solicitations annually. Puerto Rico currently awards over 120 competitively bid contracts with local vendors, according to the director. In its comments on GSA’s Federal Register notice, the city of Chandler, Arizona, estimated that in fiscal year 1995 it spent from $1,500 to $2,000 per contract to obtain bids for items that were also available through the schedules program. The city Purchasing and Material Manager told us these items included computers, office supplies, janitorial supplies, plumbing, and electrical hardware. Procurement officials from the New York State Office of General Services and the city of Albany, New York, said that procurement lead times could also be shortened for state and local governments because they would be able to simply place a delivery order from an existing supply schedules contract. An official from Louisiana State University commented that the university could eliminate about 8 weeks from the time it usually takes to receive and review bids on systems furniture for its Computing Services Building if it could use the GSA contract on systems furniture. GSA asked the National Institute of Governmental Purchasing, which is an association of federal, state, and local government procurement officials, to survey its members to determine members’ interest in participating in the cooperative purchasing program. In its January 1997 summary of survey results, GSA also found that the majority of respondents indicated that they would participate in the program if it became available. Of the 131 respondents, 111 indicated that they would participate, even though 31 respondents indicated local ordinances and laws may be a barrier. The most cited reasons respondents gave for wishing to participate in the program were better pricing and administrative ease. Some concerns, however, were also cited about legal restrictions, quality, and price, as well as the administrative complexity of using the federal supply schedules. Schedules cited as being of most interest to respondents include the computer, furniture, office equipment, office supplies, and signs schedules. These schedules were each cited by more than 30 respondents. However, 15 respondents stated they were interested in all schedules. Overwhelmingly, respondents indicated a strong desire for some form of training on using the schedules—including video tape training and Internet training. GSA noted that it has videos available for training and would provide training programs. U.S. Department of Commerce data suggest that state and local governments could potentially benefit substantially from having access to federal supply schedules depending on the extent to which they use them. Commerce data for 1987 suggest that state and local governments collectively spend substantially more for several of the types of items that are available through the schedules than the federal government does. For example, Commerce data show that state and local governments spent $2.3 billion for paper and allied products in 1987 compared to about $243 million in federal, nondefense expenditures. Although purchasing officials from most states and the local agencies we contacted want to have the option of using the federal supply schedules, several factors could significantly limit the benefits they cited. These factors include (1) state or local laws, ordinances, or policies that direct how or where state or local purchases can be made; (2) the unavailability of certain items or products through the federal supply schedules program; (3) the availability of lower prices or better terms and conditions on items obtained from other sources, and (4) the likelihood that these nonfederal governments would need to maintain the procurement capacity to continue using their other supply sources for items they do not purchase through the schedules. State or local competitive bidding laws, ordinances, and policies; the requirement to use state contracts; or preferences to use special groups of vendors, such as local businesses, the disabled, or prisons, may direct how or where state or local purchases can be made. These laws, ordinances, and policies thus may limit the extent to which state or local agencies would be able or would want to use the federal supply schedules program. Because of this, the perceived benefits cited by local procurement officials, such as the ability to obtain more competitive prices, a wider selection of goods, and reduced time and costs, may be less than otherwise expected. In response to our survey of state purchasing officials, 28 of the 34 respondents who indicated that they would make purchases from the supply schedules said that some law, ordinance, or regulation would limit their use of the cooperative purchasing program. All four of the states we contacted had competitive bidding requirements for state agency procurements, and they generally mandated that state agencies use existing state contracts. All four of the states also had preference programs for unique vendor groups, such as local businesses, the disabled, and the prison industry. Although these types of requirements and preference programs would limit state and local use of federal supply schedules, the possibility exists that they could be changed in the future to allow greater use of federal supply schedules by state and local governments. According to the National Association of State Purchasing Officials, in an effort to obtain the lowest prices available, most state and local government procurement statutes, ordinances, and rules provide that procurements exceeding a specified dollar amount must be made through formal competition, with public notices, sealed bidding, and public bid opening. In its 1992 survey of states, the Association found that 46 states had statutes requiring the procurement of goods or services by competitive sealed bids. According to the survey, the dollar amount above which competitive solicitation was required varied widely among states, from $100 in one state to $50,000 in another. However, 17 states were required to use competitive sealed bids for purchases exceeding $10,000, and 9 states were required to use sealed bids for purchases exceeding $5,000. The federal supply schedule programs are considered to be competitive under the Competition in Contracting Act in that participation in the program has been open to all responsible sources. Although some states have amended their statutes to exempt purchases obtained through the federal supply schedule program from competitive bidding requirements of state laws, this is not the case in all states. As of September 1996, more than half of the states reported still having restrictions that would limit their using the federal supply schedules. In our survey, 27 of the 50 respondents indicated that state competitive bidding requirements would limit their states’ use of supply schedules programs. All four of the states included in our case studies said that they had state bidding requirements that would limit their use of the supply schedules program. Because state competitive bidding statutes apply only to purchases that exceed specified thresholds, however, state and local governments might be able to use GSA’s schedule program for purchases that were below these thresholds and for other limited purchases. For example, in its comments to GSA in response to the April 1995 Federal Register notice regarding GSA’s plan to implement the cooperative purchasing program, Kentucky said that its state law requires state agencies to make aggregate purchases in excess of $5,000 through competitive sealed bids. Because of this requirement, Kentucky said that its agencies would be able to use the federal supply schedules only in instances where competitive bidding could not be used, such as when only one source of supply was available or an agency requested a specific brand and no substitute was justifiable. Similarly, Salt Lake City, Utah, commented that it could use the supply schedules only for small, sole-source, and emergency purchases. Comprehensive data are not readily available for us to estimate the amount of state and local governments’ purchases that must be made using state competitive purchasing requirements. However, in its 1992 survey, the National Association of State Purchasing Officials estimated that 85 percent or more of state and local government expenditures resulted from competitive solicitation. Another factor that could limit state or local governments’ use of the federal cooperative purchasing program is a requirement to use statewide or local contracts. According to the National Association of State Purchasing Officials, all states and most local governments consolidate requirements and award contracts for the purchase of goods or services for multiple users in order to reduce administrative costs associated with the preparation and issuance of solicitations on the same or similar items and the receipt, handling, and evaluation of the responses. Although the use of these contracts may be optional for some state or local agencies, the contracts may be mandatory for others. The 1992 National Association of State Purchasing Officials survey found that the extent to which states and local governments rely on statewide contracts varied. For example, state purchases through statewide contracts ranged from 5 percent of total dollar volume to up to 90 percent. Of the 50 respondents to our survey, 16 states indicated that they could use GSA’s schedules program to procure items only if the items were not available through other state procurement arrangements, such as schedules. The four states included as our case studies also generally were required to use statewide contracts. For example, the New York State Office of General Services is the central procuring office for hundreds of New York state agencies. It annually awards about 2,100 contracts with an estimated purchasing value of $800 million. According to the Purchasing Director, Office of General Services, New York state finance law requires state agencies to first consider the use of the state contracts to acquire commodities. State contracts for services and technology are available for optional use. However, they are developed to specifically address the needs of New York state agencies. In addition, the Purchasing Director explained that the Commissioner of the Office of General Services is authorized to approve the use by state agencies of a contract let by the federal government. The Director said such approval would be the procedure used to enable a New York state agency to use a federal supply schedule that would be available under the cooperative purchasing program. More than half of the contracts are available for use by about 3,100 eligible nonstate agencies, including local governments, school districts, and fire districts. These agencies account for about 40 percent of the purchases made under the statewide contracts. However, even though a state may require state agencies to use statewide contracts, exceptions may exist when agencies can demonstrate they can obtain items elsewhere at a lower cost. In addition, the mandatory use of statewide contracts may not always apply. The Purchasing Director for the West Virginia Procurement Division said that even though state agencies are generally required to use state contracts, if a state agency can document that it can procure goods or services at a lower price elsewhere, the Procurement Division will, upon request from a state agency, grant a written waiver for the agency to do so. The Assistant City Manager for Charleston, West Virginia, said that the city makes its purchases using whatever methods or procedures will result in the lowest price. This could include using a state contract. The Chief of Purchasing for the Raleigh County Board of Education in West Virginia said that the board uses a combination of purchasing methods, including the use of statewide contracts, its own contracts, and spot purchases. According to this official, the driving factor determining which procurement method is used is obtaining the lowest price. State and local laws, ordinances, or policies that provide for contracts to be awarded on the basis of factors other than best price or best conditions of sale could also limit the potential benefits of the cooperative purchasing program. These include laws that direct contracts to local businesses or to certain groups, such as prisons; preferences to support local businesses over other businesses; and commitments to use cooperative contracts. The National Association of State Purchasing Officials found in its 1992 survey that 15 states had laws mandating preference for in-state vendors, and an additional 16 states had laws favoring products produced in-state. In addition, it found that 45 states that award contracts to manufacturers required that sales and services be rendered through local dealers. Of the four states we contacted in our review, two had local vendor preference statutes. According to the Business Manager for the West Virginia Department of Transportation’s Division of Highways, West Virginia’s vendor preference law provides in-state vendors with up to a 5 percent price advantage over out-of-state vendors. In addition, if at least 75 percent of an out-of-state vendor’s workforce is located within the state, the vendor is given a 2.5 percent price advantage. Similarly, according to the Chief of Procurement, Department of Administration, Montana’s vendor preference law provides in-state vendors with a 3 percent price advantage over out-of-state vendors. She explained that the Montana statute also provides vendors a 5 percent price advantage for products produced in Montana. Some states have laws to direct purchases to certain groups, such as the disabled or the prison system. Three of the four states included in our case studies had such preferences. For example, New York’s priority system for making purchases requires state agencies to first determine whether an item or service is available from one of the state’s established preferred sources, including Corcraft, New York State Department of Correctional Services, Division of Industries; the Industries for the Blind of New York State, Inc.; the New York State Industries for the Disabled; and the New York State Office of Mental Health. State law requires that purchases be made from one of the preferred sources when needed goods or services meeting the form, function, and utility requirements of the agency are available from those sources. Similarly, state officials told us that state agencies in California and West Virginia that are purchasing goods made by the state prison industry must attempt to purchase these goods from this industry before going to another source. Even though there may not be state laws that direct that purchases be made from certain groups, regardless of whether the price is competitive, state and local governments may prefer purchasing products and services from in-state or local vendors. Their reasons could include a need for customer support services and/or the desire to support the local economy. Of the 26 state and local agencies that provided information on their procurement practices, three state and four local agencies said that a need for customer support services or the desire to support the local economy affected their procurement decisions. At the state level, the West Virginia Department of Transportation’s Business Manager said that when developing requests for bids, the Department assigns point values to such things as vendor warranty, local vendor servicing, and local availability of spare and repair parts, as well as to the bid price when awarding contracts. An official of the University of California said that its campus system prefers to patronize local businesses in the communities where campuses are located because to do so helps support the local economy. At the local level, the Finance Director for the city of Missoula, Montana, said that all equipment the city purchases is from local sources because the city cannot afford to send equipment out of Missoula for repairs. In addition, the Purchasing Coordinator for the city of Elmira, New York, said that although contracts are awarded strictly on the basis of price, contract minimum requirements may stipulate that the vendor must arrange for repair parts and servicing to be provided by dealers within 150 miles of the city. The Director of Purchasing for the Puerto Rican government said that this government also has a practice of purchasing locally. Puerto Rico may find its potential use of the supply schedules similar to that of the Virgin Islands. That territory has been able to use the schedules since 1992. According to the Deputy Commissioner for the Virgin Islands Department of Property and Procurement, the Virgin Islands uses the supply schedules only for those items that its local vendors cannot supply. This is because territorial vendors complain to their local legislators if the government procures from businesses that are not on the island. As a result, most of the Virgin Islands’ purchases are not made through the federal supply schedules program, according to the Deputy Commissioner. Interstate and intrastate arrangements that state and local governments use to combine procurement needs and collectively procure items also have the potential to reduce the extent to which these governments procure certain items through the supply schedules program. These types of arrangements may require participating nonfederal governments to combine the needs for specific items for the purposes of soliciting bids and awarding contracts and to purchase those items through those contracts. According to the Manager of Contracts and Administration for the Metropolitan Washington Council of Governments, these arrangements may result in lower prices than those arrangements where the needs of participants are not combined for the purpose of soliciting offers. In its 1992 survey, the National Association of State Purchasing Officials found that 42 states had statutory authorization for entering into cooperative procurement agreements with different units of government, and 22 states had statutory authority to enter into cooperative procurement agreements with other states. In our discussions with 26 state and local agencies’ procurement officials, 3 of the 4 states—Montana, New York, and West Virginia—indicated that they were members of cooperatives. In our nationwide survey, 30 of 50 respondents indicated that they used cooperative purchasing agreements with states, and 36 indicated that they used such agreements with local governments. One example of a large-scale cooperative procurement arrangement is the National Financial Services Center’s National Cooperative Purchasing Alliance, which is affiliated with the National Association of Counties and relies on county purchasing agents across the nation to both select and bid on products and services on behalf of local governments in the United States. One of the Center’s programs currently uses the services of a number of purchasing entities across the country, including Fairfax, Virginia; Los Angeles, California; Orange, Florida; and Erie, New York. This program, which is in the early stages of development, has resulted in the award of one contract for office supplies, many of which may be available on federal supply schedules. Center officials said that they had not compared their cooperative purchasing contracts with those of GSA’s supply schedules. However, they believed that their contracts were competitive with GSA’s. Cooperatives also exist at the regional level. For example, the Washington Council of Governments comprises 18 of the largest jurisdictions in and around the Metropolitan D.C., area, including Fairfax, Loudon, and Prince William counties in Virginia; Prince George’s and Montgomery counties in Maryland; and the District of Columbia. According to the Manager of Contracts and Administration for the Council, as of September 1996, the Council had about 20 or more cooperative solicitation contracts for the purchase of such items as fuel oil (heating and diesel), road salt, and antifreeze. Members who have pooled their demands for those products must then use those contracts to purchase those products. The Council’s Manager of Contracts and Administration said that items suitable for such cooperative solicitations include those whose specifications are established by industry, such as fuel oil, and have great pooled demand among the governments. This official said that the Council had not compared its cooperative contracts to GSA’s supply schedule contracts. However, in general, he did not believe that having the option of using GSA’s contracts would change local governments’ purchasing practices. Similarly, a representative from a cooperative initiated by the city of Fort Lauderdale and Broward County, Florida, said that the cooperative is able to obtain highly competitive bids through the pooling of members’ needs. Currently, the cooperative has about 23 members. Members have pooled their demands to obtain such items and services as oils, greases, and lubricants; photographic film; diesel fuel; gasoline; office supplies; sod; brass valves and fittings; red clay for baseball fields; aggregate (for construction); field marking paint; mail presort services; athletic bleachers; paging services; uniforms; water testing; and trucks and vans. Once a member agrees to participate in a contract, the member agrees to purchase through the contract. Although this representative said that the cooperative had not compared its contracts to GSA’s supply schedules contracts, another cooperative representative said that the city of Coral Springs and the cooperative use some GSA schedules for benchmarking and price comparisons to determine if local vendors are quoting reasonable prices. These representatives said that they would like the option of using GSA’s schedules. One representative said that having the option of using GSA’s schedules program would be convenient for making those individual purchases that are sporadic in nature, where it would be too costly to solicit for bids, or when local vendors may not be able to supply city and county needs during times of a natural disaster. Although more than 4 million items are available through the federal supply schedules program, not all items needed by state and local governments would be available through the schedules. This could affect (1) whether state and local governments make purchases through the schedules program and (2) the extent to which these governments would incur benefits. We asked 24 state and local agencies in California, New York, Montana, and West Virginia to provide invoices of recent purchases to compare prices with similar items on GSA supply schedules. Of the 24 agencies, 16 provided documentation for 255 items that they indicated that they would be interested in buying through the supply schedules program. Of the 255 items, GSA determined that 84 were not available. GSA was unable to make a determination on whether 101 of the 255 items were available because the agencies provided insufficient information for GSA to make this determination. The fact that all goods and services needed by state and local governments are not available through the schedules program is not surprising, because GSA operates the schedules program to meet federal, not state, needs. State and local government agencies in California, Montana, New York, and West Virginia said that they were interested in buying a wide variety of items through the schedules program, including computers and computer hardware, office equipment and supplies, laboratory equipment, airline tickets, furniture, ammunition, asphalt, prestressed concrete beams and culverts, road salt, paint, diesel fuel, tires, automobiles, and heavy road maintenance equipment. Of the 154 items that state and local government agencies said they were interested in buying and that GSA could make a determination on whether the items were available through the federal supply schedules, GSA identified 70 that were available through the schedules program. Whether this would be true for all state and local government needs is not known because our sample was not designed to represent all potential users of the federal cooperative purchasing program. Items that were available include selected computer printers, certain types of computers, certain types of copiers, lawn mowers, de-icing road salt, and certain kinds of office supplies. Items that were not available include certain specific types of computers and computer hardware, some airline tickets, ammunition, automobiles, certain specific office equipment and supplies, asphalt, and diesel fuel. (App. IV contains a summary of GSA’s determinations on availability and pricing of these items on federal supply schedules.) According to the Director of GSA’s Acquisition Management Center, these items, as well as other items that state and local government agencies may be interested in purchasing, may not be available through the schedules program because the program is not intended to supply all federal agencies’ needs and is not designed to meet state or local government agencies’ needs. Rather, the program is intended to facilitate federal agencies’ purchases of commercially available items that are purchased frequently enough to warrant having them available through the schedules program. According to GSA officials, GSA will not be changing its basis for determining what items are available through the schedules program in order to accommodate state or local government agencies’ needs. U. S. Department of Commerce data suggest that those items for which state and local governments spend the most money are not available through the federal supply schedules. For example, Commerce data for 1987 show state and local governments spending their largest amounts of money on new construction, maintenance repair and construction, and electric utilities services—none of which are available through the schedules program. Of the items that accounted for the next two largest amounts of funds—other business and professional services and petroleum refining and related products—only a small portion of the former and none of the latter are available through the schedules. Experience among some law enforcement agencies that have been able to purchase items through the federal supply programs since 1994 also shows that some items are not available through the schedules program. Law enforcement agencies may make purchases through the program if items purchased are suitable for counter-drug activities. A North Carolina official said that some items that state or local law enforcement agencies want to purchase are on the schedules, while some are not. For example, while purchasing a portable thermal imaging unit suitable for use on helicopters, the state found that some of the components for the system were available through GSA’s supply schedules, and some were not. The state was able to purchase part of the system through the schedules program and obtained competitive bids for the remainder of the system. The North Carolina official said that the law enforcement agency that purchased the system was able to obtain the entire system for $90,000. Had GSA’s schedules not been available for the agency to obtain components of the system, he estimated that the system would have cost an additional $15,000. Since GSA’s policy is that it will not make items available if doing so would be contrary to the interests of its principal customers, which are federal agencies, state and local agencies may continue to find some products unavailable to them. In some cases, GSA may not make all schedule items available; and in other cases, the schedules may not include items that these nonfederal governments need. For example, GSA’s Federal Register notice proposed excluding the pharmaceutical schedule and one medical equipment and supply schedule from the cooperative purchasing program. GSA also does not intend to make its airline or fire fighting vehicles schedules available through the cooperative purchasing program because of its concern that doing so would lead to higher federal prices or adverse effects on businesses. (See. ch. 3.) The extent to which items are available through the supply schedules program but at higher prices than are available through other means or with less desirable servicing or sales conditions will limit the potential effect of the cooperative purchasing program on state and local governments. Our case studies conducted as part of this review and procurement work we have done previously demonstrate that GSA does not always have the lowest price or the most favorable sales conditions. As part of our review, we asked GSA to compare its schedules’ offerings with 255 items recently purchased by 16 state and local governments included in our case studies. GSA found that although some items were more favorably priced through the schedules program, others were not.Of 70 items that state and local governments said they would be interested in purchasing that are available through the schedules program, 20 were purchased by the state and local governments at lower sales prices or with more attractive sales conditions than those of the schedules program, 47 items could have been purchased at lower prices through the schedules program, and 3 items could have been purchased at the same price. For example, the Raleigh County, West Virginia, Board of Education purchased a Hewlett Packard Laserjet computer printer for $485; GSA’s schedule price was $446, or 8.04 percent lower. The City of Mountain View, California, purchased another type of computer printer (Laserwriter 16/600) for $2,046; the GSA schedule price was $2,104, or 2.83 percent higher. Fairmont, West Virginia, State College purchased a computer system upgrade for $510.75; GSA’s schedule price was $394, or 22.86 percent lower. The State of West Virginia purchased road de-icing salt for $36.90 per delivered ton; the GSA schedule price was $42.75 per delivered ton, or about 15.9 percent higher. According to state purchasing officials, GSA may not always have the lowest price. Of the 50 respondents to our survey, 33 indicated that they had analyzed some GSA schedule prices. Of those 33 respondents, 13, or about 39 percent, indicated that state prices were generally lower than those available through GSA for the items they compared, while 2 states, or about 6 percent, indicated that GSA generally had lower prices for the items they compared. In addition, of the 33 respondents, 18, or about 55 percent, said some state prices were higher and some were lower than GSA’s prices for the items they compared. We did not ask state purchasing officials to identify any specific items or prices they compared, nor did we verify their responses. Some officials we interviewed in the four states included in our case studies also indicated that GSA’s schedule prices were not always lower than their prices. For example, a purchasing director in the New York State Office of General Services said that state contract prices are frequently lower than GSA’s schedules prices. Also, the Chief of Purchasing for the Raleigh County, West Virginia, Board of Education said that at times he has compared GSA’s schedules prices to prices the board can obtain locally and found that GSA’s schedule prices have generally been higher. For this reason, he said that opening the federal supply schedules for state and local governments will probably have little effect, even on small local businesses. He said that state and local buyers are already seeking the best match between the product or service they need or want and the lowest price, and competitively bid prices are generally lower than the prices GSA obtains. States we contacted that are participating in GSA’s law enforcement schedules program have had similar experiences. According to a North Carolina official, prices are not always lower through GSA’s schedules program, particularly with the administrative fee that is included on schedules prices to pay for administrative costs. He said that law enforcement agencies can, at times, find items through state contracts that are less expensive, and having the supply schedules available would not likely result in any state or local firms being put out of business because the schedule prices are not always better. He also said that law enforcement agencies frequently have many reasons to purchase locally aside from price, such as the desire to support local businesses. According to a West Virginia official, West Virginia has found that GSA’s prices are not always the best prices. She said that statewide contracts or department contracts frequently are competitive with GSA’s prices. She explained, for example, that the state of West Virginia and GSA both have contracts with the same manufacturer for light bar assemblies, which are the racks used to mount lights on top of police cruisers, and the state’s contract had a per item cost of about $100 to $125 less than GSA’s list price. However, some law enforcement agencies have realized savings through the federal supply schedules. For example, according to the North Carolina Alcohol Law Enforcement’s Deputy Director for Purchasing, the agency has purchased radios as well as a camera through the program. He said that the agency could not have afforded the camera except at the price available through the schedules program. An official in California’s Counter Drug Activities Procurement Program said that of the $360,000 in purchases made through the program, it was estimated that about $60,000 had been saved. This official said that departments can save about 33 percent off the prices of such items as cameras and night vision goggles. Our previous work has also shown that GSA’s prices may not always be the best available to state or local governments. In 1993, we reported that about half of the top-selling GSA multiple-award schedule items we examined were less expensive when offered to the general public or certain state governments than they were through the program. GSA has pointed out that a number of factors must be considered when one makes price comparisons between the schedules program and other supply sources. One is that federal purchases must comply with all federal procurement laws. The Raleigh County, West Virginia, Board of Education purchased a computer system for $1,455, but the GSA price for a comparable system was $1,687. However, GSA said that the lower priced system included a particular computer monitor that GSA could not offer because federal acquisition of this item would not be in compliance with federal international trade law. Another factor GSA cites is the terms of sale. To illustrate this, GSA points out that all GSA prices on the office supplies schedule provide for delivery to the customer’s desk within 24 hours of purchase, while state or local prices often require customer pick-up. GSA pointed out that GSA schedule prices represent ceiling prices and that customers are encouraged and permitted to contact schedule contractors to negotiate lower prices when making a purchase. The extent to which state and local governments could reduce administrative costs through a cooperative purchasing program is unclear. Data compiled by the Center for Advanced Purchasing Studies at Tempe, Arizona, indicate that the costs of procurement and, therefore, any costs that state or local governments may save by purchasing through the schedules program vary considerably. For example, the Center’s 1994 studies on purchasing performance benchmarks for state, county, and municipal governments show that the cost to procure a dollar’s worth of goods or services varied widely, ranging from fractions of a cent to 4 cents of administrative costs per dollar of procurement. (We have not verified these data or assessed reasons for this variability.) As chapter 1 notes, GSA charges a 1-percent fee for purchases from schedule vendors, and VA charges a 1/2-percent fee. Whether this fee will be more or less than the expenses that nonfederal governments would still incur should they use the federal supply schedules is unknown. Further, since nonfederal governments would not likely be able to use the cooperative purchasing program to meet all their procurement needs, these governments would continue to have some administrative and personnel expenses for procurement purposes. Moreover, the extent to which they could reduce their administrative costs is also unknown. Allowing Indian tribal governments to use the federal supply schedules program would appear unlikely to have a substantial effect on many Indian tribal governments because many of these governments already have the authority to use not only GSA’s supply schedules program but its other supply programs as well. The Indian Self-Determination and Education Assistance Act of 1975, as amended, gives Indian tribes the authority to contract with the federal government to operate programs serving their tribal members, as opposed to having these programs administered by BIA in the Department of the Interior and the Indian Health Service in the Department of Health and Human Services. After entering into an agreement to assume federal responsibilities, tribal governments receive the authority to purchase items from federal supply schedules or from GSA’s stock program, which has a range of items available in a nationwide network of distribution centers. Since section 1555 of FASA does not provide these tribal governments with any additional authority, the section should have little or no effect on the tribal governments that have contracted with the federal government to operate programs serving their members. In fact, by allowing Indian tribal governments to purchase from GSA customer service centers, the 1975 act provides these governments with broader access to GSA procurement programs than would section 1555, which would allow nonfederal users to make purchases only from federal supply schedules. According to BIA officials, approximately 70 percent of BIA’s programs are operated by tribes or tribal organizations. However, BIA and GSA do not maintain data on the extent to which tribal governments use GSA’s programs. According to BIA officials, although BIA may help a tribal government that has assumed responsibility for federal programs set up an account with GSA, BIA is not involved in any transactions between the tribal government and the GSA schedule vendors. According to an official in GSA’s customer support center, although GSA is aware that Indian tribal governments have purchased items through GSA’s programs, including its stock programs, GSA does not have data to measure the total sales to Indian tribal governments or to indicate what products were purchased. Officials from three tribal governments we contacted confirmed that their governments use GSA’s supply programs, but they said that their reliance on the programs varies because of the availability of items and the competitiveness of supply schedule prices. These officials said that they could not readily identify the share of their total purchases that were made through the different GSA supply programs. Even so, they stated that in certain cases, items and prices that are available through the supply programs can be financially attractive. One tribal official considered access to the schedule program to be important and noted use of GSA’s airline schedule as an example of a benefit of having access to GSA’s schedules program. (As noted earlier, GSA does not plan to make this schedule available to state and local governments through the federal cooperative purchasing program.) Officials from the other two tribal governments said that they may use GSA supply programs if needed products are available and if the prices are better than prices offered by other suppliers. However, they said that their use of the programs varied widely. The purchasing officer for one tribal government said that GSA’s supply programs, including the schedules program, represent about three-quarters of the tribal government’s total purchases. In contrast, an official for another tribal government said that this tribe’s use of GSA’s supply programs, particularly the stock program, was limited to about 5 percent of the tribe’s purchases because GSA frequently did not have needed items in stock. Both officials noted that these were only rough estimates because they did not have records that would provide a breakdown of sales by source. Tribal governments that have not entered into an agreement under the 1975 act could gain access to GSA’s supply schedules under the federal cooperative purchasing program in FASA. In practice, however, the fact that BIA or the Indian Health Service remains responsible for providing services to the tribal governments effectively means that any effect on such a tribal government from this new access may be limited. Since federal agencies continue to be responsible for providing services, these agencies would have to purchase the goods and services needed to support those services. Thus, the tribal government may not need to purchase many items. GSA officials we contacted believe that if sales made through the federal supply schedules program increase, a net reduction in prices paid by federal agencies could result from the agencies having a stronger negotiating position and a reduction in the administrative fee. Procurement officials from the Departments of Health and Human Services, the Interior, and Justice said that they had not assessed the potential effects of cooperative purchasing. The Department of Defense did assess the potential effects of cooperative purchasing on pharmaceutical prices, but Defense procurement officials told us that the Department had not conducted a comprehensive assessment of the potential effects of cooperative purchasing on other types of products. Officials in these departments said that procurement actions are decentralized in their departments and detailed data on transactions are not maintained centrally. Because procurement actions are handled at lower levels throughout their agencies, they believed that the effects of price changes at the lower levels would be small. VA and the Department of Defense have expressed concern about a possible price increase by pharmaceutical companies if drugs were made available to state and local governments through the schedules program. GSA believes that an increase in the use of and an increase in the number of sales made through the federal supply schedules as a result of the federal cooperative purchasing program would have the potential to reduce the costs of federal purchases. However, the extent to which prices could be reduced may be limited to the extent that GSA already tries to obtain the “best customer price” on contracts, even though it may encourage some potential GSA vendors to negotiate lower schedule prices. According to the Acquisition Management Center’s Director, the Federal Supply Service is mandated to become a nonprofit, self-sustaining agency. A 1-percent charge on sales made by or through the Federal Supply Service is assessed to purchasers of goods or services. The provision to assess a 1-percent fee is included in GSA’s contracts with supply schedule vendors. The vendors collect this fee as part of their sales price and transfer the fee to GSA, which offsets its operating costs. The Director of GSA’s Acquisition Management Center said that fiscal year 1997 is to be the first year that fees assessed and collected will be sufficient to sustain the Federal Supply Service’s operations. According to the Director, if state and local agencies were to make purchases through the supply schedules program, the additional sales made through the supply schedules program could ultimately result in GSA’s lowering the 1- percent charge on sales, because revenues would be more than sufficient to pay for GSA’s administrative costs. The Director said that GSA will be monitoring the extent to which revenues exceed its costs to determine whether it may need to renegotiate contracts with its vendors to reduce the fee. GSA officials also said that the cooperative purchasing program could also benefit the federal government because if the program results in increased sales, GSA may be able to negotiate lower prices with its vendors for items available through the supply schedules. They believe vendors may be willing to reduce prices because of the increased volume of sales. Procurement officials from the Departments of Health and Human Services, the Interior, and Justice said that their departments had not conducted a formal assessment of the possible effects that cooperative purchasing might have on their budgets or purchases. The Department of Defense assessed the potential effects of cooperative purchasing on pharmaceutical purchases; Defense procurement officials told us that they had not conducted a comprehensive assessment of the possible effects on other purchases. Officials in these departments commented that such an analysis would be at best difficult, if not impossible, to conduct. In addition, these officials said that they did not have sufficient data on the use of the schedules program by their departments because ordering authority in their departments was dispersed. The departments authorized program managers to manage their budgets and purchase needed items using their budgets, but they do not maintain detailed, centralized data on all items purchased by the different components of their departments. An official in the Department of the Interior’s procurement office noted, for example, that Interior had over 900 authorized purchasing officials working throughout its bureaus and offices and that these purchasing officials were not required to report all the specific items purchased. This official noted that the new purchasing card program would compound the data limitations. The official said that Interior had issued over 14,000 purchasing cards and concluded that it would not be possible to assess the effects of cooperative purchasing on Interior with the limited available data. Similarly, officials at the Departments of Defense and Health and Human Services noted that their departments did not have data centrally on the individual items purchased by their components. One official at the Department of Defense told us that the department had maintained such records until about 10 years ago but that currently, maintaining systematic data is not feasible because of how purchases are made through the schedules program. Although noting that data limitations prevented them from developing definitive predictions of the effects of cooperative purchasing, some procurement officials identified several reasons why they felt it would be unlikely that the cooperative purchasing program would have a readily noticeable effect on their departments’ purchases. One reason was that purchasing authority was spread throughout the departments. Because of this dispersed purchasing authority, procurements are generally smaller in scale than major, departmentwide procurements. Thus, if the cooperative purchasing program did affect prices paid by their departments’ components, the effect may not be large enough to be observed in any particular purchase. Some officials also noted that many of the industries that are included in the schedules program are competitive industries where other vendors would have an incentive to underbid any vendor seeking to increase prices as a consequence of cooperative purchasing. One official in the Department of the Interior, for example, said that buyers seek to pay the lowest price available for an item. If the schedule price is the lowest price for a particular item, other buyers, including business buyers, would seek to pay that price. An official in the Department of Defense also said that it was unlikely that the Department would see any sizeable effect from cooperative purchasing because the items on the federal supply schedules are commercial items with many buyers and sellers, so a shift in how any particular group of buyers operates (such as state governments using the federal supply schedules rather than their own procurement process) would not necessarily be noticeable to other buyers (such as the Department of Defense). Defense officials further noted that since use of the multiple-award schedules is not mandatory for the Department, and since any departmental component may purchase items through contracts negotiated by any other component, the Department would be less likely to experience substantial effects of wider use of the multiple-award schedules under a cooperative purchasing program. As discussed in chapter 1, GSA officials have stated that GSA would not open up a schedule if it believes that doing so would negatively affect the federal government. Prior to publishing the April 1995 Federal Register notice, GSA was told by VA that opening up the pharmaceutical schedule and one medical supply and equipment schedule may result in an increased cost to VA. On the basis of VA’s recommendation, GSA announced in the Federal Register that it proposed to exclude the two schedules from the program. After the notice was published, the Department of Defense notified GSA that it concurred in GSA’s proposal to exclude these two schedules because of the potential for increased federal prices. Also after the notice was published, a GSA official said that discussions were held with airline companies, during which these companies indicated that if nonfederal governments were able to use the airline schedule, they may raise their schedule prices. This GSA official said that because the estimated cost to the federal government of increased airline fares could be substantial, GSA is not planning on opening this schedule for state and local use. GSA’s Acquisition Management Center Director also said that GSA is not planning on opening up the schedule containing fire fighting vehicles because of the perceived potential negative effect this may have. In their written comments on a draft of this report, GSA and VA agreed that many factors make it difficult to definitively assess the effects of the cooperative purchasing program on federal and nonfederal governments. In its comments, the National Association of State Purchasing Officials agreed that opening the use of federal schedules has the potential to create a positive effect on state and local governments. The Association further noted that there were also potential areas of concern. For example, the Association noted that there could be a perception among local contractors, particularly small businesses, of diminished opportunities to bid for state and local government contracts. It also noted that in some circumstances, the Federal Supply Schedule contract will not have the lowest price and said that in such cases, the current system of multiple contracts helps to ensure that the most competitive prices are obtained. Finally, the Association pointed to several conditions in addition to those we cited that could limit use of or benefits from the cooperative purchasing program or that could cause difficulties for nonfederal governments. These conditions included mandatory contract terms or restrictions required in many state and local procurement contracts that schedule contractors might have to agree to abide by and the possibility that reliance on federal contracts could adversely affect some nonprofit, nongovernmental entities, such as charities, schools, and hospitals, that, in some states, now have access to state contracts. These types of organizations would not be eligible to use federal schedules under cooperative purchasing. The potential effect of cooperative purchasing on industry, including small business and local dealers, is likely to vary. Department of Commerce data on industry sales suggest that a number of industries that supply large portions of their output to state and local governments will not be affected at all because the services or goods they provide are not available through the schedules program. The data also show that the extent of the effects of cooperative purchasing on other industries is likely to vary due to the differing portions of their output that are sold to state and local governments. Businesses we contacted also differed in their expectations of the potential effects. Some state and local contractors we contacted believe that cooperative purchasing will have a positive effect by increasing their sales and customer bases. On the other hand, some state and local contractors fear negative effects in the form of business lost to GSA vendors if the program were implemented. Also, certain industries—including medical supplies and equipment, heavy equipment, and airlines—have expressed concern that they may be negatively affected by the cooperative purchasing program. These effects include a potential for reduced profits and decreased customer support. Because of these potential adverse effects, GSA plans to exclude some schedules that contain those industries’ goods or services. Other state and local contractors do not foresee any effect on their business, citing the unique specifications of the products they sell or their ability to offer competitive prices as the reasons they would not be affected. Finally, some contractors did not know how cooperative purchasing would affect them, citing uncertainties about how the program would be carried out and the potential for both gains and losses. Reflecting the diversity of views among individual businesses about how they would be affected by the cooperative purchasing program, associations representing industry have taken a range of positions on the program. However, these associations generally did not provide conclusive data that would provide the basis for a prediction of the effects of cooperative purchasing. Department of Commerce data on interindustry relationships for 1987—the most recent data available—provide a broad perspective on the extent to which different industry groups might be affected by the cooperative purchasing program. These data suggest that the effects are likely to vary among different industries. Some industries that supply large portions of their output to state and local governments—such as construction and service industries—generally are not available through the schedules program. Other industries that provide relatively large portions of their output to state and local governments provide products that generally are available on the schedules. According to Commerce’s data, few industries that supply goods to state and local governments rely on these governments for a large share of their sales. According to the most recent data, only 28 industries out of the 89 industries identified in the Commerce data supplied more than 3 percent of their total industry output to state and local governments. Of these 28 industries, only 14 supplied goods or services that are available through the schedules program. However, these data are national averages for broad industry groups, and particular firms, specific products, or geographical areas could have a much higher reliance on state and local purchases than suggested by these figures. Several of the industries that provided a relatively large share (6 percent or more) of their total output to state and local governments are not likely to be affected much, if at all, by cooperative purchasing according to Commerce’s data. The output that these industries supply to state and local governments was generally not available through the schedules program. For example, maintenance and repair construction, new construction, electric utility services, petroleum refining products, computer and data processing services, other printing and publishing services, and railroads and related services are the industries that supplied 6 percent or more of their output to state and local governments, as demonstrated by table 3.1. However, the types of output provided by seven of these industries were not available through the federal schedules program as of fiscal year 1996. In contrast, four industries that supplied 6 percent or more of their output to state and local governments produce output that was available through the schedules program, including ophthalmic and photographic equipment; drugs; miscellaneous manufactured products, such as signs, pens, mechanical pencils, and hard surface floor coverings; and farm, construction, and mining machinery. GSA has a photographic equipment and supplies schedule; a construction and highway maintenance schedule; and several material handling equipment schedules containing such items as forklifts and material handling equipment. It also has office supply schedules and a resilient flooring schedule. This could suggest that cooperative purchasing may have more of an effect on those industries. An additional 17 industries supplied over 3 percent, but less than 6 percent, of their output to state and local governments. These industries include furniture and fixtures, scientific equipment, industrial chemicals, computer and office equipment, and electrical equipment. Some types of computers, office equipment, and office furniture are sold in high volumes through the schedules program and, as noted in chapter 2, are products that state and local government purchasing officials would be interested in having access to through the schedules program. The remainder of the industry groups included in the national statistics sold less than 3.1 percent of their goods to state and local governments. These include various machinery industries (e.g., metalworking and electrical equipment); transportation-related equipment (e.g., engines and turbines, aircraft, and other transportation equipment, such as ships and railroad equipment); and a wide range of other services or products. Although these data provide an indication of the extent of the potential effect of cooperative purchasing on industries, the magnitude of the effect on industries within specific geographical areas could be larger or smaller than the effect suggested by the national data. In addition, the size of the effects on specific suppliers of subindustries could be larger or smaller than the averages for the industry groups included in table 3.1. For example, while the national data indicate that 3.6 percent of computer and office equipment sales could potentially be affected by the federal cooperative purchasing program, effects could vary significantly among office equipment suppliers depending on the locations of these firms, the types of office equipment they sell, and the importance of state and local governments as their customers. A discussion of the potential effect of the federal cooperative purchasing program on individual businesses follows. Representatives of 22 of the 59 state or local government contractors we contacted said that the cooperative purchasing program would have a positive effect on their businesses, although they provided no data to support their views. Of these 22 businesses, 11 said they were small businesses. The 22 businesses primarily sell computer equipment, furniture, photographic equipment and supplies, and office equipment, including copying machines, all of which are available through the schedules program. A majority of these businesses—15 of the 22—are either GSA vendors or dealers for GSA vendors. Representatives from these businesses said that allowing nonfederal governments access to the federal supply schedules would increase their sales, profits, customer base, or exposure to potential additional customers or could reduce the administrative time and effort associated with state or local governments’ competitive bidding processes. For example, nine state or local government contractors that supply photographic equipment and supplies, office equipment, or furniture said that opening the federal supply schedules to state and local governments would increase the number of buyers using the schedules. Because these contractors are also GSA vendors or dealers for GSA vendors, most noted that their businesses could expand their current customer bases, which would ultimately benefit their businesses. Further examples of businesses that perceived potential benefits include two contractors that sell office equipment. One contractor, located in Virginia, that is also a GSA vendor of office equipment has a nationwide network of dealers that provides sales and service support for products it sells. An official for this contractor said that all dealers in its network would be able to participate in sales to nonfederal agencies if the cooperative purchasing program is implemented. Another contractor, located in New York, told us that cooperative purchasing will result in increased revenues from product sales and servicing with the additional customers purchasing products off the schedule. A third state and local government contractor, located in New York, that sells office equipment said that it does not fear the competition from GSA’s vendors because there would be enough buyers in the marketplace allowing them to compete in a larger market. Finally, two businesses that sell heavy equipment both through GSA schedules and to state and local governments believed they would benefit from cooperative purchasing. One of the firms, located in Georgia, that sells forklifts said that under cooperative purchasing it would not have to bid separately on state and local contracts and that the company uses the same procedures and dealership network regardless of whether the purchasing agency is federal or nonfederal. According to the company, its sales to governmental agencies are about 2 percent of its total sales. The other company, located in New Jersey, that represents 13 different manufacturers of lawn and garden equipment said that the company’s contracts with GSA, state, and local governments are essentially identical and provide the same sales conditions. The products sold, however, rely little on a dealership network. As a result, this company believed that it would be beneficial to the company, the manufacturers it represents, and nonfederal governments to make sales only through the schedules. The contracting officers for some of GSA’s federal supply schedules, including the telecommunications equipment, office furniture, copying equipment, microcomputer, and office supply schedules, said that they expected companies that provide supplies through these schedules would benefit from the cooperative purchasing program. For example, the contracting officer for the telecommunications schedule said that this schedule should be opened to nonfederal users because, in his opinion, GSA, the contractors, and state and local governments would all benefit. He said GSA would benefit because its vendors would be selling to a broader market, thereby increasing sales, which should lower prices further in the future. He said state and local governments would also benefit by saving time and money in their purchases. Similarly, the contracting officer for the office supply schedule said that GSA would benefit since its contractors would be able to sell to a broader market, thereby increasing sales, which should lower prices further in the future. In addition, he said GSA would benefit from the 1-percent fee it receives to cover its costs. In his opinion, the office supply schedule would likely be one of the better schedules to open to state and local governments because the manufacturers currently on the schedule must be able to supply nationwide, and because the GSA vendors include five large office supply companies. He explained that upon receipt of an order, the companies contact their warehouses and the order is immediately shipped to the customer for “next-day delivery.” This contracting officer said that he has heard of no concerns on the part of the contractors about this schedule being opened to state and local governments. The other three contracting officers similarly said that they have heard of no concerns from their respective contractors, including microcomputer contractors, systems furniture contractors, and copying equipment contractors. Some of the state and local contractors we contacted said that the cooperative purchasing program could have a negative effect on them. In addition, the medical equipment and supplies, airline, and heavy equipment industries have expressed concern about the adverse effect cooperative purchasing may have on them. Because of the possible adverse effects cited by these industries, which include a potential for reduced profits, and the resulting possibility of increased prices, GSA plans to exclude, or is considering excluding, those schedules that contain these industries’ equipment or services. Of the 59 state and local contractors we contacted, 10 contractors said that the cooperative purchasing program may have a negative effect on their businesses. Of these 10 contractors, 7 said they were small businesses. These contractors supply state and local governments with furniture, photographic equipment, computer equipment, paper products, paint, and heavy equipment. Almost all of the contractors said they could lose business to GSA vendors because state and local governments would have access to the federal supply schedules under the cooperative purchasing program. For example, a small paper products distributor and a small computer equipment distributor in West Virginia said that their companies would lose business because agencies could purchase directly from the manufacturers if the federal supply schedules were opened to nonfederal agencies rather than purchase from their companies. Also, a representative from a furniture store in West Virginia said that his company buys products from manufacturers and then sells them to state and local governments at a retail price. If nonfederal governments were able to use the federal supply schedules for furniture, his company would not be able to compete with the manufacturers’ prices. A paint manufacturer in Montana was also concerned about negative effects on his business and on the customer. He explained that he believes that decentralized purchasing is better, as the needs of the local government entity are not the same as those of the federal government. He has seen that local governments often do not want to use products that they can obtain through state contracts because the terms of the state contract will not meet their needs. However, purchasing agents are likely to use the GSA schedules because it is easier than going through another procurement process. Thus, he could lose sales to GSA vendors, and the customer could get an unsuitable product. A different concern was expressed by a representative from a small woman-owned company in California that supplies products such as reflective sheeting to the California Department of Transportation. The representative said that the company would lose sales if state and local agencies had access to the federal supply schedules because the business had minority status in the state of California, and many of the state contracts the company had been awarded through competitive bidding were based on its small, minority status in the state. Several industries are opposed to GSA’s planned cooperative purchasing program because they believe the program will have an adverse effect on them. These industries are represented on some of the 13 schedules managed by VA and on 3 of the 133 schedules managed by GSA. For example, the medical equipment and supply industries fear that cooperative purchasing will disrupt their distribution networks or cause them to increase prices to the federal government. The airline industry is concerned about loss of revenues from a greater use of discounted fares. The heavy equipment industry is concerned about negative effects on dealers who currently service the state and local government market. VA has already recommended to GSA that 2 of the 13 schedules it manages—the pharmaceuticals and one medical equipment and supply—be excluded from cooperative purchasing. In its April 1995 Federal Register notice, GSA proposed excluding those two schedules, based on VA’s recommendation. Since that notice, GSA officials told us that they plan to exclude the airline schedule and the schedule containing fire fighting vehicles. GSA has not, however, made any final decisions on excluding other schedules. However, the Director of GSA’s Acquisition Management Center said that GSA intends to exclude those schedules or portions of those schedules from the cooperative purchasing program where significant controversy exists about the potential adverse effects. Several associations, manufacturers, and dealers raised concerns to GSA and us about the potential adverse effects cooperative purchasing of medical equipment and supplies may have on their companies. They cited a disruption of the distribution network, reduction in profits, and an increase in federal supply schedule prices as possible effects. An association representing public hospital pharmacies, on the other hand, pointed to potential savings and diminished needs for government subsidies as possible benefits of cooperative purchasing. The Health Industry Manufacturers Association and the Health Industry Group Purchasing Association, representing medical equipment and supply manufacturers and purchasing organizations, oppose cooperative purchasing. These associations sponsored individual studies to determine the impact of opening the federal supply schedules. Both studies concluded that opening the federal supply schedules would decrease the federal government discount and increase the cost of medical and surgical equipment and supplies. According to the contractor who conducted these studies, his research found that large, infrequently purchased expensive equipment with long life cycles may offer little opportunity for discounting. However, the medical and surgical supply industry is more complex. Since the medical supply industry includes a broad range of products and categories with varying discounts, the contractor that conducted the studies found that some individual product lines can be discounted significantly but others cannot. The conclusions in these studies are based on the assumption that the medical equipment and supply industry would react to the cooperative purchasing program in the same manner as the pharmaceutical industry. We did not verify the data or analyses contained in these studies. The Health Industry Distributors Association, which represents over 700 companies, many of which are small businesses, opposes the cooperative purchasing program because public hospitals could not select their own distributor to meet their needs, and health care providers and distributors would incur an increased administrative and recordkeeping burden. Manufacturers expressed the same concerns. The manufacturers we spoke with said that the distribution network for federal and state or local government customers is different. They said that federal government orders are usually shipped directly from the manufacturer to the buyer, while sales to state and local governments are generally handled through a local dealer. According to manufacturers, cooperative purchasing could put local dealers who rely heavily on sales to state and local governments out of business to the extent that the manufacturers would ship directly to state and local governments. With sales no longer being handled by local dealers, manufacturers also were concerned about the increase in the administrative burden that would be placed on VA vendors if they had to fill orders for state and local governments. According to one manufacturer, making the schedules available to state and local governments could increase this burden to the point where he would have to consider reducing the products he sold on the schedule or raising prices. In contrast, the Public Hospital Pharmacy Coalition, representing hospitals owned or funded by state or local governments, supports cooperative purchasing because it anticipates lower prices and reduced administrative expenses for eligible hospitals. Noting that public hospitals rely heavily on government payers and subsidies, the coalition said that cost reductions would lessen their dependence on state and local governments. Officials at VA’s National Acquisition Center, which manages the medical equipment and supply schedules, said that distribution networks at the state and local level would likely vary considerably, depending on the size of the customer. In some cases, the manufacturer might be directly supplying the state or local customer. The officials said that one would have to check with each state or local customer to determine if they received products from a distributor or manufacturer. A VA official also stated that in her opinion, one of the real issues was not the disruption of the distribution network; rather, it was that manufacturers would have to break their established agreements with dealers and distributors for state and local customers in order to serve that market themselves. The VA officials did not agree that a manufacturer’s administrative burden would increase significantly. Most companies would be tracking their sales regardless of whether the sale was made through a federal supply schedule or through a state or local agency procurement. Manufacturers we spoke with said that there is a higher cost of doing business with state and local government customers, a cost that the manufacturer cannot recoup at the federal supply schedule price. They said that implementing cooperative purchasing could result in manufacturers raising prices on the federal supply schedule. Manufacturers and distributors are also concerned that nonfederal governments would expect VA vendors to perform additional services, such as warehousing, training, or filling small orders. The manufacturers and distributors do not have to perform these services for federal agencies, and the schedule prices do not include costs that would be associated with providing such services. GSA officials agreed that some medical equipment suppliers provide more services to nonfederal governments, such as training, and that this service is not available through federal contracts. According to GSA officials, should state or local governments want additional services, they would have to separately contract and pay for them. VA officials also said that vendors should not be expected to provide services beyond what the federal supply contracts specify at the schedule prices. The Public Hospital Pharmacy Coalition also agreed that state and local customers may require additional services. It said that if distributors and dealers can justify higher prices by providing such services, the state and local customers would be less likely to use cooperative purchasing. In addition, manufacturers and distributors are also concerned that nonfederal government agencies would not promptly pay bills for medical equipment and supplies ordered through VA vendors and instead take 2 to 3 months to pay their bills as opposed to 15 days. Although the VA officials at the National Acquisition Center acknowledged that some state and local governments do not always have good payment histories, they reiterated that any entity using the federal supply schedules would have to abide by the terms and conditions specified, which include prompt payment provisions. According to GSA, it is considering having federal prompt payment provisions apply under cooperative purchasing unless a state has a prompt payment law, in which case the state provisions, including recourse for noncompliance, would apply. GSA officials further pointed out that vendors would be informed of these provisions and could refuse to sell to a nonfederal government if vendors chose not to do so. Two other issues raised by the Health Industry Distributors Association were how vendors would determine whether a nonfederal organization was eligible to purchase products under the schedules program, and what monitoring would be done to determine whether vendors were selling only to eligible organizations. GSA’s current plan is to establish an eligibility determination process under which nonfederal organizations wishing to participate in cooperative purchasing would submit an application to GSA. GSA would then determine eligibility and list those eligible nonfederal governments in an electronic data base. According to GSA officials, GSA has not yet determined how it will monitor adherence to program requirements, including eligibility requirements, under the cooperative purchasing program, and it could change its approach for implementing several aspects of the program, including prompt payment provisions and the eligibility determination process, when it finalizes its implementation plan. As discussed in chapter 2, GSA proposed to exclude two schedules maintained by VA because VA believed that if these two schedules were included in the cooperative purchasing program, the industries selling items on these schedules would increase prices charged to the federal government. These schedules include the pharmaceutical schedule and one of the medical equipment and supply schedules—in vitro diagnostic substances, reagents, test kits, and sets. As indicated previously, the issues surrounding pharmaceuticals will be discussed in a separate GAO report. VA recommended that one schedule that includes certain medical equipment and supplies be excluded from the cooperative purchasing program because prices for some items on that schedule were also governed by the Veterans Health Care Act of 1992. Since making its initial recommendation to GSA, VA has concluded that items available through this schedule are not governed by the 1992 act. However, VA officials fear that businesses that manufacture and sell some products that are available through this schedule would increase their schedule prices. GSA accepted VA’s recommendation on the basis that the schedule contained some items that were covered by the 1992 act. This schedule also contains other medical equipment and supplies—such as needles and pipettes—and these types of products may or may not be affected by the cooperative purchasing program as much as other products on this schedule. Industries represented on the other schedules managed by VA may or may not be similarly affected. Among other items, medical equipment and supply schedules include wheelchairs, antiseptic soap, and dental equipment. According to VA officials responsible for managing these schedules, they did not review other schedules when GSA’s implementation of cooperative purchasing was suspended because they did not know if the program would be implemented. According to GSA, the airline industry also raised objections to federal airline fares being made available for the cooperative purchasing program. A GSA official told us that airline company representatives expressed concern about the loss of revenue from greater use of the discounted federal fares and about controlling the use of GSA fares for state and local government employees. Further, she said that airline company representatives told her that the companies are concerned that some nonfederal employees may abuse the GSA fares and use these fares for nonbusiness-related travel. This GSA official said that GSA was concerned that if the schedule were opened to state and local governments, airlines would no longer be willing to participate, increasing travel costs for federal agencies substantially. Even though GSA has not made a final determination on whether the airline schedule will remain closed to state and local governments, as noted in chapter 2, GSA officials told us that they do not intend to make the schedule available for cooperative purchasing. In comments provided to GSA in response to its April 1995 Federal Register notice, representatives of the heavy equipment industry expressed their concerns that the cooperative purchasing program would negatively affect the industry. GSA has subsequently received additional comments expressing this concern from the heavy equipment industry since publishing its notice. Heavy equipment includes products such as road sweepers; emergency vehicles, such as fire trucks; tractors; and turf equipment, which are sold through about six GSA schedules. In their comments, several manufacturers and dealers that sell various products on some of these schedules said that local dealers’ profits could be adversely affected if the schedules containing these products are opened to state or local governments. According to these companies, profits would be reduced because dealers would receive lower fees for sales through schedules in their geographic areas, and profits from warranty work would not be sufficient to sustain operations. Several dealers said they would be forced out of business or would have to lay off employees, and local governments would lose the benefit of the training assistance they provide as part of their sales efforts. We confirmed that these concerns remain, at least for a number of such businesses. For example, three heavy equipment manufacturers whose equipment is available through the federal schedules program told us that sales to state and local governments through the federal schedules program would take business away from their dealers and present serious financial difficulties for many dealers. These manufacturers sell directly to federal agencies and pay their local dealers for any necessary set-up, delivery, and related servicing. Several dealers told us that what manufacturers pay them is not enough to keep them operating. Similarly, a fire truck manufacturer that is a GSA vendor said that nearly all of its fire truck sales are to state and local governments through a dealership network. The manufacturer pays dealers a fee or commission for each sale in the dealers’ geographic sales areas, and this fee is reduced for sales through the schedules program. Although acknowledging that it would have the option of not participating in the cooperative purchasing program, this manufacturer expressed concern that its competitors would do so, thus forcing it to do the same. During the course of our review, several other dealers that sell fire fighting vehicles contacted us expressing concern about significant adverse effects they would experience due to the high proportions of their sales that are to state and local governments and the limited or nonexistent fees or commissions they would receive for schedule purchases. At our request, GSA’s contracting officers for five heavy equipment schedules reviewed comments GSA received in response to its April 1995 Federal Register notice. According to the contracting officers, the majority of the comments focused on one GSA schedule—the construction and highway maintenance equipment schedule. Subsequent to GSA’s Federal Register notice, GSA received numerous comments from another heavy equipment industry represented on GSA’s fire fighting vehicles and waste disposal vehicles schedule. The contracting officer for these two schedules said that he did not believe that those two schedules should be available to nonfederal governments. First, he was concerned that the cooperative purchasing program may have a detrimental effect on the dealers because a high proportion of sales are made to state and local governments, and this may affect the manufacturers’ relationships with their dealers. His second concern was that the GSA vendors on these schedules may elect to cancel their GSA contracts, or increase the prices under the federal schedules program. In contrast, contracting officers for other schedules that were mentioned in the industry comments to GSA, including the aerial lift equipment, turf equipment, generators, and air compressor schedules, said that few companies commented that they were concerned about equipment sold through these schedules. The Director of GSA’s Acquisition Management Center stated that as of January 1997, GSA was planning on excluding the schedule that contains fire fighting vehicles from the cooperative purchasing program based on information we provided GSA as well as the responsible contracting officer’s assessment of the potential impact opening this schedule may have on the industry as well as the federal government. According to the Director, both the industry and the federal government could be negatively affected. Even though GSA has not yet made final decisions on other schedules, such as the construction and highway maintenance schedule, the Director said that GSA intends to exclude those schedules or portions of those schedules from the cooperative purchasing program where significant controversy exists about the potential adverse effects. Representatives from 13 of the 59 state or local government contractors we contacted said that the cooperative purchasing program would have no effect on their companies. Of these 13 contractors, 6 said they were small businesses. The 13 contractors sell, among other things, office supply equipment; computer equipment; furniture; and road construction supplies, such as stone and asphalt. Among the reasons they cited were the unique specifications of products they sell to state or local governments, competitive prices, or the desire of local governments to have local servicing. For example, a hot mix asphalt contractor and a concrete products contractor told us that opening the GSA schedules to state and local governments would not have any effect on their companies. The contractors said that the products they supply had different specifications for different applications or projects, so state and local government agencies would have to continue to request bids for their projects, as the specifications and requirements would be unique to a project. For example, the mixture needed to repair a dam surface would be different from that needed to pave a parking lot. In another example, a contractor for the state of West Virginia who supplies office equipment said that even though state government agencies’ requests for procurements are much narrower and more localized than those of federal agencies, there would likely be little effect if the GSA schedules were opened because state and local government agencies are successful at obtaining competitive prices, and these agencies always seek out the best price. As a result, the contractor said that it was doubtful that state or local agencies would change the way they procured goods and services and instead buy through the federal schedules program. As a result, he said that his small business would likely see little impact from the cooperative purchasing program. A contractor in Montana that supplies computer equipment said that customers want “today’s technology at today’s prices.” He also said that because GSA’s contracts with vendors are long-term contracts, his contracts with the City of Missoula, Montana, and the University of Montana are such that his small business can react more quickly to the dynamics of the fast-changing computer industry. Because of this ability, he did not believe that the cooperative purchasing program would affect his business. A spokesman for another office supply company, which is both a GSA vendor and a state contractor in California and Nevada, also said that the cooperative purchasing program would have little effect on his company because the state of California already has a schedules program very similar to the federal schedules program. However, he said the program could assist some states, such as Nevada, by reducing the amount of time required to procure office equipment from several months to only a few weeks. Finally, a spokesman for a road sweeper company said that the cooperative purchasing program would not affect his company because even though the company holds the GSA contract to supply sweepers to the federal government, he believes local governments would not buy this type of equipment through a federal supply schedule. According to this spokesman, local governments will not buy sweepers through the road-clearing and equipment schedule because such governments can get comparable prices through competitive bidding at the dealership level. He also said that contracts that local dealers have with local governments provide for extensive training and servicing, which would not be provided under this manufacturer’s contract with GSA. Of the 59 state and local government contractors we contacted, 14 said that they did not know what effect the cooperative purchasing program would have on their companies. Of these 14 companies, 7 said they were small businesses. These companies include those that sell furniture, computer equipment, laboratory equipment and supplies, photographic supplies, and heavy equipment. These companies cited uncertainties about how others would react to cooperative purchasing and noted that the program offered both potential gains and losses. For example, according to one computer equipment supplier in West Virginia, it was difficult to predict what impact cooperative purchasing would have because it would depend not only on the difference in pricing between GSA’s vendors and state and local contractors but also on other factors, such as the servicing and warranty arrangements that were included as part of manufacturers’ contracts with GSA. In addition, a furniture contractor in California, who is a dealer for a furniture manufacturer that is a GSA vendor, told us that it was difficult to determine what effect the cooperative purchasing program might have on his company. According to a dealership official, the GSA contract is not very profitable for the dealership because the manufacturer sets the price for GSA contract sales, which usually results in a lower profit margin than the dealership would like. This lower price can hurt the servicing of the contract, because there is not sufficient profit for the local dealer to provide proper service. However, the dealership official said that although contracts with local government agencies are more profitable than GSA schedule program sales, his company incurs substantial costs by bidding on local government agency procurements. The process has become very complex and expensive, and costs had ranged from $5,000 to $10,000. Consequently, quite often this particular dealership had not bid on local government procurement solicitations. Reflecting the diversity of views among individual businesses about how they would be affected by the cooperative purchasing program, associations representing industry have taken a range of positions on the program. With the exception of the medical equipment and supply industries, these associations did not provide data that would provide the basis for their predictions of the effects of cooperative purchasing. Some industry associations told us that they are in favor of the cooperative purchasing program. The Information Technology Industry Council, for instance, said that it supported the program but noted that its members would want some flexibility in its implementation. The Coalition for Government Procurement, representing over 300 businesses that supply about 75 percent of the federal government’s purchases, told us that about half of the Coalition’s membership supports the program and the other half opposes it. In some other cases, however, industry associations told us that they have not taken a position on cooperative purchasing or that they had mixed opinions on the program. In some cases, association officials told us that they were not sufficiently familiar with cooperative purchasing to take a position. Several associations that represent small businesses, including the American Small Business Association and National Small Business United, said that they did not have enough information to form positions. As discussed earlier, several associations representing heavy equipment manufacturers and dealers and manufacturers of medical equipment and supplies opposed the program. These associations, most of which expressed their opposition in comments on GSA’s Federal Register notice, included the Associated Equipment Distributors, the Environmental Industry Association, the Material Handling Equipment Distributors Association, the National Retail Federation, the Health Industry Distributors Association, and the Health Industry Manufacturers Association. In their oral comments, representatives from the Coalition for Government Procurement agreed with the contents of this chapter. They also raised concerns about some aspects of the cooperative purchasing program as currently proposed. For example, the Coalition said that it did not agree with GSA’s tentative plan to apply state prompt payment provisions in those cases in which states have them. It said that this could significantly increase industry’s burden because businesses would have to work under many different state laws rather than a uniform law—the federal prompt payment statute. In addition, the Coalition raised some concerns about possible problems that could develop as the cooperative purchasing program is implemented. For example, it cited the possibility of some nonfederal governments (1) bypassing the cooperative purchasing program by asking GSA vendors to sell them products at schedule prices or at schedule prices less the administrative fee, without the GSA vendors remitting the administrative fee to GSA; or (2) purchasing products through the cooperative purchasing program but, instead of using the products themselves, reselling the products at higher prices than they paid. Finally, the Coalition noted that although it recognized that some businesses could save administrative costs by not having to compete separately for state or local contracts, some nonfederal government procurement processes required relatively little administrative effort by businesses. In their comments, both GSA and VA acknowledged the uncertainties of and lack of data associated with the effects cooperative purchasing would have on businesses. Similarly, the National Association of State Purchasing Officials noted a number of uncertainties, such as the extent to which businesses would be willing to abide by various state requirements and that the value of state contracts to some businesses could be diminished if some state agencies used the federal schedules rather than state contracts. GSA’s plans for implementing the cooperative purchasing program continue to evolve. These plans include, among other things, determining whether the potential negative effects on small business that might be associated with opening up particular supply schedules are outweighed by the potential positive effects on nonfederal government agencies. GSA’s determinations will entail judgments about trade-offs of positive and negative effects, and the data necessary to conclusively predict these effects are not likely to be available. GSA recognizes these trade-offs exist, but Congress, state and local governments, and industry would have better information on how GSA would make its determinations if GSA improved its implementation approach in several ways. As noted in chapter 1, in its April 1995 Federal Register notice, GSA indicated that schedules would be made available to nonfederal agencies upon their request unless the contracting officer responsible for the applicable schedule determined that it would not be appropriate to do so. Individual schedule vendors would be able to elect whether or not to make the products or services they sell through the schedules available to authorized nonfederal users. In addition, the notice stated that schedule contracts would be established only to meet the needs of federal agencies and proposed that two schedules—one for pharmaceuticals and one for certain medical equipment and supplies—would not be opened to state and local governments. GSA officials said that GSA took no further actions to finalize the Federal Register notice after its authority to implement section 1555 was suspended. GSA officials, however, told us that GSA was considering a number of changes to how it would implement the program. GSA stated that it developed these changes after meeting with representatives of the National Association of State Purchasing Officials, the National Institute of Governmental Purchasing, as well as several industry associations; and after reviewing public comments received after publishing its initial implementation plan. First, as a matter of policy, individual supply schedules would not be made available for use by nonfederal governments if opening that schedule would adversely affect the support provided to federal agencies in terms of price, quality of products or services, or delivery. Second, rather than assigning responsibility to the contracting officer for making case-by-case determinations regarding opening individual schedules, GSA officials were considering assigning responsibility to the Federal Supply Service’s Assistant Commissioner for Acquisition. In making these determinations, the Assistant Commissioner would be expected to consider the recommendation of the contracting officer responsible for particular schedules and to consult, as appropriate, with other interested parties or associations representing them. The contracting officers’ recommendations would be based on an evaluation of the potential effects on federal agencies and whether opening the schedule would be likely to have an adverse effect on local small business concerns or dealers that would not be offset by benefits to nonfederal agencies. With respect to VA’s schedules, GSA officials told us that GSA is considering assigning responsibility for making decisions to VA. The option of excluding individual schedules or classes of schedules from the cooperative purchasing program has come up in both the Federal Register notice and in our discussions with GSA. The Federal Register notice proposed excluding two schedules (pharmaceuticals and one medical equipment and supply schedule) from the cooperative purchasing program. According to a GSA official, GSA also does not intend to open the fire fighting vehicle schedule or the airline fare program to state and local participation. GSA officials said that they proposed to exclude the pharmaceutical schedule and one medical equipment and supply schedule in the Federal Register notice and plan to exclude fire fighting vehicles and airlines because of concern that opening up these schedules to nonfederal users would not be in the interest of the federal government. In these cases, GSA anticipated that costs to federal agencies would rise for products on these schedules if the schedules were opened. For other schedules, GSA officials said that GSA would decide on opening up schedules on a case-by-case basis. According to GSA officials, GSA could also exclude portions of individual schedules from the program while opening the remaining portions of the individual schedules. Once GSA decides that it may be appropriate to open a schedule to nonfederal agencies, GSA officials said that GSA would publish notices in the Commerce Business Daily and/or the Federal Register to obtain input from interested parties, such as industry associations; federal, state, and local government agencies; and schedule vendors. According to GSA, it would also use associations as a vehicle to provide information to individual interested industries and state or local governments. These notices would identify which schedule or schedules GSA would consider opening up for use by nonfederal agencies and explain how the program would work. The notices would include a contract clause that would have to be included in vendors’ contracts in order for these vendors to sell to nonfederal agencies through the schedules program. Each contractor on each federal supply schedule (about 6,600 contractors in total) that GSA or VA would propose to open would have the option to sell to state and local governments. GSA officials stated that such a process will allow GSA and VA to gauge the interest on the part of state and local governments in using the schedule and willingness of schedule contractors to sell to state and local governments under the schedule contract. They said that the process will also provide the opportunity for nonschedule contractors and federal agencies to express their views. According to GSA, after GSA considers the input of potentially affected parties and if it decides to open a particular schedule, schedule contracts will be modified to permit use by state and local governments. The state and local governments that applied for authorization to use the federal supply schedules would subsequently be notified that the schedule was open for use. According to GSA officials, this approach would allow for interested parties to provide input before a decision is made and allow GSA to make an assessment of the appropriateness of opening a particular schedule while minimizing the costs of implementing the cooperative purchasing program. The approach to implementing the cooperative purchasing program that GSA officials told us about appears reasonable in several respects. For example, it makes the program optional for GSA vendors and recognizes that nonfederal governments cannot be compelled to use the program, acknowledges that there may be trade-offs associated with opening up a particular schedule, recognizes that GSA’s primary mission is to meet the needs of federal agencies, provides a process for informing many potentially affected businesses, allows for schedule-by-schedule consideration, establishes decisionmaking authority at a higher level than initially proposed, and identifies the trade-off decisions that have to be made. However, although GSA is considering changes to the implementation plan in the Federal Register notice, GSA has not completed a detailed, written plan that sets forth all its current thinking on how it intends to implement cooperative purchasing. Since the suspension of section 1555’s authority for the cooperative purchasing program is temporary, we believe that it would be prudent for GSA to be prepared to implement the program by having a detailed, written implementation plan. Such a plan would provide information to Congress, state and local governments, and industry that would better enable them to evaluate the likely effects of GSA’s determinations. Further, it would provide guidance to GSA and VA staff to facilitate consistency in these determinations. Our work indicates that a successful plan would require, at a minimum, several components: guidance on the data that should be sought and analysis conducted in determining the (1) expected effects on federal agencies; (2) expected effects on nonfederal governments; and (3) expected effects on businesses, including non-GSA vendors; identification of potentially affected parties and the various means to be used to notify them when schedules will be considered for opening to nonfederal governments; designation of an official at an appropriate level of responsibility to make final determinations on whether individual schedules should be made available to nonfederal governments, particularly when businesses express concerns about significant adverse effects; provisions for evaluating the actual effects of opening schedules; and provisions for opening part of a schedule. As indicated above, GSA initially published a Federal Register notice containing several elements of its planned implementation approach for the cooperative purchasing program. When the program was suspended, GSA discontinued work on completing a formal, written plan. However, GSA officials appropriately continued to consider how it would implement the program and identified changes to its initial planned approach set forth in the Federal Register. Several state and local governments and industry associations we contacted, as well as several of GSA’s contracting officers, did not know how GSA planned to implement the program, or what information GSA would use to make its decisions on whether schedules would be opened up to nonfederal governments. Limited or nonexistent data make assessing the potential effects of the cooperative purchasing program a difficult task. Not having information on how GSA intends to implement the program made it difficult for affected parties to assess the potential effects of cooperative purchasing and is likely to make it difficult for GSA’s and VA’s contracting officers to act consistently when they seek and consider information on possible effects. The lack of this type of information is also likely to hamper Congress in any further deliberations it may want to have on cooperative purchasing. GSA, in deciding whether or not to make products or services available on federal supply schedules to nonfederal governments, will be required to make judgmental decisions regarding (1) the extent to which vendors and nonfederal governments will exercise their option of participating in the program; (2) the likelihood of vendors responding in such a manner that prices, the quality of products or services, or delivery will be affected from the standpoint of federal agencies; and (3) trade-offs between any expected potential benefits to nonfederal governments and any expected potential adverse effects on businesses. The Director of GSA’s Acquisition Management Center said that GSA has not yet provided guidance to its or VA’s staff, industry, or nonfederal governments on the data and analysis to be considered for making these judgmental decisions. For example, while many of the associations we contacted had views on the possible effects of cooperative purchasing, they generally provided no conclusive, detailed data to support their views. This guidance would help GSA and VA staff, including contracting officers, as well as affected businesses, industry associations, and nonfederal governments, know the data and analyses that are to be considered to make decisions and should help GSA staff make decisions that are as informed and consistent as possible. Although data availability is likely to remain a challenge for GSA, having a process that facilitates gathering appropriate data and developing an analytical framework to analyze these data would enhance the process of making those decisions. Our work indicates that some data, such as the share of an industry’s output that is sold to state and local governments, can provide some insight on potential effects, even if a particular measure, such as the share of output, alone cannot provide a precise quantitative prediction of the effects. Similarly, analysis of some characteristics of an industry, such as the ability of firms in an industry to charge different buyers different prices, may also help provide some insight on potential effects, such as the potential for increased prices to federal agencies. Explicitly identifying its priorities in weighing potential benefits and adverse effects would enhance GSA’s efforts to make its decisions on a consistent basis. Although GSA has indicated that its first priority is that its federal customers not face adverse effects, it has not yet indicated how it would address any recurring benefits or adverse effects compared to any one-time effects. Even with guidance for GSA and VA staff, industry, and nonfederal entities, however, our findings suggest that sufficient data may not be available to GSA or VA for them to make quantitative assessments of expected benefits and negative effects. This indicates that GSA would often have to make judgmental and trade-off decisions based largely on views of affected parties. In some cases, GSA’s decisions to open schedules may have significant adverse effects on some businesses, and GSA would have to make judgments about whether expected benefits to nonfederal governments outweigh expected adverse effects on these businesses. Excluding schedules, however, may prevent state and local governments from realizing some potential benefits. Given this situation, a sensible plan would detail the process to be used to identify potentially affected parties and solicit and consider data and views from them. GSA officials told us they plan to announce their intentions to open schedules in the Commerce Business Daily, whose purpose is to announce federal government contracting opportunities, and/or the Federal Register, as well as work with associations representing state and local governments and industry. It is unclear, however, whether these actions could reach a sufficient number of potentially affected groups or would sufficiently target those groups that may be most affected by GSA’s opening up individual schedules. It is unclear that these groups would routinely be aware of Commerce Business Daily announcements or Federal Register notices, even though this latter publication is intended to reach a broader audience. Further, while GSA states that it plans to use associations representing industry as a means to get information to individual interested parties, it is unclear that consulting with industry associations alone would provide GSA with an understanding of the effects that opening a schedule may have on individual businesses. During the course of our work, we found that some industry groups, state and local contractors, and state and local governments were not aware of the cooperative purchasing program, despite the April 1995 Federal Register notice. In addition, several associations told us that their memberships had conflicting views on the program, which, in some cases, prevented the association from taking a position. To recognize the judgment inherent in the decisions GSA may be making when determining whether schedules should be opened and the potential lack of sufficient data with which to make these decisions, GSA acknowledges that it may need to elevate the level at which decisions are made. In its Federal Register notice, GSA indicated that its contracting officers may be making decisions on opening schedules. However, GSA is now considering assigning this responsibility to the Assistant Commissioner for Acquisition, Federal Supply Service. The Assistant Commissioner would receive recommendations from contracting officers regarding requests to make schedules available to nonfederal users. In those instances where GSA has delegated authority to award schedule contracts to another agency, such as VA, GSA is considering also delegating authority to decide on opening schedules to that agency’s Senior Procurement Executive. Decisions to open schedules are policy decisions that could have significant adverse effects on some businesses or industries. In our opinion, policy decisions that can have such significant effects should be made at a higher level than the contracting officer level. Neither GSA’s Federal Register notice nor changes GSA officials told us they were considering included a provision for evaluating GSA’s implementation of the cooperative purchasing program, including the effects of opening schedules to state and local governments, even though GSA officials said that at one time it had considered implementing the program in a series of “pilots.” Because the effects of cooperative purchasing are likely to vary by industry or even product or service, the uncertainties over the extent to which state and local governments and business will actually exercise their options to participate in the program and purchase items from vendors listed on the schedules, and because it will likely be very difficult to get sufficient data before implementation to predict effects, we believe evaluations would be helpful to GSA. Such evaluations should help GSA (1) determine actual effects, (2) better gauge the types of data needed to make decisions, (3) identify the best means for obtaining relevant input from potentially affected organizations, and (4) provide a basis for GSA to reverse any decisions that may turn out to have more negative than positive effects. These evaluations could also provide objective information on whether the program may be lowering prices or administrative costs. A related improvement to GSA’s implementation approach would be to include in its plan steps to be taken in the event a decision to open a schedule is found to have unexpected adverse effects. This situation was not addressed in GSA’s Federal Register notice. Possible steps could include reversing its decision or taking some other action to mitigate the adverse effects. Another element that would enhance the potential for the implementation plan to be successful would be a provision for opening part of a schedule to nonfederal governments when a schedule contains a mix of products that could be affected differentially by cooperative purchasing. For example, the fire fighting and waste disposal vehicles schedule contains products that are made by two different industries, as does the construction and highway maintenance equipment schedule. According to GSA’s contracting officer for these two schedules, the effects of the cooperative purchasing program would be quite different on the various industries contained in those schedules. The fire fighting vehicle industry relies almost exclusively on sales to nonfederal governments, while the waste disposal vehicle industry produces many types of products that are sold not only to nonfederal governments, but private industry as well. Similarly, the in vitro diagnostic medical equipment and supply schedule contains a diverse mix of products. According to a VA official, when VA requested GSA to exclude this schedule from the cooperative purchasing program, it was concerned with potential price increases for only three of the items on the schedule because they represent most of the costs related to the schedule. In their written comments on a draft of this report, GSA and VA agreed that assessing the potential effect of cooperative purchasing will be difficult because of questions about how nonfederal governments and businesses would react to the program and the lack of data on which to predict the potential effects; the agencies agreed that an implementation plan that would consider the effects on all affected parties would enhance the decisionmaking process for the program. Both agencies further said that the uncertainty about the program would make it important that the determination to open or not open a particular schedule to cooperative purchasing be on a case-by-case basis. GSA said that it believed using a process like the one we recommended would provide enough information for GSA to make informed decisions. GSA said that it would base its decisions on the best available information. VA also noted the importance of having a good decisionmaking process and implementation plan and said that it was considering industry conferences for schedules that were candidates for the cooperative purchasing program. In its comments on the draft report, the Coalition for Government Procurement said that it generally agreed with our conclusion that GSA’s approach to implementing cooperative purchasing appears reasonable in several respects, but it expressed some concerns about GSA’s tentative plan. In particular, as indicated in chapter 3, it disagreed with GSA’s tentative plan that state prompt payment provisions would be applied for states having such laws, noting the potentially increased administrative burden of requiring sellers to work under multiple laws rather than a uniform law—the federal prompt payment law. The Coalition also disagreed with a part of GSA’s tentative plan regarding how businesses could exercise the option not to accept orders. Under GSA’s tentative plan, vendors would have the option to modify their contracts with GSA to enable nonfederal governments to purchase goods and services. Once a vendor had agreed to the modification, it would have 5 days after receiving orders from nonfederal governments to decline a particular order. The Coalition said that this would not be adequate time for some businesses to make this decision for new customers and that this could also create uncertainty among the nonfederal governments placing orders. The National Association of State Purchasing Officials also expressed concern with this aspect of GSA’s tentative plan, noting that such a provision could leave state agencies without a readily available supply source. The Coalition suggested that GSA involve representatives from nonfederal governments and from businesses in developing its implementation plan and phase in its implementation of cooperative purchasing. Similarly, VA pointed out that some effects of cooperative purchasing, such as lower federal product prices or lower vendor administrative costs, will not be known until some experience is gained under the program. During the course of our review, GSA officials told us they were aware of concerns potentially affected parties had with cooperative purchasing and have worked with and will continue to work with VA and these parties in developing its implementation plan. Further, it appears that GSA’s and VA’s intention to consider opening schedules on a schedule-by-schedule basis would, in effect, provide for a phase-in approach that would provide them experience with opening some schedules before a large number are opened. The potential benefits and negative economic consequences of opening up federal supply schedules to nonfederal governments are likely to vary considerably among state and local government agencies as well as among industries and individual businesses. Since the effects of cooperative purchasing will depend in large part on how GSA implements the program, it is important for GSA to provide Congress with a detailed implementation plan. Such a plan could show how GSA would decide whether or not to open a particular schedule to nonfederal users and how it would seek to find a balance of the benefits and adverse effects of cooperative purchasing. Such information would provide a stronger basis than is currently available for Congress in its consideration of whether it should take any action while GSA’s authority for the cooperative purchasing plan remains suspended. The potential effects of the cooperative purchasing program are likely to vary among state, local, and the Puerto Rican governments. Since participation is voluntary, these governments would use the schedules only if they perceived benefits from doing so. Some state and local governments are likely to benefit from lower prices for some products, less administrative burden, and shortened procurement cycle times as a result of cooperative purchasing, although the extent to which these benefits would materialize is unclear and depends on several factors. The expected benefits are likely because several state and local governments and some businesses want the schedules opened and because some schedule prices are lower than nonfederal governments’ prices. Also, some state and local governments and businesses agree that reduced administrative effort and cycle times are a likely result of cooperative purchasing. In addition, some nonfederal law enforcement agencies that have had access to the schedules said that they experienced benefits from having such access. Several factors are likely to affect the extent to which these expected benefits would materialize. These include state or local laws, policies, or preferences that could preclude or constrain use of the schedules in some instances; the unavailability of some items through the schedules program; the frequent ability of state and local agencies to get better prices or contract terms through other sources; and the relatively small proportion of state and local expenditures that are made for some items available through the schedules program. These factors will vary among and within states and localities, making precise predictions of effects quite difficult, if not impossible. Predictions are even more difficult given the possibility that some state and local governments could change their laws, ordinances, or policies in the future to permit greater use of federal supply schedules, and businesses could change their practices as well. These possibilities remain speculative at this point. Indian tribal governments are not likely to experience significant effects from cooperative purchasing. This is because many have already had access to federal supply schedules, and federal agencies would remain responsible for providing services to tribes in program areas for which tribal governments do not already have access to the schedules. Cooperative purchasing’s effects on businesses are likely to vary among industries and individual firms, including firms in the same industry. It appears reasonable to us that at least some of the benefits perceived by some businesses, including small businesses and dealers, may occur. These potential benefits would include increased sales, profits, or exposure to additional markets and reduced administrative costs as a result of businesses not having to compete separately for some contracts with various state and local governments. Those companies that are already GSA vendors and that sell to both federal and nonfederal governments would likely see the greatest administrative savings since these companies would not have to separately compete for the federal, state, and local contracts. For a particular firm, these administrative savings would depend on the nature of the business, the extent to which it supplies state or local governments, and the extent to which state and local governments exercise the option of buying through the cooperative purchasing program. Thus, the potential for administrative savings cannot be predicted. The full extent to which businesses would elect to exercise the option of selling to nonfederal governments through the program also cannot be predicted. On the other hand, some industries, including small businesses and dealers, could experience reduced sales or profits, a reduction in operations, or even closure if the schedules containing products they sell are opened for nonfederal buyers. While the extent to which these effects would occur cannot be predicted, two factors that can influence the results are the proportion of an industry’s or firm’s sales to state and local governments and how that industry takes into consideration its dealership network in its contracts with GSA. Those manufacturers that sell higher proportions of their products to state and local governments and whose dealerships receive no or reduced fees or commissions for sales made through the federal supply schedules program appear to have the greatest potential for experiencing significant adverse effects, along with their dealers. The effects can be even more severe if dealers are expected to provide extensive service in connection with these types of sales. The optional nature of the program, however, should limit the extent to which manufacturers would want to participate in the program when doing so would negatively affect their dealership networks. In those cases when competitive forces could influence decisions, however, these effects could be further mitigated by GSA through its plan to exclude schedules from the program when adverse effects on federal agencies are likely or if the adverse effects on businesses are likely to exceed expected benefits to nonfederal governments. Regardless of whether the actual effect on different industries would be positive or negative, several factors would tend to limit the magnitude of the effect. Various industries sell varying proportions of their output to state and local governments, and, as previously discussed, several conditions would limit the volume of purchases nonfederal governments would make through the schedules. Also, some businesses are not likely to be affected at all because prices already offered to state and local governments may be comparable to or better than schedule prices, their product or service is not available through the schedules, or state or local governments may not choose to buy through the schedule to retain such benefits as service or training from their current contractors. These variables, together with the lack of available data to independently predict how nonfederal governments or their suppliers would respond to the cooperative purchasing program in the future, make it impossible to accurately predict the overall effect of the program on individual businesses. All of the uncertainties at the state, local, and business level make it difficult, if not impossible, to determine the effect of cooperative purchasing on the federal government. Although it appears likely that Puerto Rico and some state and local governments and businesses would use the program, it is not clear whether this expanded use of the schedules would lead to lower schedule prices or lower federal administrative fees. On the other hand, it is doubtful that the federal government would experience adverse effects since GSA plans to exclude schedules when such effects are anticipated and would be able to act if unexpected negative effects arise. GSA’s policy that it will continue to administer the federal supply schedules program primarily for its federal customers is consistent with GSA’s mission. GSA’s plan for implementing the cooperative purchasing program is evolving and has not yet been put into a final written document. Although this is understandable given the legislative suspension of authority for the program, Congress, GSA, and any affected parties will need a written plan before implementation of cooperative purchasing. In our view, such a plan is essential for Congress to be able to judge whether GSA is taking appropriate steps to fairly balance the potentially beneficial and adverse effects of cooperative purchasing, without compromising the interests of its federal customers. The implementation approach GSA has been developing seems reasonable in several respects, including recognition that effects will vary and judgment will be involved in making trade-off decisions. However, these trade-off decisions are likely to be quite difficult in a number of situations in which some or many businesses perceive significant adverse effects, while state or local governments desire access to the schedules. A written plan would provide a basis for GSA to ensure that its staff is making decisions in a manner consistent with all available information. The plan could indicate, for instance, that GSA would consider the share of industry output that is sold to state and local governments as one data element that would contribute to GSA’s decision. It could also discuss how GSA would weigh the views of affected parties in situations without adequate quantitative data. Further, should GSA delegate decisionmaking authority to VA’s Senior Procurement Executive, a written plan could provide a mechanism for consistent decisionmaking at GSA and VA. GSA’s decisions will be further complicated in some cases because businesses in the same industries have differing views about the program, and there may not be sufficient quantitative data to enable GSA to weigh the benefits and adverse effects. This makes it critical for the parties that are potentially affected to have a clear understanding of how GSA intends to implement the program and how it will consider the views of affected parties as well as any available quantitative data. Such understanding will be crucial for the credibility of GSA’s decisions should the program be implemented as the law now provides. We believe that certain elements in the approach GSA has been considering should particularly be incorporated into its final written plan. These include such items as the optional nature of the program, designation of a high-level official to make final decisions on opening schedules, provision for opening parts of schedules when effects for different industries may vary significantly, and use of the Commerce Business Daily and/or the Federal Register to announce its intention to open schedules. However, we believe that GSA’s plan should also include (1) guidance to its and VA’s staff on considering benefits and negative effects, (2) steps that will be taken in addition to using the Commerce Business Daily and/or the Federal Register to notify potentially affected parties, (3) provisions for evaluating the actual effects of decisions made to open schedules, and (4) steps that will be taken if the actual effects of opening schedules are different from those GSA projected. We recommend that as part of GSA’s report on the cooperative purchasing program to Congress mandated by the Clinger-Cohen Act of 1996, the Administrator provide a detailed plan setting forth the steps that GSA will take to implement the program. In particular, the Administrator’s report should provide Congress with a written implementation plan that emphasizes the optional nature of the program and includes guidance that will be provided to GSA and VA staff on the available quantitative data, affected parties’ views, and other factors that need to be considered in assessing benefits and negative effects of opening up schedules; identifies appropriate processes for obtaining and considering information and views from a full range of affected parties; designates a high-level official or officials who are to make final decisions on opening schedules, especially when businesses express significant concern about potential adverse effects; provides for evaluating the actual effects of decisions to open schedules, and a means for addressing the effects if the data so warrant; and allows for partially opening schedules when appropriate. GSA and VA agreed with our conclusions and recommendation. Both agencies said that the uncertain effects of cooperative purchasing illustrated the importance of having a process that would enable them to make informed decisions on a case-by-case basis. GSA agreed that such a plan would assist Congress and others in understanding the program and evaluating its potential impact and benefits. The National Association of State Purchasing Officials agreed with our conclusion that allowing nonfederal governments to use federal supply schedules can lead to positive effects for state and local governments. It noted, however, that any potential positive effects would be limited by the exclusion of certain contracts from the program. The Association also agreed that GSA should use communication tools in addition to the Commerce Business Daily for states and small businesses. The Coalition for Government Procurement generally agreed with our conclusions and recommendation and emphasized the importance of an implementation plan and good evaluations of the program’s effects. The Coalition suggested that GSA involve business and nonfederal government representatives in formulating this plan and that GSA phase in the implementation. | Pursuant to a legislative requirement, GAO assessed the potential effects of a cooperative purchasing program administered by the General Services Administration (GSA) on nonfederal governments and federal agencies, and on industry, including small businesses and dealers. GAO found that: (1) the potential effects of the cooperative purchasing program are likely to vary among state, local, and the Puerto Rican governments; (2) since participation is voluntary, these governments would use the schedules only if they perceived benefits from doing so; (3) most of the nonfederal entities GAO surveyed anticipated that they would participate; (4) although some of these governments may experience benefits, several factors may limit the extent of these benefits; (5) the program is likely to have little if any effect on Indian tribal governments because the schedules program is already available to them under separate authority; (6) if the GSA effectively implements its plan to exclude schedules from the program when adverse effects on federal agencies are indicated, there is little risk that the program will negatively affect the federal government, but whether it will have positive effects depends largely on whether increased use of the schedules by state and local governments would lead to lower prices and reduced administrative charges by GSA; (7) it is unclear at this time whether either of these would occur; (8) the potential effects of the cooperative purchasing program on industry, including small businesses and dealers, are also likely to vary, although sufficient data are not available to conclusively predict these effects; (9) some businesses, particularly GSA vendors, expect to benefit from increased sales or reduced administrative costs, while other businesses expect to lose sales or have lower profits; (10) still other businesses do not believe they will be affected by the program; (11) most of the concerns that businesses have expressed about significant adverse effects involve only a few GSA schedules; (12) GSA's plan to implement the cooperative purchasing program is still evolving; (13) in 1995, GSA published its initial approach and has been considering changes while implementation has been suspended; (14) GSA has not yet completed a more current, detailed plan, but such a plan would better enable Congress to weigh the merits of cooperative purchasing since so much depends on implementation decisions; (15) although the approach GSA has been considering appears reasonable in key respects, GAO believes a number of improvements would better position GSA to make decisions on making particular schedules available to nonfederal users; and (16) these improvements include the preparation of a written implementation plan and guidance to staff on factors to consider when making decisions. |
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The Bureau’s mission is to provide comprehensive data about the nation’s people and economy. Its core activities include conducting decennial, economic, and government censuses; conducting demographic and economic surveys; managing international demographic and socioeconomic databases; providing technical advisory services to foreign governments; and performing other activities such as producing official population estimates and projections. Conducting the decennial census is a major undertaking that includes the following major activities: Establishing where to count. This includes identifying and correcting addresses for all known living quarters in the United States (address canvassing) and validating addresses identified as potential group quarters, such as college residence halls and group homes (group quarters validation). Collecting and integrating respondent information. This includes delivering questionnaires to housing units by mail and other methods, processing the returned questionnaires, and following up with nonrespondents through personal interviews (nonresponse follow-up). It also includes enumerating residents of group quarters (group quarters enumeration) and occupied transitional living quarters (enumeration of transitory locations), such as recreational vehicle parks, campgrounds, and hotels. It also includes a final check of housing unit status (field verification) where Bureau workers verify potential duplicate housing units identified during response processing. Providing census results. This includes processes to tabulate and summarize census data and disseminate the results to the public. Figure 1 illustrates key decennial activities. The 2010 census enumerates the number and location of people on Census Day, which is April 1, 2010. However, census operations begin long before Census Day and continue afterward. For example, address canvassing for the 2010 census will begin in April 2009, while tabulated census data must be distributed to the President by December 31, 2010, and to state legislatures by March 31, 2011. Figure 2 presents a timeline of key decennial operations. Automation and IT are to play a critical role in the success of the 2010 census by supporting data collection, analysis, and dissemination. Several systems will be used in the 2010 census. For example, enumeration “universes,” which serve as the basis for enumeration operations and response data collection, are organized by the Universe Control and Management (UC&M) system, and response data are received and edited to help eliminate duplicate responses using the Response Processing System (RPS). Both UC&M and RPS are legacy systems that are collectively called the Headquarters Processing Systems. Geographic information and support to aid the Bureau in establishing where to count U.S. citizens are provided by the Master Address File/Topologically Integrated Geographic Encoding and Referencing (MAF/TIGER) system. The Decennial Response Integration System (DRIS) is to provide a system for collecting and integrating census responses from all sources, including forms and telephone interviews. The Field Data Collection Automation (FDCA) program includes the development of handheld computers for the address canvassing operation and the systems, equipment, and infrastructure that field staff will use to collect the data. Paper-Based Operations (PBO) was established in August 2008, primarily to handle some of the operations that were originally part of FDCA. PBO includes IT systems and infrastructure needed to support the use of paper forms for operations such as group quarters enumeration activities, nonresponse follow-up activities, enumeration at transitory locations activities, and field verification activities. These activities were originally to be conducted using IT systems and infrastructure developed by the FDCA program. Finally, the Data Access and Dissemination System II (DADS II) is to replace legacy systems for tabulating and publicly disseminating data. Table 1 describes the key systems supporting the 2010 census, as well as the offices responsible for their development. Figure 3 shows the timeframes when each of the systems for the 2010 census are to be operational, according to the Census Bureau. We have reported long-standing weaknesses in the Bureau’s management of its IT systems. For example, in October 2007, we reported on the status and plans of key 2010 census IT acquisitions and whether the Bureau was adequately managing associated risks. We identified critical weaknesses in the Bureau’s risk management practices, including those associated with risk identification, mitigation, and executive-level oversight. Further, operational testing planned during the census Dress Rehearsal would take place without the full complement of systems and functionality that was originally planned, the Bureau had not finalized its plans for testing all the systems, and it was unclear whether the plans would include testing to address all interrelated systems and functionality. We recommended that the Bureau develop a comprehensive plan to conduct an end-to-end test of its systems under census-like conditions. In March 2008, we designated the 2010 census as a high-risk area, citing several long-standing and emerging challenges. These challenges included, among other things, weaknesses in risk management and system testing, elimination of several operations from the 2008 Dress Rehearsal, and questions surrounding the performance of handheld computers developed for the 2010 census. We have also testified on significant risks facing the 2010 census. For example, in March 2008, we testified that the FDCA program was experiencing significant problems, including schedule delays and cost increases resulting from changes to system requirements, which required additional work and staffing. Shortly thereafter, in April 2008, we testified on the Bureau’s efforts to implement risk reduction strategies, including the decision to drop the use of handheld computers during the nonresponse follow-up operation and revert to a paper-based operation. Further, in June 2008, we testified that the Bureau had taken important steps to plan for a paper-based nonresponse follow-up operation, but several aspects remained uncertain. We concluded that it was critical to test capabilities for supporting the nonresponse follow-up operation. In July 2008, we reported that continued planning and testing of the handheld computers would be critical to the address canvassing operation. Specifically, the Bureau had developed a testing plan that included a limited operational field test, but the plan did not specify the basis for determining whether the FDCA solution was ready for address canvassing and when and how this determination would occur. In response to our findings and recommendations, the Bureau has taken several steps to improve its management of the 2010 Decennial Census. For example, the Bureau has sought external assessments of its activities from independent research organizations, implemented a new management structure and management processes, brought in experienced personnel in key positions, and established improved reporting processes and metrics. As stated in our testing guide and the Institute of Electrical and Electronics Engineers (IEEE) standards, complete and thorough testing is essential for providing reasonable assurance that new or modified IT systems will perform as intended. To be effective, testing should be planned and conducted in a structured and disciplined fashion that includes processes to control each incremental level of testing, including testing of individual systems, the integration of those systems, and testing to address all interrelated systems and functionality in an operational environment. System testing: verifies that the complete system (i.e., the full complement of application software running on the target hardware and systems software infrastructure) meets specified requirements. It allows for the identification and correction of potential problems within an individual system, prior to integration with other systems. Integration testing: verifies that systems, when combined, work together as intended. Effective integration testing ensures that external interfaces work correctly and that the integrated systems meet specified requirements. End-to-end testing: verifies that a defined set of interrelated systems, which collectively support an organization’s core business area or function, interoperate as intended in an operational environment. The interrelated systems include not only those owned and managed by the organization, but also the external systems with which they interface. To be effective, this testing should be planned and scheduled in a structured and disciplined fashion. Comprehensive testing that is effectively planned and scheduled can provide the basis for identifying key tasks and requirements and better ensure that a system meets these specified requirements and functions as intended in an operational environment. In preparation for the 2010 census, the Bureau planned what it refers to as the Dress Rehearsal. The Dress Rehearsal is managed by the Bureau’s Decennial Management Division, in collaboration with other Bureau divisions (including the program offices, shown in table 1, which are responsible for developing and testing each of the systems). The Dress Rehearsal includes systems and integration testing, as well as end-to-end testing of key operations in a census-like environment. During the Dress Rehearsal period, running from February 2006 through June 2009, the Bureau is developing and testing systems and operations, and it held a mock Census Day on May 1, 2008. The Dress Rehearsal activities, which are still under way, are a subset of the activities planned for the actual 2010 census and include testing of both IT and non-IT related functions, such as opening offices and hiring staff. The Dress Rehearsal tested several activities involving key systems. For example, the Bureau tested key systems with address canvassing and group quarters validation operations, including FDCA handheld computers and the MAF/TIGER system. In addition, the Bureau used the UC&M system and MAF/TIGER to provide an initial list of housing unit addresses for the Dress Rehearsal test sites. Questionnaires were mailed to these housing units in April 2008. Subsequently, a mock Census Day was held on May 1, 2008—1 month later than originally planned. The mock Census Day was delayed, in part, to focus greater attention on testing the technology being used. The Dress Rehearsal identified significant technical problems during the address canvassing operations. For example, the Bureau had originally planned to use handheld computers, developed under the FDCA program, for operations such as address canvassing and non-response followup. However, from May 2007 to June 2007, the Bureau tested the handhelds under census-like conditions for the first time during the Dress Rehearsal address canvassing operation. Bureau officials observed a number of performance problems with the handheld computers, such as slow and inconsistent data transmissions. In addition, help desk logs revealed that users had frequently reported problems, such as the devices freezing up or users having difficulties collecting mapping coordinates and working with large blocks (geographic areas with large numbers of housing units, more often found in urban areas). The Bureau also found system problems during testing of the group quarters validation operation, in which field staff validate addresses as group quarters and collect information required for their later enumeration. As part of this operation, the Bureau tested the operations control system—designed to manage field operations that rely on paper, as well as those that rely on the handheld computers—and the system was found to be unreliable. As a result, the workload for these operations had to be supplemented with additional paper-based efforts by local census office staff, instead of being performed electronically, as intended. As a result of the problems observed with the handheld computers and operations control system, cost overruns and schedule slippage in the FDCA program, and other issues, the Bureau removed the planned testing of key operations from the Dress Rehearsal as follows: update/leave (that is, after enumerators update addresses, they leave questionnaires at housing units; this occurs mainly in rural areas lacking street names, house numbers, or both), enumeration of transitory locations, group quarters enumeration, and field verification. Furthermore, in April 2008, the Secretary of Commerce announced a redesign of the 2010 Decennial Census, including the FDCA program. Specifically, the Bureau would no longer use handheld computers for nonresponse follow-up (its largest field operation), but would conduct paper-based nonresponse follow-up, as in previous censuses. It would, however, continue to use the handheld computers for the address canvassing operations. In May 2008, the Bureau issued a plan that detailed key components of the paper-based operation and described processes for managing it and other operations. It later established the PBO office to manage designing, developing, and testing paper-based operations, as well as to prepare related training materials. In addition to the planned Dress Rehearsal testing, the Bureau is planning supplementary testing to prepare for the 2010 Decennial Census. This testing includes system, integration, and end-to-end testing of changes resulting from the Dress Rehearsal, operations or features that were not tested during the Dress Rehearsal, and additional features or enhancements that are to be added after the Dress Rehearsal. The Bureau has made progress in conducting system, integration, and end- to-end testing for the 2010 census, but much remains to be done. Significant testing remains to be done, and many plans for the remaining testing activities have not been developed. The weaknesses in the Bureau’s IT testing can be attributed, in part, to a lack of sufficient executive-level oversight and guidance on testing. Without comprehensive oversight and guidance, the Bureau cannot ensure that it is thoroughly testing its systems before the 2010 Decennial Census. Through the Dress Rehearsal and other testing activities, the Bureau has completed key system tests, but significant testing has yet to be performed, and planning for this is not complete. For example, the Headquarters Processing systems (UC&M and RPS) are still completing system testing related to the Dress Rehearsal, and the program office is planning for further testing. For DRIS, on the other hand, system testing related to the Dress Rehearsal is complete, and additional 2010 system testing is under way. Table 2 summarizes the status and plans for system testing. For both Headquarters Processing Systems (UC&M and RPS), system testing for the Dress Rehearsal has been partially completed, as shown in table 3. For UC&M, Dress Rehearsal system testing is divided into three phases, as shown. These phases include a total of 19 products (used to control and track Dress Rehearsal enumeration activities). The completed phases (1 and 2) included the development and testing of 14 products. Program officials had planned to complete testing of the remaining 5 products for UC&M by October 2008, but as of December 2008, the program had not yet completed this testing. For RPS, Dress Rehearsal system testing is being done by component— eight components perform functions for key activities such as data integration—where response data are integrated before processing. According to program officials, development and testing of four components are complete, and the remaining four components are planned to be completed by March 2009. In addition to ongoing Dress Rehearsal system testing, the program office intends to perform system testing for 2010 census operations, but plans for this testing have not yet been developed. According to program officials, they have not developed testing plans and schedules for additional testing for the 2010 census because Bureau management has not yet finalized the requirements for 2010 operations. Finalizing these requirements may involve both changes to existing requirements and new requirements. Program officials stated that they do not anticipate substantial changes in UC&M and RPS system requirements for 2010 census operations and plan to have them finalized by May 2009. In commenting on a draft of this report, the Bureau provided an initial test plan and schedule, but did not provide the finalized baselined requirements for the Headquarters Processing Systems for 2010 operations. Until the baseline requirements are established, it is unclear whether the amount of additional testing necessary for 2010 census operations will be significant. According to industry best practices, defining requirements for a system is important because they provide a baseline for development and testing activities and are used to establish test plans, which define schedule activities, roles and responsibilities, resources, and system testing priorities. The absence of finalized requirements increases the risk that there may not be sufficient time and resources to adequately test the systems, which are critical to ensuring that address files are accurately organized into enumeration universes and that duplicate responses are eliminated. System testing has been partially completed for MAF/TIGER products (that is, extracts from the MAF/TIGER system) required for the 2010 census. For MAF/TIGER, testing activities are defined by products needed for key activities, such as address canvassing. During Dress Rehearsal system testing, the program office completed testing for a subset of MAF/TIGER products for address canvassing, group quarters validation, and other activities. Additional system testing is planned for the 2010 census. According to program officials, as of December 2008, the Bureau had defined requirements and completed testing for 6 of approximately 60 products needed for 2010 operations (these 6 products are related to address canvassing). The program office has also developed detailed test plans and schedules through April 2009, but these do not cover all of the remaining products needed to support the 2010 census. Table 4 is a summary of the status of MAF/TIGER 2010 testing and plans. According to program officials, the detailed test plans for the remaining products will be developed after the requirements for each are finalized. As mentioned, establishing defined requirements is important because these provide a baseline for development and testing activities and define the basic functions of a product. The officials stated that they were estimating the number of products needed, but would only know the exact number when the requirements for the 2010 census operations are determined. The officials added that, by January 2009, they plan to have a detailed schedule and a list of the products needed through December 2009. Without knowing the total number of products, related requirements, and when the products are needed for operations, the Bureau risks both not sufficiently defining what each product needs to do and not being able to effectively measure the progress of MAF/TIGER testing activities, which therefore increases the risk that there may not be sufficient time and resources to adequately test the system and that the system may not perform as intended. System testing has been partially completed for DRIS components, including paper, workflow control and management, and telephony. Portions of the functionality in each DRIS component are being developed and tested across five increments for 2010 operations. As of November 2008, the program had planned and completed testing of increments 1, 2, and 3. Testing of increment 4 is currently ongoing. Table 5 is a summary of the status of DRIS testing for 2010 operations. (In addition, system testing of a subset of DRIS functionality, including the integration of certain response data, took place during the Dress Rehearsal.) The DRIS program has developed a detailed testing plan and schedule, including the remaining testing for increment 5. For example, detailed testing plans have been developed for all 558 functional requirements for DRIS. According to program officials, most of the 558 functional requirements will be fully tested during increments 4 and 5. As of November 2008, 22 of the 558 requirements had been tested. Although plans and schedules were completed, the change from handheld computers to paper processes for nonresponse follow-up has caused changes to DRIS processing requirements. For example, DRIS program officials stated that they now need to process an additional 40 million paper forms generated as a result of this switch. Although DRIS program officials stated that they are prepared to adjust their test schedule and plan to accommodate this change, they cannot do so until the requirements have been finalized for the switch to paper processes. (This responsibility is primarily that of the PBO program office.) Furthermore, based on the switch to paper, DRIS may not be able to conduct a test using these operational systems and live data. This increases the risk that the Bureau could experience problems with these systems and the processing of paper forms during the 2010 census. The DRIS program office is addressing this risk by developing alternative strategies for testing and providing additional resources as contingencies for activities that may not be fully tested before 2010 operations begin. FDCA testing has been partially completed, but much more work remains. System testing for FDCA took place during the Dress Rehearsal, but problems encountered during this testing led to the removal of key operations from the Dress Rehearsal and the April 2008 redesign, as described earlier. Going forward, FDCA development and testing for 2010 operations are being organized based on key census activities. For example, FDCA testing for the address canvassing and group quarters validation operations was completed in December 2008. The FDCA contractor is currently developing and testing a backup system (known as the continuity of operations system) for address canvassing and group quarters validation, and is currently testing another system (known as map printing) to provide printed maps for paper-based field operations, such as nonresponse follow-up. Table 6 summarizes the FDCA test status. Although system testing for address canvassing and group quarters validation was recently completed, program officials have not demonstrated that all current system requirements have been fully tested. As part of a contract revision required by the April 2008 redesign, the FDCA program established a revised baseline for system requirements on November 20, 2008. According to program officials, this revision included both modifications to previous requirements and removal of requirements that were part of activities transferred to PBO. As of December 2008, program officials stated that detailed testing plans for many of the requirements exist, but need to be revised to address the newly baselined requirements. Furthermore, as of December 2008, the FDCA program had not finalized detailed testing plans and schedules for the continuity of operations and map printing systems. According to program officials, they had not yet developed detailed testing plans and schedules for testing systems’ requirements because their focus has been on testing the system for address canvassing and group quarters validation. Officials added that they plan to begin testing the requirements for the continuity of operations system in January 2009, and for the map printing system in February 2009. However, without having established testing plans and schedules for these systems, it is unclear what amount of testing will be needed and whether sufficient time has been allocated in the schedule to fully test these systems before they are needed for operations. Testing has only recently started for PBO because it is still in the preliminary phase of program planning and initial system development as the Bureau shifts responsibility for certain operations from the FDCA program office to PBO. Because this office has only recently been created, it is currently hiring staff, developing a schedule for several iterations of development, establishing a means to store and trace requirements, developing testing plans, and establishing a configuration management process. According to program officials, development will occur in five releases, numbered 0 through 4. The first release, Release 0, is planned to contain functionality for the nonresponse follow-up and group quarters enumeration activities. Table 7 provides the current status of PBO Release 0 test activities. However, the Bureau still has not yet determined when detailed testing plans and schedules for PBO systems will be developed. Officials stated that a more detailed schedule for Release 0 and development schedules for the remaining releases are under development, and that they plan to have the majority of the schedules developed by the end of January 2009. In commenting on a draft of this report, the Bureau provided a partial schedule for PBO test activities. Furthermore, officials stated they had not yet fully defined which requirements PBO would be accountable for, and which of these requirements will be addressed in each iteration of development. The officials did state that the requirements will be based on those requirements transferred from FDCA as part of the reorganization. Bureau officials stated they had not yet completed these activities because responsibility for the requirements was only formally transferred as of October 2008. The program office expects to have its first iteration of requirements traceable to test cases by March 2009. However, officials did not know what percentage of program requirements will be included in this first iteration. Although progress has been made in establishing the PBO program office, numerous critical system development activities need to be planned and executed in a limited amount of time. Because of the compressed schedule and the large amount of planning that remains, PBO risks not having its systems developed and tested in time for the 2010 Decennial Census. Testing is critical to ensure that the paper forms used to enumerate residents of households who do not mail back their questionnaires, group quarters, and transitional living quarters are processed accurately. The DADS system (which had been used in the 2000 census) is currently being tested during the Dress Rehearsal, which is scheduled to be completed in March 2009. However, the Bureau intends to replace DADS with DADS II, which is currently being developed and tested for 2010 operations. DADS II is still in the early part of its life cycle, and the program office has only recently started system testing activities. The two main DADS II components, the Replacement Tabulation System (RTS) and Replacement Dissemination System (RDS), are being developed and tested across a series of three iterations. As of December 2008, the program had begun iterations 1 and 2 for RTS, and iteration 1 for RDS. Table 8 summarizes the RTS and RDS testing status. The DADS II program office has developed a high-level test plan for RTS and RDS system testing, but has not yet defined detailed testing plans and a schedule for testing system requirements. System requirements for the new system have been baselined, with 202 requirements for RTS and 318 requirements for RDS. According to program officials, the program office is planning to develop detailed testing plans for the system requirements for both RTS and RDS. Effective integration testing ensures that external interfaces work correctly and that the integrated systems meet specified requirements. This testing should be planned and scheduled in a disciplined fashion according to defined priorities. For the 2010 census, each program office is responsible for and has made progress in defining system interfaces and conducting integration testing, which includes testing of these interfaces. However, significant activities remain in order for comprehensive integration testing to be completed by the date that the systems are needed for 2010 operations. For example, DRIS has conducted integration testing with some systems, such as FDCA, UC&M, and RPS, and is scheduled to complete integration testing by February 2010. The FDCA program office has also tested interfaces related to the address canvassing operation scheduled to begin in April 2009. However, for many other systems, such as PBO, interfaces have not been fully defined, and other interfaces have been defined but have not been tested. Table 9 provides the status of integration testing among key systems. In addition, the Bureau has not established a master list of interfaces between key systems, or plans and schedules for integration testing of these interfaces. A master list of system interfaces is an important tool for ensuring that all interfaces are tested appropriately and that the priorities for testing are set correctly. Although the Bureau had established a list of interfaces in 2007, according to Bureau officials, it was not updated because of resource limitations at the time and other management priorities. As of October 2008, the Bureau had begun efforts to update this list, but it has not provided a date when this list will be completed. Without a completed master list, the Bureau cannot develop comprehensive plans and schedules for conducting systems integration testing that indicate how the testing of these interfaces will be prioritized. This is important because a prioritized master list of system interfaces, combined with comprehensive plans and schedules to test the interfaces, would allow for tracking the progress of this testing. With the limited amount of time remaining before systems are needed for 2010 operations, the lack of comprehensive plans and schedules increases the risk that the Bureau may not be able to adequately test system interfaces, and that interfaced systems may not work together as intended. The Dress Rehearsal was originally conceived to provide a comprehensive end-to-end test of key 2010 census operations; however, as mentioned earlier, because of the problems encountered with the handheld devices, among other things, testing was curtailed. As a result, although several critical operations underwent end-to-end testing in the Dress Rehearsal, others did not. According to the Associate Director for the 2010 census, the Bureau tested approximately 23 of 44 key operations during the Dress Rehearsal. Examples of key operations that underwent end-to-end testing during the Dress Rehearsal are address canvassing and group quarters validation. An example of a key operation that was not tested is the largest field operation—nonresponse follow-up. Although the Bureau recently conducted additional testing of the handhelds, this test was not a robust end-to-end test. In December 2008, after additional development and improvements to the handheld computers, the Bureau conducted a limited field test for address canvassing, intended to assess software functionality in an operational environment. We observed this test and determined that users were generally satisfied with the performance of the handhelds. According to Bureau officials, the performance of the handheld computers has substantially improved from previous tests. However, the test was not designed to test all the functionality of the handhelds in a robust end-to-end test—rather, it included only a limited subset of functionality to be used during the 2009 address canvassing operations. Further, the field test did not validate that the FDCA system fully met specified requirements for the address canvassing operation. Bureau officials stated that additional testing of the FDCA system, such as performance testing, mitigated the limitations of this field test. Nonetheless, the lack of robustness of the field test poses several risks for 2010 operations. Specifically, without testing all the FDCA system’s requirements in a robust operational environment, it is unclear whether the system can perform as intended when the address canvassing operation begins in April 2009. Furthermore, as of December 2008, the Bureau has neither established testing plans nor schedules to perform end-to-end testing of the key operations that were removed from the Dress Rehearsal, nor has it determined when these plans will be completed. As previously mentioned, these operations include enumeration of transitory locations, group quarters enumeration, and field verification. Although the Bureau has established a high-level strategy for testing these operations, which provides details about the operations to be tested, Bureau officials stated that they have not developed testing plans and schedules because they are giving priority to tests for operations that are needed in early 2009. In addition, key systems needed to test these operations are not ready to be tested because they are either still in development or have not completed system testing. Until system and integration testing activities are complete, the Bureau cannot effectively plan and schedule end-to-end testing activities. Without sufficient end-to- end testing, operational problems can go undiscovered, and the opportunity to improve these operations will be lost. The decreasing time available for completing end-to-end testing increases the risk that testing of key operations will not take place before the required deadline. Bureau officials have acknowledged this risk in briefings to the Office of Management and Budget. The Bureau is in the process of identifying risks associated with incomplete testing and developing mitigation plans, which it had planned to have completed by November 2008. However, as of January 2009, the Bureau had not completed these mitigation plans. According to the Bureau, the plans are still being reviewed by senior management. Without plans to mitigate the risks associated with limited end-to-end testing, the Bureau may not be able to respond effectively if systems do not perform as intended. As stated in our testing guide and IEEE standards, oversight of testing activities includes both planning and ongoing monitoring of testing activities. Ongoing monitoring entails collecting and assessing status and progress reports to determine, for example, whether specific test activities are on schedule. Using this information, management can effectively determine whether corrective action is needed and, if so, what action should be taken. In addition, comprehensive guidance should describe each level of testing (for example, system, integration, or end-to-end), criteria for each level, and the type of test products expected. The guidance should also address test preparation and oversight activities. Although the 2010 Decennial Census is managed by the Decennial Management Division, the oversight and management of key census IT systems is performed on a decentralized basis. DRIS, FDCA, and DADS II each have a separate program office within the Decennial Automation Contracts Management Office; Headquarters Processing and PBO are managed within the Decennial System and Processing Office; and MAF/TIGER is managed within the Geography Division. Each program has its own program management reviews and develops plans and tracks metrics related to testing. These offices and divisions collectively report to the Associate Director for the 2010 Census. According to the Bureau, the associate director chairs biweekly meetings where the officials responsible for these systems meet to review the status of key systems development and testing efforts. In addition, in response to prior recommendations, the Bureau took initial steps to enhance its programwide oversight; however, these steps have not been sufficient to establish adequate executive-level oversight. In June 2008, the Bureau established an inventory of all testing activities specific to all key decennial operations. This inventory showed that, as of May 2008, 18 percent of about 1049 system testing activities had not been planned. (See fig. 4.) In addition, approximately 67 percent of about 836 operational testing activities had not been planned. Although officials from the Decennial System and Processing Office described the inventory effort as a means of improving executive-level oversight, the inventory has not been updated since May 2008, and officials have no plans for further updates. Instead, officials stated that they plan to track testing progress as part of the Bureau’s detailed master schedule of census activities. However, this schedule does not provide comprehensive status information on testing. In another effort to improve executive-level oversight, the Decennial Management Division began producing (as of July 2008) a weekly executive alert report and has established (as of October 2008) monthly dashboard and reporting indicators. However, these products do not provide comprehensive status information on the testing progress of key systems and interfaces. For example, the executive alert report does not include the progress of testing activities, and although the dashboard provides a high-level, qualitative assessment of testing for key operations and selected systems, it does not provide information on the testing progress of all key systems and interfaces. Further, the assessment of testing progress has not been based on quantitative and specific metrics. For example, the status of testing key operations removed from the Dress Rehearsal was marked as acceptable, or “green,” although the Bureau does not yet have plans for testing these activities. Bureau officials stated that they marked these activities as acceptable because, based on past experience, they felt comfortable that a plan would be developed in time to adequately test these operations. The lack of quantitative and specific metrics to track progress limits the Bureau’s ability to accurately assess the status and progress of testing activities. In commenting on a draft of this report, the Bureau provided selected examples in which they had begun to use more detailed metrics to track the progress of end-to-end testing activities. Finally, although the Bureau announced in August 2008 that it was planning to hire a senior manager who would have primary responsibility for monitoring testing across all decennial systems and programs, the position had not been filled as of January 2009. Instead, agency officials stated that the role is being filled by another manager from the Decennial Statistical Studies Division, who has numerous other responsibilities. The Bureau also has weaknesses in its testing guidance; it has not established comprehensive guidance for system testing. According to the Associate Director for the 2010 Census, the Bureau did establish a policy strongly encouraging offices responsible for decennial systems to use best practices in software development and testing, as specified in level 2 of Carnegie Mellon’s Capability Maturity Model® Integration. However, beyond this general guidance, there is no additional guidance on key testing activities such as criteria for each level or the type of test products expected. Standardized policies and procedures help to ensure comprehensive processes across an organization and allow for effective executive-level oversight. The lack of guidance has led to an ad hoc—and, at times—less than desirable approach to testing. While the Bureau’s program offices have made progress in testing key decennial systems, much work remains to ensure that systems operate as intended for conducting an accurate and timely 2010 census. Several program offices have yet to prepare and execute system test plans and schedules and ensure that system requirements are fully tested. In addition, the Bureau has not developed a master list of interfaces, which is necessary to prioritize testing and to develop comprehensive integration test plans and schedules. Additionally, end-to-end testing plans for key operations have not been finalized or executed based on established priorities to help ensure that systems will support census operations. Weaknesses in the Bureau’s IT testing can be attributed, in part, to a lack of sufficient executive-level oversight and guidance. More detailed metrics and status reports would help the Bureau to better monitor testing progress and identify and address problems. Giving accountability for testing to a senior-level official would also provide the focus and attention needed to complete critical testing. Also, completing risk mitigation plans will help ensure that actions are in place to address potential problems with systems. Given the rapidly approaching deadlines of the 2010 census, completing these important tests and establishing stronger executive-level oversight and guidance are critical to ensuring that systems perform as intended when they are needed. To ensure that testing activities for key systems for the 2010 census are completed, we are making 10 recommendations. We recommend that the Secretary of Commerce require the Director of the Census Bureau to expeditiously implement the following recommendations: For the Headquarters UC&M and RPS, finalize requirements for 2010 census operations and complete testing plans and schedules for 2010 operations that trace to baselined system requirements. For MAF/TIGER, establish the number of products required, define related requirements, and establish a testing plan and schedule for 2010 operations. For FDCA, establish testing plans for the continuity of operations and map printing systems that trace to baselined system requirements. For PBO, develop baseline requirements and complete testing plans and schedules for 2010 operations. Establish a master list of system interfaces; prioritize the list, based on system criticality and need date; define all interfaces; and develop integration testing plans and schedules for tracking the progress of testing these interfaces. Establish a date for completing testing plans for the operations removed from the Dress Rehearsal operations and prioritize testing activities for these operations. Finalize risk mitigation plans detailing actions to address system problems that are identified during testing. Establish specific testing metrics and detailed status reports to monitor testing progress and better determine whether corrective action is needed for all key testing activities. Designate a senior manager with primary responsibility for monitoring testing and overseeing testing across the Bureau. In addition, after the 2010 census, we recommend that the Bureau establish comprehensive systems and integration testing guidance to guide future testing of systems. The Associate Under Secretary for Management of the Department of Commerce provided written comments on a draft of this report. The department’s letter and general comments are reprinted in appendix II. In the comments, the department and Bureau stated they had no significant disagreements with our recommendations. However, the department and Bureau added that since the FDCA replan last year, their testing strategy has been to focus on those things they have not done before, and to demonstrate to their own satisfaction that new software and systems will work in production. The department added that it has successfully conducted Census operations before, and was focusing “on testing the new things for 2010—not things that have worked before.” While we acknowledge that the Bureau has conducted key census operations before, the systems and infrastructure in place to conduct these operations have changed substantially since the 2000 census. For example, while the Bureau has conducted paper-based nonresponse followup during previous censuses, it will be using newly developed systems which have not yet been fully tested in a census-like environment to integrate responses and manage the nonresponse followup work load. In addition, new procedures, such as one to remove questionnaires that were mailed in late from the nonresponse followup operation, have not been tested with these systems. Any significant change to an existing IT system introduces the risk that the system may not work as intended; therefore, testing all systems after changes have been made to ensure the systems work as intended is critical to the success of the 2010 census. In addition, the department and Bureau provided technical comments, such as noting draft plans that had been developed after the conclusion of our work, that we have incorporated where appropriate. We are sending copies of this report to the Secretary of Commerce, the Director of the U.S. Census Bureau, and other appropriate congressional committees. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact David Powner at (202) 512-9286 or [email protected]. GAO staff who made contributions to this report are listed in appendix III. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. To determine the status of and plans for testing key decennial systems, we analyzed documentation related to system, integration, and end-to-end testing. For system testing, we analyzed documentation related to each key decennial system, including system test plans, schedules, requirements, results, and other test-related documents. We then compared the Bureau’s practices with those identified in our testing guide and Institute of Electrical and Electronics Engineers (IEEE) standards to determine the extent to which the Bureau had incorporated best practices in testing. We also interviewed program officials and contractors of key decennial systems to obtain information on the current status of and plans for testing activities. For integration testing, we analyzed interface control documents, interface testing plans, and schedules. We also analyzed documentation of the Census Bureau’s (Bureau) oversight of integration testing activities, including efforts to issue integration testing guidance and monitor the progress of integration testing activities. We interviewed program officials at each key decennial system program office to obtain information on the current status of and plans for integration testing and interviewed program officials at the Decennial Systems Processing Office to obtain information on the executive-level oversight of integration testing activities. We compared the Bureau’s practices with those identified in our testing guide and IEEE guidance. For end-to-end testing, we analyzed documentation related to the testing of key census operations during the Bureau’s Dress Rehearsal, additional testing conducted for the address canvassing operation, and efforts to establish testing plans and schedules for operations removed from the Dress Rehearsal. We also observed the Bureau’s operational field test, held in December 2008 in Fayetteville, North Carolina. We interviewed program officials at the Decennial Systems Processing Office to obtain information on the current status and plans for end-to-end testing activities. We compared the Bureau’s practices with those identified in our testing guide and IEEE guidance. We also analyzed documentation of the Bureau’s overall oversight of testing, including its executive alert reports and monthly dashboard reports. In addition, we assessed system testing guidance and interviewed the Associate Director for the Decennial Census to obtain information on the overall oversight of testing activities. We conducted this performance audit from June 2008 to February 2009 in the Washington, D.C., and Fayetteville, North Carolina, areas, 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 objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. In addition to the contact name above, individuals making contributions to this report included Cynthia Scott (Assistant Director), Sher`rie Bacon, Barbara Collier, Neil Doherty, Vijay D’Souza, Nancy Glover, Lee McCracken, Jonathan Ticehurst, Melissa Schermerhorn, and Karl Seifert. | The Decennial Census is mandated by the U.S. Constitution and provides vital data that are used, among other things, to reapportion and redistrict congressional seats. In March 2008, GAO designated the 2010 Decennial Census a high-risk area, citing a number of long-standing and emerging challenges, including weaknesses in the Census Bureau's (Bureau) management of its information technology (IT) systems and operations. In conducting the 2010 census, the Bureau is relying on both the acquisition of new IT systems and the enhancement of existing systems. Thoroughly testing these systems before their actual use is critical to the success of the census. GAO was asked to determine the status of and plans for testing key decennial systems. To do this, GAO analyzed testing documentation, interviewed Bureau officials and contractors, and compared the Bureau's efforts with recognized best practices. Although the Bureau has made progress in testing key decennial systems, critical testing activities remain to be performed before systems will be ready to support the 2010 census. Bureau program offices have completed some testing of individual systems, but significant work still remains to be done, and many plans have not yet been developed (see table below). In its testing of system integration, the Bureau has not completed critical activities; it also lacks a master list of interfaces between systems; has not set priorities for the testing of interfaces based on criticality; and has not developed testing plans and schedules. Although the Bureau had originally planned what it refers to as a Dress Rehearsal, starting in 2006, to serve as a comprehensive end-to-end test of key operations and systems, significant problems were identified during testing. As a result, several key operations were removed from the Dress Rehearsal and did not undergo end-to-end testing. The Bureau has neither developed testing plans for these key operations, nor has it determined when such plans will be completed. Weaknesses in the Bureau's testing progress and plans can be attributed, in part, to a lack of sufficient executive-level oversight and guidance. Bureau management does provide oversight of system testing activities, but the oversight activities are not sufficient. For example, Bureau reports do not provide comprehensive status information on progress in testing key systems and interfaces, and assessments of the overall status of testing for key operations are not based on quantitative metrics. Specifically, key operations that do not yet have plans developed are marked as making acceptable progress based solely on management judgment. Further, although the Bureau has issued general testing guidance, it is neither mandatory nor specific enough to ensure consistency in conducting system testing. Without adequate oversight and more comprehensive guidance, the Bureau cannot ensure that it is thoroughly testing its systems and properly prioritizing testing activities before the 2010 Decennial Census, posing the risk that these systems may not perform as planned. |
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The federal real property portfolio is vast and diverse, totaling more than 900,000 buildings and structures—including office buildings, warehouses, laboratories, hospitals, and family housing—and worth hundreds of billions of dollars. The six largest federal real property holding agencies— DOD; GSA; the U.S. Postal Service; and the Departments of Veterans Affairs (VA), Energy, and the Interior—occupy 87.6 percent of the total square footage in federal buildings. Overall, the federal government owns approximately 83 percent of this space and leases or otherwise manages the rest; however, these proportions vary by agency. For example GSA, the central leasing agent for most agencies, now leases more space than it owns. The federal real property portfolio includes many properties the federal government no longer needs. In May 2011, the White House posted an interactive map of excess federal properties on its Web site, noting that the map illustrates a sampling of over 7,000 buildings and structures currently designated as excess. These properties range from sheds to underutilized office buildings and empty warehouses. We visited an office and warehouse complex in Fort Worth, Texas that was listed on the Web site. Ten of the properties listed on the Web site as part of the Fort Worth complex were parceled together and auctioned in May 2011, but the sale is not yet final. The structures ranged from large warehouses to a concrete slab. (See fig. 1.) Work we are currently doing for this subcommittee on how federal agencies designate excess federal real property will include visits to other properties from around the country that are considered excess. After we first designated federal real property as a high-risk area in 2003, the President issued Executive Order 13327 in February 2004, which established new federal property guidelines for 24 executive branch departments and agencies. Among other things, the executive order called for creating the interagency FRPC to develop guidance, collect best practices, and help agencies improve the management of their real property assets. DOD has undergone four BRAC rounds since 1988 and is currently implementing its fifth round. Generally, the purpose of prior BRAC rounds was to generate savings to apply to other priorities, reduce property deemed excess to needs, and realign DOD’s workload and workforce to achieve efficiencies in property management. As a result of the prior BRAC rounds in 1988, 1991, 1993, and 1995, DOD reported that it had reduced its domestic infrastructure, and transferred hundreds of thousands of acres of unneeded property to other federal and nonfederal entities. DOD data show that the department had generated an estimated $28.9 billion in net savings or cost avoidances from the prior four BRAC rounds through fiscal year 2003 and expects to save about $7 billion each year thereafter, which could be applied to other higher priority defense needs. These savings reflect money that DOD has estimated it would likely have spent to operate military bases had they remained open. However, we found that DOD’s savings estimates are imprecise because the military services have not updated them regularly despite our prior reported concerns on this issue. The 2005 BRAC round affected hundreds of locations across the country through 24 major closures, 24 major realignments, and 765 lesser actions, which also included terminating leases and consolidating various activities. Legislation authorizing the 2005 BRAC round maintained requirements established for the three previous BRAC rounds that GAO provide a detailed analysis of DOD’s recommendations and of the BRAC selection process. We submitted the results of our analysis in a 2005 report and testified before the BRAC Commission soon thereafter. Since that time, we have published annual reports on the progress, challenges, and costs and savings of the 2005 round, in addition to numerous reports on other aspects of implementing the 2005 BRAC round. The administration and real-property-holding agencies have made progress in a number of areas since we designated federal real property as high risk in 2003. In 2003, we reported that despite the magnitude and complexity of real-property-related problems, there had been no governmentwide strategic focus on real property issues. Not having a strategic focus can lead to ineffective decision making. As part of the government’s efforts to strategically manage its real property, the administration established FRPC—a group composed of the OMB Controller and senior real property officers of landholding agencies—to support real property reform efforts. Through FRPC, the landholding agencies have also established asset management plans, standardized real property data reporting, and adopted various performance measures to track progress. The asset management plans are updated annually and help agencies take a more strategic approach to real property management by indicating how real property moves the agency’s mission forward; outlining the agency’s capital management plans; and describing how the agency plans to operate its facilities and dispose of unneeded real property, including listing current and future disposal plans. According to several member agencies, FRPC no longer meets regularly but remains a forum for agency coordination on real property issues and could serve a larger role in future real property management. We also earlier reported that a lack of reliable real property data compounded real property management problems. The governmentwide data maintained at that time were unreliable, out of date, and of limited value. In addition, certain key data that would be useful for budgeting and strategic management were not being maintained, such as data on space utilization, facility condition, historical significance, security, and age. We found that some of the major real-property-holding agencies faced challenges developing reliable data on their real property assets. We noted that reliable governmentwide and agency-specific real property data are critical for addressing real property management challenges. For example, better data would help the government determine whether assets are being used efficiently, make investment decisions, and identify unneeded properties. In our February 2011 high-risk update, we reported that the federal government has taken numerous steps since 2003 to improve the completeness and reliability of its real property data. FRPC, in conjunction with GSA, established the Federal Real Property Profile (FRPP) to meet a requirement in Executive Order 13327 for a single real property database that includes all real property under the control of executive branch agencies. FRPP contains asset-level information submitted annually by agencies on 25 high-level data elements, including four performance measures that enable agencies to track progress in achieving property management objectives. In response to our 2007 recommendation to improve the reliability of FRPP data, OMB required, and agencies implemented, data validation plans that include procedures to verify that the data are accurate and complete. Furthermore, GSA’s Office of Governmentwide Policy (OGP), which administers the FRPP database, instituted a data validation process that precludes FRPP from accepting an agency’s data until the data pass all established business rules and data checks. In our most recent analysis of the reliability of FRPP data, we found none of the previous basic problems, such as missing data or inexplicably large changes between years. In addition, agencies continue to improve their real property data for their own purposes. From a governmentwide perspective, OGP has sufficient standards and processes in place for us to consider the 25 elements in FRPP as a database that is sufficiently reliable to describe the real property holdings of the federal government. Consequently, we removed the data element of real property management from our high-risk list this year. The government now has a more strategic focus on real property issues and more reliable real property data, but problems related to unneeded property and leasing persist because the government has not addressed underlying legal and financial limitations and stakeholder influences. In our February 2011 high-risk update, we noted that the legal requirements agencies must adhere to before disposing of a property, such as requirements for screening and environmental cleanup, present a challenge to consolidating federal properties. Currently, before GSA can dispose of a property that a federal agency no longer needs, it must offer the property to other federal agencies. If other federal agencies do not need the property, GSA must then make the property available to state and local governments and certain nonprofit organizations and institutions for public benefit uses, such as homeless shelters, educational facilities, or fire or police training centers. As a result of this lengthy process, GSA’s underutilized or excess properties may remain in an agency’s possession for years and continue to accumulate maintenance and operations costs. We have also noted that the National Historic Preservation Act, as amended, requires agencies to manage historic properties under their control and jurisdiction and to consider the effects of their actions on historic preservation. The average age of properties in GSA’s portfolio is 46 years, and since properties more than 50 years old are eligible for historic designation, this issue will soon become critically important to GSA. The costs of disposing of federal property further hamper some agencies’ efforts to address their excess and underutilized real property problems. For example, federal agencies are required by law to assess and pay for any environmental cleanup that may be needed before disposing of a property—a process that may require years of study and result in significant costs. In some cases, the cost of the environmental cleanup may exceed the costs of continuing to maintain the excess property in a shut-down status. The associated costs of complying with these legal requirements create disincentives to dispose of excess property. Moreover, local stakeholders—including local governments, business interests, private real estate interests, private-sector construction and leasing firms, historic preservation organizations, various advocacy groups for citizens that benefit from federal programs, and the public in general— often view federal facilities as the physical face of the federal government in their communities. The interests of these multiple, and often competing stakeholders, may not always align with the most efficient use of government resources and can complicate real property decisions. For example, as we first reported in 2007, VA officials noted that stakeholders and constituencies, such as historic building advocates or local communities that want to maintain their relationship with VA, often prevent the agency from disposing of properties. In 2003, we indicated that an independent commission or governmentwide task force might be necessary to help overcome stakeholder influences in real property decision making. In 2007, we recommended that OMB, which is responsible for reviewing agencies’ progress on federal real property management, assist agencies by developing an action plan to address the key problems associated with decisions related to unneeded real property, including stakeholder influences. OMB agreed with the recommendation. The administration’s recently proposed legislative framework, CPRA, is somewhat responsive to our recommendation in that it addresses legal and financial limitations, as well as stakeholder influences in real property decision making. With the goal of streamlining the disposal process, CPRA provides for an independent board to determine which properties it considers would be the most appropriate for public benefit uses. This streamlined process could reduce both the time it takes for the government to dispose of property and the amount the government pays to maintain property. To provide financial assistance to the agencies, CPRA establishes an Asset Proceeds and Space Management Fund from which funds could be transferred to reimburse an agency for necessary costs associated with disposing of property. Reimbursing agencies for the costs they incur would potentially facilitate the disposal process. To address stakeholder influences, the independent board established under CPRA would, among other things, recommend federal properties for disposal or consolidation after receiving recommendations from civilian landholding agencies and would independently review the agencies’ recommendations. Grouping all disposal and consolidation decisions into one set of proposals that Congress would consider in its entirety could help to limit local stakeholder influences at any individual site. CPRA does not explicitly address the government’s overreliance on leasing. In 2008, we found that decisions to lease selected federal properties were not always driven by cost-effectiveness considerations. For example, we estimated that the decision to lease the Federal Bureau of Investigation’s field office in Chicago, Illinois, instead of constructing a building the government would own, cost about $40 million more over 30 years. GSA officials noted that the limited availability of upfront capital was one of the reasons that prevented ownership at that time. Federal budget scorekeeping rules require the full cost of construction to be recorded up front in the budget, whereas only the annual lease payments plus cancellation costs need to be recorded for operating leases. In April 2007 and January 2008, we recommended that OMB develop a strategy to reduce agencies’ reliance on costly leasing where ownership would result in long-term savings. We noted that such a strategy could identify the conditions under which leasing is an acceptable alternative, include an analysis of real property budget scoring issues, and provide an assessment of viable alternatives. OMB concurred with this recommendation but has not yet developed a strategy to reduce agencies’ reliance on leasing. One of CPRA’s purposes—to realign civilian real property by consolidating, colocating, and reconfiguring space to increase efficiency—could help to reduce the government’s overreliance on leasing. Our current work examines the efficiency of the federal government’s real property lease management in more detail. DOD has undergone five BRAC rounds to realign DOD’s workload to achieve efficiencies and savings in property management, including reducing excess properties. The BRAC process, much like CPRA, was designed to address obstacles to closures or realignments, thus permitting DOD to close or realign installations and its missions to better use its facilities and generate savings. Certain key elements of DOD’s process for closing and realigning its installations may be applicable to the realignment of real property governmentwide. Some of these key elements include establishing goals, developing criteria for evaluating closures and realignments, developing a structural plan for applying selection criteria, estimating the costs and savings anticipated from implementing recommendations, establishing a structured process for obtaining and analyzing data, and involving the audit community. DOD’s BRAC process was designed to address certain challenges to base closures or realignments, including stakeholder interests, thereby permitting the department to realign its missions to better use its facilities, generate savings, and sometimes also resulting in the disposal of property. The most recent defense base closure and realignment round followed a historical analytical framework, carrying many elements of the process forward or building upon lessons learned from the department’s four previous rounds. DOD used a logical, reasoned, and well-documented process. In addition, we have identified lessons learned from DOD’s 1988, 1991, 1993, and 1995 rounds, and we have begun an effort to assess lessons learned from the 2005 BRAC round. DOD’s 2005 BRAC process consisted of activities that followed a series of statutorily prescribed steps, including: Congress established clear time frames for implementation; DOD developed options for closure or realignment recommendations; BRAC Commission independently reviewed DOD’s proposed President reviewed and approved the BRAC recommendations; and Congress did not disapprove of the recommendations and thus they became binding. In developing its recommendations for the BRAC Commission, DOD relied on certain elements in its process that Congress may wish to consider as it evaluates the administration’s proposed legislation for disposing of or realigning civilian real property, as follows: Establish goals for the process. The Secretary of Defense emphasized the importance of transforming the military to make it more efficient as part of the 2005 BRAC round. Other goals for the 2005 BRAC process included fostering jointness among the four military services, reducing excess infrastructure, and producing savings. Prior rounds were more about reducing excess infrastructure and producing savings. Develop criteria for evaluating closures and realignments. DOD initially proposed eight selection criteria, which were made available for public comments via the Federal Register. Ultimately, Congress enacted the eight final BRAC selection criteria in law and specified that four selection criteria, known as the “military value criteria,” were to be given priority in developing closure and realignment recommendations. The primary military value criteria include such considerations as an installation’s current and future mission capabilities and the impact on operational readiness of the total force; the availability and condition of land, facilities, and associated airspace at both existing and potentially receiving locations; the ability to accommodate a surge in the force and future total force requirements at both existing and potentially receiving locations; and costs of operations and personnel implications. In addition, Congress specified that in developing its recommendations, DOD was to apply “other criteria,” such as the costs and savings associated with a recommendation; the economic impact on existing communities near the installations; the ability of the infrastructure in existing and potential communities to support forces, missions, and personnel; and environmental impact. Further, Congress required that the Secretary of Defense develop and submit to Congress a force structure plan that described the probable size of major military units—for example, divisions, ships, and air wings—needed to address probable threats to national security based on the Secretary’s assessment of those threats for the 20-year period beginning in 2005, along with a comprehensive inventory of global military installations. In authorizing the 2005 BRAC round, Congress specified that the Secretary of Defense publish a list of recommendations for the closure and realignment of military installations inside the United States based on the statutorily-required 20-year force- structure plan and infrastructure inventory, and on the selection criteria. Estimate costs and savings to implement closure and realignment recommendations. To address the cost and savings criteria, DOD developed and used the Cost of Base Realignment Actions model (COBRA) a quantitative tool that DOD has used since the 1988 BRAC round to provide consistency in potential cost, savings, and return-on- investment estimates for closure and realignment options. We reviewed the COBRA model as part of our review of the 2005 and prior BRAC rounds and found it to be a generally reasonable estimator for comparing potential costs and savings among alternatives. As with any model, the quality of the output is a direct function of the input data. Also, DOD’s COBRA model relies to a large extent on standard factors and averages and does not represent budget quality estimates that are developed once BRAC decisions are made and detailed implementation plans are developed. Nonetheless, the financial information provides important input into the selection process as decision makers weigh the financial implications—along with military value criteria and other considerations—in arriving at final decisions about the suitability of various closure and realignment options. However, according to our assessment of the 2005 BRAC round, actual costs and savings were different from estimates. Establish an organizational structure. The Office of the Secretary of Defense emphasized the need for joint cross-service groups to analyze common business-oriented functions. For the 2005 BRAC round, as for the 1993 and 1995 rounds, these joint cross-service groups performed analyses and developed closure and realignment options in addition to those developed by the military services. In contrast, our evaluation of DOD’s 1995 BRAC round indicated that few cross-service recommendations were made, in part because of the lack of high-level leadership to encourage consolidations across the services’ functions. In the 1995 BRAC round, the joint cross-service groups submitted options through the military services for approval, but few were approved. The number of approved recommendations that the joint cross-service groups developed significantly increased in the 2005 BRAC round. This was in part, because high-level leadership ensured that the options were approved not by the military services but rather by a DOD senior-level group. Establish a common analytical framework. To ensure that the selection criteria were consistently applied, the Office of the Secretary of Defense, the military services, and the seven joint cross-service groups first performed a capacity analysis of facilities and functions in which all installations received some basic capacity questions according to DOD. Before developing the candidate recommendations, DOD's capacity analysis relied on data calls to hundreds of locations to obtain certified data to assess such factors as maximum potential capacity, current capacity, current usage, and excess capacity. Then, the military services and joint cross-service groups performed a military value analysis for the facilities and functions based on primary military value criteria, which included a facility’s or function’s current and future mission capabilities, physical condition, ability to accommodate future needs, and cost of operations. Involve the audit community to better ensure data accuracy. The DOD Inspector General and military service audit agencies played key roles in identifying data limitations, pointing out needed corrections, and improving the accuracy of the data used in the process. In their oversight roles, the audit organizations, who had access to relevant information and officials as the process evolved, helped to improve the accuracy of the data used in the BRAC process and thus strengthened the quality and integrity of the data used to develop closure and realignment recommendations. For example, the auditors worked to ensure certified information was used for BRAC analysis, and reviewed other facets of the process, including the various internal control plans, the COBRA model, and other modeling and analytical tools that were used in the development of recommendations. There are a number of important similarities between BRAC and a civilian process as proposed in the administration’s CPRA. As a similarity, both BRAC and CPRA employ the all-or-nothing approach to disposals and consolidations, meaning that once the final list is approved by the independent commission or board, it must be accepted or rejected as a whole. Another important similarity is that both the BRAC and proposed CPRA processes call for an independent board or commission to review recommendations. A key difference between BRAC and the administration’s proposed CPRA is that while the BRAC process placed the Secretary of Defense in a central role to review and submit candidate recommendations to the independent board, CPRA does not provide for any similar central role for civilian agencies. The BRAC process required the Secretary of Defense to develop and submit recommendations to the BRAC Commission for review. In this role, the Office of the Secretary of Defense reviewed and revised the various candidate recommendations developed by the four military services and the seven separate joint cross service groups. In contrast, the administration’s proposed CPRA does not place any official or organization in such a central role to review and submit the recommendations proposed by various federal agencies to the independent board for assessment and approval. Another key difference between BRAC and CPRA is the time period in which the commission will be in existence. CPRA, as proposed by the administration, is a continuing commission which will provide recommendations twice a year for 12 years, whereas, the BRAC Commission convened only for those years in which it was authorized. For example, after the most recent 2005 BRAC round, the Commission terminated by law in April 2006. However, we believe the need for a phased approach involving multiple rounds of civilian property realignments is warranted given it may take several BRAC-like rounds to complete the disposals and consolidations of civilian real property owned and leased by many disparate agencies including GSA, VA, Department of the Interior, Department of Energy, and others. In closing, the government has made strides toward strategically managing its real property and improving its real property planning and data over the last 10 years, but those efforts have not yet led to sufficient reductions in excess property and overreliance on leasing. DOD’s experience with BRAC could help the process move forward to dispose of unneeded civilian real property and generate savings for the taxpayer. Chairman Carper, Ranking Member Brown, and Members of the Subcommittee, this concludes our prepared statement. We will be pleased to answer any questions that you may have at this time. For further information on this testimony, please contact David Wise at (202) 512-2834 or [email protected] regarding federal real property, or Brian Lepore at (202) 512-4523 or [email protected] regarding the BRAC process. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. In addition to the contacts named above, Keith Cunningham, Assistant Director; Laura Talbott, Assistant Director; Vijay Barnabas; Elizabeth Eisenstadt; Amy Higgins; Susan Michal-Smith; Crystal Wesco; and Michael Willems made important contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The federal government holds more than 45,000 underutilized properties that cost nearly $1.7 billion annually to operate, yet significant obstacles impede efforts to close, consolidate, or find other uses for these properties. GAO has designated federal real property management as a high-risk area, in part because of the number and cost of these properties. The Office of Management and Budget (OMB) is responsible for reviewing federal agencies' progress in real property management. In 2007, GAO recommended that OMB assist agencies by developing an action plan to address key obstacles associated with decisions related to unneeded real property, including stakeholder influences. In May 2011, the administration proposed legislation, referred to as the Civilian Property Realignment Act (CPRA), to, among other things, establish a legislative framework for disposing of and consolidating civilian real property and that could help limit stakeholder influences in real property decision making. This statement identifies (1) progress the government has made toward addressing obstacles to federal real property management, (2) some of the challenges that remain and how CPRA may be responsive to those challenges, and (3) key elements of the Department of Defense's (DOD) base realignment and closure (BRAC) process that could expedite the disposal of unneeded civilian properties. To do this work, GAO relied on its prior work, and reviewed CPRA and other relevant reports. In designating federal real property management as a high-risk area, GAO reported that despite the magnitude and complexity of real-property-related problems, there was no governmentwide strategic focus on real property issues and governmentwide data were unreliable and outdated. The administration and real-property-holding agencies have subsequently improved their strategic management of real property by establishing an interagency Federal Real Property Council designed to enhance real property planning processes and implementing controls to improve the reliability of federal real property data. Even with this progress, problems related to unneeded property and leasing persist because the government has not yet addressed other challenges to effective real property management, such as legal and financial limitations and stakeholder influences. CPRA is somewhat responsive to these challenges. For example, CPRA proposes an independent board that would streamline the disposal process by selecting properties it considers appropriate for public benefit uses. This streamlined process could reduce disposal time and costs. CPRA would also establish an Asset Proceeds and Space Management Fund that could be used to reimburse agencies for necessary disposal costs. The proposed independent board would address stakeholder influences by recommending federal properties for disposal or consolidation after receiving recommendations from civilian landholding agencies and independently reviewing the agencies' recommendations. CPRA does not explicitly address the government's overreliance on leasing, but could help do so through board recommendations for consolidating operations where appropriate. GAO is currently examining issues related to leasing costs and excess property. Certain key elements of DOD's BRAC process--which, like CPRA, was designed to address obstacles to closures or realignments--may be applicable to the disposal and realignment of real property governmentwide. These elements include establishing goals, developing criteria for evaluating closures and realignments, estimating the costs and savings anticipated from implementing recommendations, and involving the audit community. A key similarity between BRAC and CPRA is that both establish an independent board to review agency recommendations. A key difference is that while the BRAC process places the Secretary of Defense in a central role to review and submit candidate recommendations to the independent board, CPRA does not provide for any similar central role for civilian agencies. |
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Introduced in the early 1990s, credit derivatives have been widely adopted as a tool for allowing market participants to take on or reduce their exposure to credit risk. First used primarily by banks to reduce credit exposures stemming from loans made to clients, credit derivatives have evolved to include an array of different products (table 1). According to regulators and others, credit derivatives have the potential to improve the overall efficiency and resiliency of the financial markets by spreading credit risk more widely across a large and diverse pool of investors. According to the British Bankers’ Association, single-name credit default swaps remain the most common type of credit derivative, comprising about 33 percent of the market in 2006, though their share of the market has decreased since 2004. These swaps allow the buyer of protection to transfer the credit risk associated with default on debt issued by a single corporation or sovereign entity—called the reference entity. With a standard credit default swap, the buyer of credit risk protection pays a quarterly premium payment to the seller of credit risk protection over the life of the contract, typically 5 or more years. Should a defined credit event occur, such as a default by the specified corporation on the referenced debt, the protection seller would assume the losses. As table 1 shows, other commonly traded products include full index trades, synthetic collateralized debt obligations, and tranched index trades. In the credit derivatives market, banks and securities broker-dealers generally serve as the product dealers, acting as the buyer or seller in credit derivative trades with end-users or other dealers. The top five dealers in 2005, ranked by total trading volumes as estimated by Fitch Ratings, were Morgan Stanley, Deutsche Bank, Goldman Sachs, JP Morgan Chase, and UBS. End-users of credit derivatives include hedge funds, insurance companies, pension funds, and mutual funds. According to ISDA, which conducts periodic surveys of market participants, the credit derivatives market has grown dramatically in recent years, increasing from an estimated total notional amount of nearly $1 trillion outstanding at year-end 2001 to over $34 trillion at year-end 2006 (see fig. 1). Part of this rapid growth has been attributed to product innovation and an increasing number of market participants, particularly hedge funds. Despite its expansion, the credit derivative market is still much smaller than the OTC interest rate derivatives market, which had a total notional amount outstanding of around $286 trillion at year-end 2006. Traders and sales staff at dealers who interact with customers represent the dealer’s “front office.” The staff in the front office generally use electronic systems to capture the trade data and transmit it to the systems used to manage market and credit risk. Dealers also have “back offices,” which include staff that record, verify, and confirm trades executed by the front office. As shown in figure 2, the steps for entering into and processing an OTC trade for credit derivatives include negotiation, capture, verification, and confirmation. These processes have been increasingly automated over time, but some remain manual. For example, a relatively small percentage of credit derivative products—generally those with more customized and complex terms—cannot be confirmed electronically. In addition, various post-trade processes occur during the life of a credit derivatives contract, including making or receiving premium payments, exchanging collateral, and settling contracts after a credit event occurs, such as a bond default. Segregating these various duties into front and back office responsibilities serves to maintain operational integrity, such as by identifying data entry errors and to minimize fraud and other violations. Management responsibilities performed by the back office vary by institution, but they may include evaluating transactional exposure against established market and credit limits and risk management reporting. Some dealers have combined a number of the functions performed by the back office, such as risk management, into a middle office, and some use a separate risk management group. Because OTC credit derivative transactions occur between private parties and are not traded on regulated exchanges, they are not subject to regulation in the United States, provided that the parties and other aspects of the transaction satisfy requirements of the Commodity Exchange Act. For credit derivatives that would otherwise be securities, the transactions fall within the definition of “swap agreement” in the Gramm-Leach-Bliley Act. The Commodity Exchange Act allows unregulated derivatives trading in certain types of commodities by eligible parties under limited circumstances. Similarly, the Commodity Exchange Act and the Securities Act of 1933 allow unregulated derivatives trading by eligible parties under limited circumstances. Although the OTC credit derivatives products themselves are not regulated, certain market participants are. If the dealer is a U.S. bank federally chartered as a national bank, it is supervised by OCC. If a bank is owned by a bank holding company, its holding company is regulated by the Federal Reserve. These bank regulators oversee these entities to ensure the safety and soundness of the banking system and the stability of the financial markets. If the credit derivatives dealer is a securities broker-dealer, it is overseen by SEC. According to U.S. regulators, some of the U.S. banks and securities broker- dealers also conduct credit derivatives trades in foreign affiliates subject to foreign regulation. Similarly, other participants in the credit derivatives market include foreign banks that are supervised by foreign regulators and, in some cases, also by U.S. regulators if operating in the United States. As the credit derivatives market grew, lack of automation and other factors led to large backlogs of unconfirmed trades at dealers. The eight dealers we interviewed told us that they began to experience a significant increase in their backlogs of unconfirmed trades ranging from the middle of 2003 to the first half of 2005. According to ISDA’s survey data, trading volume in credit derivatives more than doubled around this period, with the average number of trades conducted at large firms increasing from 644 trades a week in 2004 to 1,450 trades a week in 2005. According to data provided to regulators by 14 of the largest credit derivatives dealers— which include U.S. and foreign banks and securities broker-dealers—these dealers collectively executed around 130,000 trades in September 2005, and dealers’ backlogs of confirmations outstanding had risen to over 150,000 (table 2). Of these, 63 percent had been outstanding for more than 30 days, and 41 percent had been outstanding for more than 90 days. A major factor contributing to the backlogs was dealer and end-user reliance on largely manual processes for confirming credit derivative trades that could not keep up with the rapidly growing trade volume. Unlike highly automated processes for confirming trades in corporate stocks, the processes that dealers were generally using to confirm their credit derivative trades relied on inefficient manual procedures. For example, a dealer would manually prepare a confirmation and fax it to the counterparty; in turn, the counterparty would manually compare its trade record against the confirmation and, if the terms matched, fax the signed confirmation to the dealer. Such manual processes were resource intensive and generally lacked the scalability required to efficiently confirm the rapidly growing volume of trades. Recognizing the need to improve the efficiency of the confirmation process for credit derivatives, dealers had been working with the Depository Trust and Clearing Corporation (DTCC) to increase the use of an automated confirmation system. DTCC staff said that they started to work with several dealers in 2002 to create an automated system to electronically compare, match, and confirm credit derivative trades. The initial strategy was to have the system confirm only single-name credit default swaps and then to expand the system’s capabilities to confirm other credit derivative products and provide other services. DTCC launched its automated system, Deriv/SERV, in late 2003, and 15 dealers and 7 end-users had signed up to use the system by around mid-2004. DTCC staff explained that obtaining wider use of Deriv/SERV took time, in part because of the need to publicize the system and because users needed to train their staff and revise their systems to use Deriv/SERV. According to staff at one hedge fund, many end-users did not initially use Deriv/ SERV because they lacked the necessary technology. Consequently, up to 85 percent of the credit derivative trades were being confirmed manually during 2004, according to market participants. However, DTCC has expanded Deriv/SERV’s capabilities to confirm a broader range of credit default swaps and as much as 46 percent of trades were being confirmed electronically by September 2005, according to data provided to regulators by 14 major dealers. The second major factor contributing to the backlogs was the increasing incidence of end-users transferring their positions to other counterparties. Although the length of the contract for the most popular credit derivatives typically spans 5 years, some end-users, particularly hedge funds, engaged in frequent “in and out” trading of these products or had other incentives to liquidate their positions earlier. To do so, the end-users assigned their sides of trades to third parties. Although the agreements accompanying the trades did not permit assignments without the dealer’s prior consent, the dealers agreed to assignments after the fact because of competitive pressures and because the new counterparties (the assignees) tended to be other dealers. In effect, these assignments (also called novations) ultimately resulted in a new contract between the original dealer and the new counterparty, which would not be reflected on the dealer’s records until the original dealer accepted the assignment. A hedge fund official told us that when his firm wanted to terminate trades early, it initially returned to the original dealers, but the dealers charged termination fees that made this method more costly than assigning the trades. Assignments have provided greater market liquidity and price discovery, but according to dealers and regulators, they complicated the confirmation process. Without prior knowledge of an assignment, the original dealer could not readily confirm the details of the new trade until the dealer became aware of the assignment. Some end-users said that they obtained consent from the original dealers but that the dealers were not communicating the information internally to the appropriate staff for the purpose of confirming the trade. Although assigned trades were a small share of total trading volumes, they represented a disproportionately large share of unconfirmed trades because of the time required to identify the correct counterparty. According to data provided by the 14 major dealers to regulators, trade assignments accounted for 13 percent of dealers’ trading volume in September 2005 but 40 percent of their total confirmations outstanding for more than 30 days at the end of September 2005. Dealers told us that they typically detected unilateral assignments through payment errors. For example, a dealer would receive a premium payment from a party other than the party with which it had entered into the trade. Importantly, market participants had agreed to settle premium payments due under credit default swaps on a quarterly basis in order to provide greater market liquidity. Bank examiners told us that because of this settlement cycle, it could take a dealer as many as 90 days or more to detect a unilateral assignment through a payment error. Dealers we spoke with identified several other factors that hampered their efforts to confirm trades in a timely manner. First, some dealers told us that as the volume of trading in credit derivatives grew, they faced challenges hiring experienced back-office staff and that training new staff took months. Second, other dealers said that the lack of standardized documentation, particularly for new products, led to disputes over the trade terms or the need to negotiate them, further delaying confirmation. Compounding matters, there was a shortage of derivatives attorneys available for such negotiations, according to a bank examiner. Finally, two dealers said that the industry lacked standardized reference data to identify the specific entities referenced in credit derivative contracts. One of the dealers told us that the lack of such data led to mistakes in recording trades and hampered electronic confirmations. Mistakes in documenting the correct reference entity prompted a group of dealers to develop a database of reference entities and obligations in 2003 that has become an industry standard. Although dealers were capturing their credit derivatives trades in their risk management systems to manage the associated market and credit risks, the substantial backlog of unconfirmed trades heightened dealers’ operational risk, potentially hampering their ability to effectively manage other risks. As with any trading activity, dealers engaging in credit derivative trades are exposed to market, credit, and other risks that they must adequately measure, monitor, and control. According to dealers and their regulators, the major credit derivatives dealers generally were entering their credit derivatives trades promptly into their trade capture systems and, in turn, measuring, monitoring, and managing the credit and market risks associated with those trades. Dealers, for example, measure and manage market risk by estimating the potential losses that a portfolio of positions may suffer and then impose limits that restrict the estimated losses to an acceptable level. Similarly, dealers manage counterparty credit risk—which can produce losses if the dealers fail to receive payments owed to them—generally by measuring the total credit exposure to, and creditworthiness of, individual counterparties, and not allowing these exposures to exceed pre-established limits. Although the credit and market risks were being managed, the large backlogs of unconfirmed trades increased dealers’ operational risks. Confirmations serve as an internal control to verify that both parties agree to the trade terms and have accurately recorded the trade in their systems. For this reason, trades should be confirmed as soon as possible. Having unconfirmed trades could allow errors to go undetected that might subsequently lead to losses and other problems. Errors could be made at any time—for example, counterparties could miscommunicate when making a trade or dealers could enter the wrong trade data into their systems. If such errors go undetected, a dealer could make an incorrect premium payment to a counterparty or inaccurately measure and manage risk exposures, notably market and counterparty credit risks. Similarly, errors could lead to legal disputes between a dealer and a counterparty if a credit event triggered a contract settlement. Further, these operational risks have the potential to contribute to broader market problems. For example, in its July 2005 report on strengthening the stability of the global financial system, the Counterparty Risk Management Policy Group II, composed of representatives of dealers and end-users, noted that as the number of outstanding credit derivatives trades continues to grow, a credit event involving a popular reference entity could materially strain the ability of market participants to settle transactions in a timely and efficient manner. However, these operational risks did not result in such broader market problems, in part because of favorable market conditions when the confirmation backlog arose and because only seven referenced entities in the United States have defaulted since 2005—with market participants able to effectively settle trades referencing these entities. Although unconfirmed trade backlogs were growing, dealers had been taking steps to reduce the operational risks associated with these trades. To ensure that the trade data being captured and used to manage risks were accurate, dealers were informally contacting their counterparties before sending out confirmations to verify the key economic terms of the trades, but this practice varied among the nine dealers reviewed. Specifically, five dealers generally followed this practice for their credit derivative trades, according to their staff or examiners. In contrast, two dealers generally had been informally verifying trade terms for only those trades considered higher risk, according to their staff or examiners. Finally, staff at two other dealers said that they generally were not verifying trade terms before confirmation because their counterparties preferred not to do so. The dealers also were monitoring their confirmation backlogs based on risk, such as by the number of days an unconfirmed trade was outstanding. Moreover, two dealers curtailed business with clients that had a large number of outstanding confirmations. In addition, the dealers had reviewed their confirmation processes and were improving them by, among other things, upgrading technology, reorganizing operations, and hiring staff. While dealers found some errors after confirming their trades, only two of the dealers interviewed told us that they had suffered a $1-million-or-more loss as a result of an error stemming from their confirmation backlog but characterized the losses as immaterial. Like unconfirmed trades, unilateral assignments increased operational, credit, and legal risks. First, unilateral assignments led to operational risk by creating new trades that were not being confirmed promptly to detect errors. Second, to effectively manage credit risk, dealers must know, at a minimum, the correct identities of the counterparties to their credit derivative contracts. Unconfirmed trades arising from unilateral assignments meant that dealers did not always know the exact counterparty to which they were exposed. As a result, their ability to accurately measure their credit exposure and enforce their pre-established limits on it was hampered. Moreover, because dealers did not always know the correct counterparties for each of their trades, they often made premium payments to, or received payments from, the wrong entity. Third, unconfirmed assigned trades also raised dealers’ legal risk because of the potential for counterparties to later dispute the terms of the trade or the enforceability of the contract. For example, a court may deem an assigned trade as legally invalid if the original dealer did not provide its written consent. As the Counterparty Risk Management Policy Group II reported in 2005, some assignments occurred before the original trades were confirmed, increasing the risk of potential disputes over the status and the terms of the trade. Several factors helped to mitigate the risks arising from unilateral assignments. According to dealers and regulators, the assignments did not increase market risk for dealers because dealers generally were capturing the key economic terms of the trades in their risk management systems accurately, and these terms remained the same when a trade was assigned. Further, although unilaterally assigned trades impaired the ability of dealers to measure and manage their counterparty credit risk, dealers and examiners told us that hedge funds and other end-users assigned nearly all of their trades to dealers, given their role as intermediaries to end-users. Because dealers were typically more creditworthy than the end-users assigning the trades, the original dealers ended up with more creditworthy counterparties after an assignment, according to dealers and examiners. Situations could arise, however, where this factor would not necessarily mitigate the original dealer’s counterparty credit exposure. In addition, dealers told us that they had collateral arrangements with their counterparties to manage their credit risk. For example, dealers required hedge funds to post a negotiated amount of initial collateral, such as cash or securities, for each trade they entered into with dealers. As a risk management practice, two dealers told us that they would not release collateral to their counterparties until they verified that a trade was assigned. In addition, a provision of the standard contract that counterparties enter into as part of conducting derivatives transactions— known as the ISDA Master Agreement—required counterparties to obtain the written consent of their counterparty before assigning a trade. Some dealers told us that they could have relied on this provision, if needed, to reject a unilateral assignment. Finally, none of the dealers said that their counterparties tried to nullify an assigned trade. The unilateral assignments and the increasing backlogs raised regulatory concerns that prompted U.S. and foreign regulators and the major credit derivative dealers to seek a collective solution. FSA, which oversees financial activities in the United Kingdom, took one of the first actions to address the backlogs by sending dealers a letter in February 2005. The letter expressed FSA’s concern about dealers’ level of unsigned confirmations and asked them to consider the robustness of their operational processes and risk management frameworks in the rapidly evolving credit derivatives market. U.S. regulatory staff told us that they had been aware of the backlogs since at least 2004 through their oversight activities and discussions with other regulators. For example, in 2004, U.S. bank examiners began to identify the growing backlogs of unconfirmed trades at dealers, including how unilateral assignments were contributing to such backlogs. Although they began monitoring dealers’ efforts to resolve these issues, the regulators recognized in spring of 2005 that individual dealer efforts to address the practice of unilateral assignments were proving unsuccessful and that greater automation was needed. Regulatory staff told us that these unilateral assignments posed a “collective action” problem, in that dealers could not individually stop the practice for fear of losing business to other dealers that did not require counterparties to notify them prior to assigning a trade. According to regulatory staff, the prevalence of unilateral assignments was especially troubling because dealers did not always know the counterparties to their trades, raising questions about dealers’ ability to accurately manage the risks of these activities. In addition, regulatory staff said that the fact that dealers did not always know their counterparty’s identity raised operational concerns about the ability of market participants to settle trades, should a large reference entity default. Finally, regulators noted that resolving the causes of the backlogs required multilateral regulatory involvement, because no single regulator oversaw all the dealers. To address these problems with confirmation backlogs and unilateral trade assignments, FRBNY convened a meeting in September 2005 with the 14 major credit derivative dealers and their regulators—referred to as the joint regulatory initiative. Regulatory representatives from around the world—including OCC, SEC, FSA, the German Financial Supervisory Authority, and the Swiss Federal Banking Commission—attended the meeting as supervisors of at least one of the major dealers involved in the initiative. At this meeting, the U.S. and foreign regulators discussed how the dealers would improve assignment practices and resolve the confirmation backlogs. In October, the dealers sent FRBNY a letter that outlined the steps to be taken to improve the credit derivatives industry’s practices and confirmation backlogs. The plan included establishing target dates and levels by which to reduce the increasing the use of electronic confirmations systems, supporting the implementation of a protocol to end unilateral assignments, improving the process for settling credit derivatives contracts after a credit event, and providing regulators with monthly data for measuring dealers’ progress. To enable the regulators to monitor the dealers’ progress as part of the joint regulatory initiative, the 14 dealers agreed to collect data on their credit derivatives activities, including trading volume, unconfirmed trades, and trades confirmed using automated systems. Under the agreement, the dealers provide their individual data to Markit Group, a provider of independent data, portfolio valuations, and OTC derivatives trade processing. In turn, Markit Group aggregates the data across the dealers to protect the confidentiality of each dealer’s data and then provides the regulators with aggregate data in a monthly report. In February 2006, FRBNY hosted a follow-up meeting with the dealers and their regulators to discuss the progress and stated that it was encouraged by the progress that had been made. Following the meeting, the dealers sent FRBNY a letter committing to further improvements in market practices to “achieve a stronger steady state position for the industry.” Among the commitments the dealers made were (1) to ensure that all trades with standardized terms that were eligible for automated processing would be processed electronically, and (2) to work with DTCC to create a central depository to store electronically the details of all credit derivatives contract terms. In September 2006, FRBNY hosted a third follow-up meeting with the dealers and regulators to discuss the dealers’ progress. Since the initial meeting in September 2005, the 14 dealers have significantly reduced the number of outstanding confirmations. As shown in figure 3, the aggregated data that has been provided to regulators showed that the 14 dealers had reduced their total number of confirmations outstanding from 153,860 in September 2005 to 37,306, or by about 76 percent, by the end of October 2006. Under the joint regulatory initiative organized by FRBNY, each dealer committed to incrementally reducing its number of confirmations outstanding more than 30 days by various amounts over the course of the following 9 months. The data that the dealers have been providing to regulators showed that they collectively exceeded each of the reduction goals they had agreed to meet and had reduced by 94 percent the total number of confirmations outstanding over 30 days from the September 2005 level to the October 2006 level (table 3). The dealers were able to achieve this reduction even though their monthly trading volume in credit derivatives generally increased during this period. After October 2006, four additional foreign dealers have joined the original 14 dealers in providing monthly confirmation backlog and related data to Markit Group for aggregation and distribution to the regulators. As shown in table 4, with the inclusion of the additional dealer data, the total number of outstanding confirmations over 30 days has increased in comparison to the level at the end of October 2006, especially in March 2007. At the same time, table 4 shows that monthly trading volume has increased beginning in January 2007, and the number of confirmations outstanding more than 30 days as a share of the total number of outstanding confirmations has decreased slightly during this period. U.S. regulatory staff characterized the rise in the confirmation backlog as modest and attributed it generally to the increase in trading volume and noted that the automation of the confirmation process has helped dealers handle the increased volume. To achieve these reductions in their unconfirmed trade backlogs, dealers took various steps. For example, dealers engaged in events called “lock ins” with other dealers and, to a lesser extent, end-users. Under a lock in, operations staff from either two dealers or staff from one dealer and one of their key end-user customers convened in a room and compared the trades they had conducted together until all or almost all were reconciled and confirmed. Dealers and end-users also used “tear-up services” to reduce the total number of open trades and thus eliminate the number of trades that needed to be confirmed. In a tear-up process, an automated system matches up offsetting positions across many market participants, allowing those trades to be, in effect, terminated and thereby removing the need to confirm such trades. To prevent new trades from adding to the backlog, the dealers also increased their use of automated confirmation systems and set deadlines for confirming trades. First, as part of the joint regulatory initiative, the 14 major dealers committed to use DTCC’s automated system, Deriv/SERV, to confirm trades made with other dealers by the end of October 2005 and to require their active clients to use it or a comparable automated system, such as SwapsWire, by mid-January 2006. As shown in figure 4, the share of the total monthly trades confirmed electronically increased from 46 percent to 85 percent between the end of September 2005 and the end of October 2006. Moreover, at the end of October 2006, the dealers collectively had 3,900 active clients—of which 98 percent, on average, were using an automated confirmation system or were in the process of subscribing to one. Second, the 14 dealers committed to electronically confirming all trades that could be confirmed electronically (i.e., contracts with standardized terms) within 5 business days of the trade date, by the end of October 2006. Deriv/SERV has continually expanded its capabilities to electronically confirm not only a wider range of products but also changes to existing contracts, including assignments. At the end of October 2006, about 90 percent of the total trades were eligible to be confirmed electronically, and about 94 percent of those eligible trades were electronically confirmed, according to the data provided by the 14 dealers. Of the trades confirmed electronically, 84 percent, on average, were confirmed within the stipulated 5 business days. In addition, the industry has taken steps to help ensure that new products do not create backlogs. Officials at DTCC and ISDA said that they have formed industry working groups and revised certain procedures to reduce the time it takes to standardize the legal documentation for new credit derivatives, in turn enabling these products to be confirmed electronically by Deriv/SERV. An additional step taken to prevent further confirmation backlogs was to end the practice of unilateral assignments, which ISDA and market participants had been attempting to address since at least 2002. For example, ISDA published a novation agreement to document assignments in 2002, issued provisions governing credit derivatives assignments as part of its 2003 documentation standards for credit derivatives, and issued novation definitions and guidance on best practices for assignments in 2004. Despite such efforts, an ISDA working group found that market participants were using different practices to process assignments, increasing risks to counterparties and creating operational inefficiency and backlogs in processing trades. ISDA officials told us that in early 2005 they had the working group start (1) to develop a protocol to streamline practices for dealers and end-users to follow to assign a trade and (2) to reach out to end-users as part of the effort. In the summer of 2005, the working group began circulating a draft protocol for comment. Shortly before the regulators initiated their joint action in September 2005, ISDA issued its voluntary Novation Protocol, and major dealers signed up for it. In their October 2005 letter to FRBNY, the dealers committed to finalizing a guide to support the protocol’s implementation. By signing the protocol, a party seeking to assign a trade agrees to obtain the consent of its original counterparty through e-mail or other electronic means. Although the major dealers signed the protocol in September, some end-users were initially reluctant to sign, in part because they were concerned that dealers would not be able to consent to assignments promptly. In response, all the major dealers agreed to reply to assignment requests within 2 hours. By November 30, 2005, 2,000 market participants had signed the protocol. Most of the major hedge funds have signed the protocol, according to officials from the Managed Funds Association, which represents the majority of the largest hedge funds. According to some dealers and U.S. financial regulators, the widespread adoption of the ISDA Novation Protocol has effectively ended the practice of unilateral assignments, eliminating a key factor that had contributed to the backlogs. Because the vast majority of assignments become dealer-to- dealer trades, the protocol enables dealers to monitor each other to ensure that clients are complying with it. If a dealer were to allow its client to assign a trade without obtaining the original dealer’s consent, the original dealer would discover the compliance failure when it discovered the assignment. To facilitate the confirmation of assignments, Deriv/SERV also expanded its system in mid-2005 to electronically confirm assignments. As a result of the ISDA protocol and automation of the assignment process, the number of unconfirmed assigned trades outstanding for more than 30 days declined from around 39,500 at the end of September 2005 to around 940 at the end of October 2006 (fig. 5), even though the number of trades being assigned during this period generally increased. From the end of September 2005 to the end of October 2006, the share of assignments confirmed electronically has increased from 24 percent to 82 percent. The dealers and other market participants we interviewed uniformly viewed the joint regulatory initiative as instrumental in reducing the backlog, automating the credit derivatives market’s infrastructure, and bringing the industry together to address the confirmation backlog problem. The market participants noted that regulatory support was crucial in encouraging cooperation among dealers and end-users to address problems related to the confirmation backlog. Specifically, they said that regulators’ involvement helped to persuade certain end-users to agree to adhere to ISDA’s Novation Protocol. In addition, they told us that the joint regulatory initiative catalyzed industry efforts to move to automated confirmation matching services such as DTCC’s Deriv/SERV— bringing about automation sooner than it otherwise would have occurred. Such intervention expedited the adoption of automated tools by end-users, enhancing dealers’ efforts to implement such tools as Deriv/SERV. Additionally, the joint initiative led to the formation of a group composed of dealers that meets weekly to discuss, among other things, operational issues. Two dealers told us that this group has helped to resolve problems in processing confirmations and also allowed the dealers to hear the views of end-users. While the dealers have made significant progress since 2005, they have continued their efforts to reduce backlogs and improve the infrastructure of the credit derivatives market. First, in addition to committing to confirm virtually all standardized trades electronically within 5 business days of the trade date, the dealers have committed to confirming all nonstandardized trades within 30 days after trade date. Because nonstandardized trades are complex and customized, such trades must be confirmed manually, according to ISDA officials. According to data provided by the dealers to regulators over the last 3 months, these trades have accounted for less than 10 percent of the total credit derivatives trading volume. According to regulators and dealers, these trades are generally complex and involve issues that require time to be legally negotiated before the trades can be confirmed. However, Federal Reserve and OCC staff have expressed concern that taking 30 days to confirm nonstandardized trades is too long and are continuing to work with dealers to reduce the confirmation time. The 14 dealers have made considerable progress in promptly confirming their nonstandardized trades, reducing the number of such trades remaining unconfirmed for more than 30 days from around 5,600 at the end of September 2005 to fewer than 440 by the end of October 2006. However, as the four additional dealers began providing their data after October 2006, the number of unconfirmed nonstandardized trades rose, reaching around 6,800 at the end of March 2007. To mitigate the risk of any unconfirmed nonstandardized trades, the dealers have committed to verifying the key economic terms of such trades informally within 3 business days of the trade date. As of the end of March 2007, dealers were meeting this commitment, on average, for around 54 percent of their nonstandardized trades. Second, under the joint regulatory initiative, the dealers have worked to reduce operational risks by committing to improvements in the settlement process for credit default swaps. For example, credit default swaps generally require that the purchaser of credit protection under a credit default swap deliver the bonds (or loans) referenced in the contract to the counterparty if the bond issuer goes bankrupt. In exchange, the counterparty pays the par, or face, value of the bonds to the protection purchaser. This settlement method avoids difficulties that could arise when the bonds are valued after a bankruptcy. However, situations can arise in which the amount of bonds needing to be delivered exceeds the amount of outstanding securities. For example, when the auto parts maker Delphi filed for bankruptcy in 2005, credit derivatives on its bonds and loans totaled an estimated $28 billion in notional amount, but Delphi had only $5.2 billion in bonds and loans outstanding. In addition to increasing the difficulty of meeting the delivery obligation under a credit derivatives contract, a temporary shortage of bonds also could cause the price of the needed securities to increase immediately following a default. To facilitate settlement in this type of situation, ISDA has developed protocols to allow contracts to be settled in cash rather than by delivery of the debt. Under this process, the bond’s price is established through an auction, and the counterparties providing credit risk protection pay their counterparties in cash based on the difference between the bond’s auction price and par value. Since 2005, ISDA has used its protocols to facilitate cash settlement in seven credit events involving U.S. firms. The protocols covering the first six credit events enabled cash settlement of only credit default swap indexes. In its most recent form, the protocol permits cash settlement in index, single-name, and certain other credit derivatives. ISDA plans to include the cash settlement mechanism in its revised documentation standards for credit derivatives in 2007. Finally, DTCC is working with dealers and end-users to implement a central trade depository to automate trade processes other than confirmation and thus reduce operational risks. Under the joint regulatory initiative, the dealers committed to work with DTCC to create (1) a database to electronically store the official legal record of all credit derivative contracts eligible for automated confirmation, taking into account subsequent changes made to the contracts, such as assignments, and (2) a central infrastructure supporting the warehouse to standardize and automate post-trade processes over the life of each contract. Specifically, the warehouse will support premium payment calculations and facilitate not only the bilateral payment settlement of electronically confirmed trades but also reconciliations for collateral management and credit event processing. DTCC launched the warehouse in November 2006, with all new trades electronically confirmed through Deriv/SERV automatically loaded into the warehouse. In addition, dealers are inputting their trade data for their existing credit derivatives contracts into the warehouse to create a complete database, and this effort is expected to continue through 2007. Two dealers told us that the trade input process is an extensive project, because around a million trades need to be inputted. DTCC also plans to expand the warehouse to support central payment calculation and settlement capability in 2007. U.S. financial regulators were overseeing the operational and other risks at individual credit derivatives dealers through their continuous supervision and examinations. After the joint regulatory initiative, the industrywide data from the major dealers provided the regulators with more effective means of monitoring the resolution of the backlog and related problems. The Federal Reserve and OCC were aware of the confirmation backlogs at banks and were monitoring efforts to address them before the joint regulatory initiative. Of the 14 dealers participating in the joint regulatory initiative, nine are U.S. or foreign banks. Five of the banks are chartered as national banks and individually supervised and examined by OCC through its teams of examiners. Each of these banks is a subsidiary of a bank holding company or financial holding company supervised by the Federal Reserve. OCC staff told us that the five U.S. banks conduct around 90 percent of their credit derivatives activities within the bank, not in their holding companies or other subsidiaries. As a result, OCC bank examiners are primarily responsible for overseeing the banks’ credit derivatives activities but coordinate their oversight with their Federal Reserve counterparts. Federal Reserve officials told us that their examiners also oversee the U.S. operations of the foreign banks that are major dealers participating in the joint initiative. At the four national banks and one foreign bank we reviewed, management had become aware of the confirmation processing and backlog problems at their own banks primarily through internal audit reports or management information reports tracking outstanding confirmations. The timeframes in which the problems surfaced at the banks and were brought to management’s attention varied, with one bank’s management learning about the problems in late 2003 and another bank’s management not until the summer of 2005. Nonetheless, according to examiners of these banks, as bank management became aware of these problems, they provided these audit or management reports or had discussions with the bank examiners supervising their institutions. Bank examiners told us that they continually supervise how the banks are identifying, monitoring, and managing their operational, credit, market, and other risks posed by credit derivatives and other products through reviews of internal audit and management reports, meetings with key bank officials, and examinations. After learning of the backlog problems at the banks, the examiners said that they monitored each bank’s efforts to address the processing problems and reduce the backlog, such as by periodically reviewing reports tracking the backlog, meeting with bank management and staff, or conducting examinations. Through their supervision, for example, the examiners reviewed the level of resources the banks were devoting to processing their credit derivatives trades. They also examined to varying degrees the credit derivatives confirmation process of four of the five banks between 2004 and 2006. For example, in 2004, examiners reviewed the progress that two banks were making in reducing their confirmation backlogs and in addressing the causes of the backlogs, including assignments of credit derivative trades. Based on examinations done in 2005, examiners directed two banks to develop plans to ensure that their infrastructures were capable of supporting the trading volume of credit derivatives, and the examiners said that the banks had developed such plans. In addition to focusing on the confirmation backlogs, examiners generally examined how well each of the five banks was managing its market, credit, and other risks associated with its credit derivatives activities. The examiners did not examine one bank’s confirmation process because the bank was in the process of implementing a plan to address its backlog, but examiners monitored the bank’s progress through informal reviews. Bank regulators were also reviewing the banks’ efforts to ensure the security and resiliency of their information technology systems. Managers at the four national banks we interviewed described taking various steps to ensure the security of their credit derivatives systems. For example, the systems used at these banks included restrictions on who could input or access data in the systems. Managers at these banks also were responsible for periodically reviewing and testing their staff’s access rights to the systems to ensure that they were appropriate. According to bank staff, the security controls were reviewed or tested regularly by internal and external auditors—for example by conducting penetration tests in which auditors would attempt to obtain unauthorized access to the systems. In addition, the bank officials told us that they have taken steps to ensure the resiliency of their systems, including processing their credit derivatives in several different locations, creating off-site backup facilities, and developing disaster recovery plans. The examiners of these banks told us that they had tested or reviewed whether the banks were complying with controls designed to protect the security and resiliency of their information technology systems. For example, examiners told us that they reviewed managers’ oversight of their staff’s access rights to the systems and checked for testing of business continuity plans. Unlike the bank regulators, SEC only recently began providing oversight of the credit derivatives activities of broker-dealers because such activities have generally been conducted in affiliates not subject to SEC regulation. According to SEC staff, the five U.S. broker-dealers that are active in the credit derivatives market generally book their trades in unregulated affiliates that are not subject to SEC supervision because they are not registered, nor required to be registered, with SEC. However, in June 2004 SEC instituted its Consolidated Supervised Entity (CSE) program, under which large broker-dealers may qualify for alternative net capital rules in exchange for consenting to supervision on a consolidated basis by SEC. The five U.S. broker-dealers engaged in credit derivatives trading applied for and were granted CSE status. Under the SEC’s CSE program, SEC supervises the broker-dealers on a consolidated basis, with its prudential supervision extending beyond the broker-dealers to their unregulated affiliates and holding companies. The five broker-dealers participating in the CSE program are also participating in the joint regulatory initiative. Although aware that backlogs for OTC derivatives were an issue, SEC staff became aware of the extent of the credit derivatives backlogs at U.S. broker-dealers through continuous supervision and examinations conducted after these firms applied to the CSE program. SEC officials noted that although they were generally aware of the backlog in confirming credit derivatives through a study of the credit derivatives market conducted by the Joint Forum in 2004, they were surprised at the extent of the problem by the summer of 2005. According to SEC staff, in 2005 risk managers and internal auditors at the CSE broker-dealers told SEC staff about the confirmations backlog and its potential impact on the credit derivatives market. Broker-dealer staff, during the summer of 2005, were periodically discussing with SEC the resources they were devoting to reducing their backlogs and the associated risks. For example, one firm devoted about 30 full-time staff and 20 consultants to reducing its backlog, according to SEC staff. Supplementing this information about the confirmations backlog, examinations conducted as part of the CSE application process also assisted SEC in learning more about the nature of the backlog and related concerns. As part of the application process, SEC examined the firms’ internal risk management systems and controls, issuing examination reports from November 2004 through January 2006. SEC targeted credit derivatives products within the scope of all but one of its five application examinations, choosing products that posed the greatest risks and represented the highest volume in the firms. Examination findings related to the credit derivatives confirmation backlog included delays in issuing confirmations promptly after the trade date and discrepancies between confirmation documentation and output data from systems used to input trades. Broader examination findings included concerns that internal audits at some firms did not always document processes or sufficiently follow up on recommendations and that some firms did not accurately compute counterparty credit ratings, in some cases for hedge fund counterparties. The findings were shared with the firms, and SEC has monitored the firms’ implementation of its recommendations. In addition to overseeing firms’ credit derivatives backlogs, SEC staff told us that their CSE broker-dealer examinations conducted at the time of application also addressed the security and resiliency of these firms’ information technology systems, including those that are used for credit derivatives activities. For example, at the broker-dealers, SEC staff reviewed reports by firms’ internal audit departments on security and resiliency of information technology systems in general, as some of these systems handled credit derivatives transactions. In addition, SEC examinations included business continuity planning reviews based on draft interagency standards on protecting the resiliency of the U.S. financial system. Although both U.S. banking and securities regulators were individually overseeing aspects of U.S. dealers’ credit derivatives activities, the joint regulatory initiative provided U.S. and foreign regulators with information that enabled them to better oversee the progress being made by the major dealers to address the backlog issue. While the individual regulators had data on the backlogs at the dealers under their supervision, no one regulator supervised all 14 major dealers and thus had data on the size of the problem across all dealers. Under the joint regulatory initiative, U.S. financial regulatory staff said that they told the 14 dealers what information they needed in order to track dealers’ progress in addressing the backlog and related problems. Based on the capabilities of their management information systems, the dealers collectively developed a template to collect standardized metrics. The data include information on trading volume, trade assignments, trades confirmed electronically and manually, and confirmations outstanding based on length of time the trades remained unconfirmed. Under the arrangement, each dealer provides the standardized data to its primary regulator at the end of the month. For example, the U.S. broker-dealers provide their data to SEC, and the national banks provide their data to OCC. In addition, each dealer provides its data to Markit Group, which aggregates the data across all the dealers to preserve the confidentiality of each dealer’s data and computes averages for the metrics, such as the average number of outstanding confirmations for the dealers. In turn, Markit Group provides the U.S. and foreign regulators and dealers participating in the joint regulatory initiative with a set of the aggregate data. According to U.S. and foreign financial regulators, the aggregate and individual dealer data have provided regulators with an effective tool for tracking overall and individual dealer progress. According to U.S. regulators, using a template to standardize data collection has helped to ensure the comparability of the data across the dealers. The regulators also told us that the data are critical to the joint regulatory initiative, because the combined data provide transparency, enabling the regulators to track the progress of individual dealers under their supervision and helping each dealer to see how well it is doing relative to the average. Similarly, FSA officials told us that the aggregate data has provided regulators with a simple way to monitor the backlog level for the entire market and to compare individual dealers’ backlog levels against the average. The officials also said that the common set of measures has helped to instill discipline among the dealers. Under the joint regulatory initiative organized by FRBNY, the U.S. and foreign regulators are continuing to monitor the credit derivatives market and have expanded their efforts in September 2006 to address confirmation backlogs in the market for OTC derivatives based on equities. According to dealers, it takes longer to confirm an OTC equity derivative trade than any other type of OTC derivative trade, because such trades are processed largely through manual rather than automated means because of the lack of standardized trade documentation. Based on data provided by the major dealers to the regulators, they had over 81,000 unconfirmed trades at the end of November 2006, with around 31,000, or 54 percent, of these trades remaining unconfirmed for over 30 days. In a November 2006 letter to FRBNY, 17 dealers committed to working with industry organizations to improve the efficiency of the equity derivatives market, in part through the greater adoption of automation. Among other things, the dealers committed (1) to reduce by 25 percent the number of unconfirmed trades outstanding more than 30 days by the end of January 2007 based on dealers’ highest level of outstanding confirmations from July to September 2006 and (2) to use at least one industry-accepted electronic confirmation service and one other such platform by the end of March 2007. U.S. regulatory staff told us that dealers met the first goal but that, as of April 2007, one dealer had not yet fully met the second goal. At the end of March 2007, the number of unconfirmed equity derivative trades outstanding more than 30 days rose to around 43,000 trades. U.S. regulatory staff said that the increase generally resulted from the inability of the manual processes used by dealers and end-users to confirm trades to keep pace with the increase in trading volume. The dealers also agreed to continue to provide the U.S. and foreign regulators with standardized data not only on credit derivatives but also on OTC equities, interest rate, foreign exchange, and commodity derivatives. U.S. regulators said that they wanted to track data across the major OTC derivatives products to ensure that work done in connection with equity derivatives does not hamper the ability of the dealers to process their other OTC derivative trades in a timely manner. Such data will assist regulators in monitoring the operational and other risks raised by OTC derivative products. Given that individual efforts could not fully resolve the backlog problem, U.S. and foreign regulators we interviewed said that the joint regulatory initiative proved instrumental in ensuring that the problem was addressed. According to representatives of FSA, bringing together the various financial regulators from throughout the world was an approach that worked very well to ensure collaboration among regulatory bodies. Similarly, U.S. bank examiners told us that the joint regulatory initiative served an important role in getting the dealers to work collectively and by providing a level regulatory playing field. U.S. and foreign regulators and dealers are already applying this model to address similar issues in the OTC equity derivatives market. We provided a draft of this report to the Federal Reserve, OCC, and SEC for their review and comment. The Federal Reserve and SEC provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies of this report to other interested congressional committees and the Chairman, Federal Reserve; the Comptroller of the Currency; and the Chairman, SEC. We will also make copies available to others upon request. The report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-6878 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. To identify what caused the credit derivatives dealers’ trade confirmation backlogs and how the backlogs are being addressed, we analyzed credit derivatives trading volume, confirmation backlog, and other transaction data provided by the major dealers to Markit Group, a provider of independent data, portfolio valuations, and over-the-counter derivatives trade processing. We also analyzed operations and other data that dealers provided to the International Swaps and Derivatives Association (ISDA), a global over-the-counter derivatives trade association. We conducted data reliability assessments for the Markit Group and ISDA data and determined that the data were sufficiently reliable for our purposes. We also reviewed reports and relevant publications from industry associations, industry working groups, international organizations, companies, and academics on the credit derivatives market. Of the 14 dealers participating in the joint regulatory initiative, we interviewed operations and other staff from three U.S. banks, one foreign bank, and four U.S. securities broker-dealers. We selected these dealers to ensure that we included a range of characteristics, based on type of regulator (bank or broker-dealer), trading volume (high or low), and headquarters location (United States or foreign). We also interviewed staff from the Federal Reserve, including its examiners for two banks; the Office of the Comptroller of the Currency (OCC), including its examiners for three banks; the Securities and Exchange Commission (SEC); and the U.K.’s Financial Services Authority (FSA). We reviewed examinations conducted between 2004 and 2006 and other supervisory materials covering the eight dealers we interviewed and two other dealers that also participated in the joint regulatory initiative. In addition, we interviewed representatives from industry associations, including ISDA, the Managed Funds Association (representing hedge funds) and the Securities Industry and Financial Markets Association (representing securities firms, banks, and asset managers). Finally, we interviewed officials from the Depository Trust and Clearing Corporation about its automated services for processing credit derivative trades and an official from a hedge fund. To determine how U.S. financial regulators were overseeing the dealers’ operational risk, including related information technology systems associated with credit derivatives activities, we reviewed examination manuals and other supervisory or regulatory guidance prepared by the Federal Reserve, the OCC, and the SEC. We also reviewed and analyzed supervisory strategies prepared and examinations conducted between 2004 and 2006 by the Federal Reserve and the OCC on the credit derivatives activities of five banks participating in the joint regulatory initiative. In addition, we reviewed and analyzed examinations conducted between 2004 and 2006 by SEC covering the holding companies of the five securities broker-dealers participating in the joint regulatory initiative. Also, we interviewed staff at the Federal Reserve, OCC, and SEC participating in the joint regulatory initiative. We also interviewed Federal Reserve or OCC examiners assigned to supervise and examine five of the banks participating in the joint regulatory initiative and SEC staff who examined the holding companies of the five securities broker-dealers participating in the joint regulatory initiative. Finally, we interviewed FSA officials to understand their efforts in identifying the confirmation backlogs and in participating in the joint regulatory initiative. We conducted our work in Charlotte, North Carolina; Chicago; New York; and Washington, D.C., from August 2006 to March 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above, Cody Goebel, Assistant Director; Robert Lee; Paul Thompson; Marc Molino; Emily Chalmers; and Richard Tsuhara made key contributions to this report. 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. | Over-the-counter (OTC) credit derivatives are privately negotiated contracts that allow a party to transfer the risk of default on a bond or loan to another party without transferring ownership. After trading in these products grew dramatically in recent years, backlogs of thousands of trades developed for which dealers had yet to formally confirm the trade terms with end-users--such as hedge funds, pension funds, and insurance companies--and other dealers. Not confirming these trades raised the risk that losses could arise. GAO was asked to review (1) what caused the trade confirmation backlogs and how they were being addressed and (2) how U.S. financial regulators were overseeing dealers' credit derivative operations, including the security and resiliency of the information technology systems used for these products. GAO analyzed data on credit derivatives operations that dealers submitted to regulators, reviewed regulatory examination reports and work papers, and interviewed regulators, dealers, end-users, and industry organizations. After trading volumes grew exponentially between 2002 and 2005, the 14 largest credit derivatives dealers--including U.S. and foreign banks and securities broker-dealers--accumulated backlogs of unconfirmed trades totaling over 150,000 in September 2005. These backlogs resulted from reliance on inefficient manual confirmation processes that failed to keep up with the rapidly growing volume and because of difficulties in confirming information for trades that end-users transferred to other parties without notifying the original dealer. Although these trades were being entered into the systems that dealers used to manage the risk of loss arising from price changes (market risk) and counterparty defaults (credit risk), the credit derivatives backlogs increased dealers' operational risk by potentially allowing errors that could lead to losses or other problems to go undetected. In response, a joint regulatory initiative involving U.S. and foreign regulators directed the 14 major dealers to work together to reduce the backlogs and address the underlying causes. By increasing automation and requiring end-users to obtain counterparty consent before assigning trades, the 14 dealers reduced their total confirmations outstanding more than 30 days by 94 percent to 5,500 trades by October 2006. Through ongoing supervision and examinations, U.S. banking and securities regulators became aware of the credit derivatives backlogs as early as late 2003 and had been monitoring efforts taken by each dealer to reduce its backlog. Under the joint regulatory initiative, regulators obtained aggregate data from the dealers that allowed regulators to better monitor how backlogs were being resolved. Recognizing the potential for similar problems to arise in other OTC derivatives markets, regulators began obtaining similar data for other OTC derivative products in November 2006. |
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VBA is in the process of modernizing many of its older, inefficient systems and has reportedly spent an estimated $294 million on these activities between October 1, 1986 and February 29, 1996. The modernization program can have a major impact on the efficiency and accuracy with which over $20 billion in benefits and other services is paid to our nation’s veterans and their dependents. However, in the last 6 years some aspects of VBA’s service to the veterans have not improved. For example, in the past 6 years, VBA’s reported processing time for an original compensation claim rose from 151 days in fiscal year 1990 to 212 days in fiscal year 1994. In March 1996 the average time was 156 days. Software development is a critical component of this major modernization initiative. VBA, with the assistance of contractors, will be developing software for the Veterans Services Network (VETSNET) initiative, a replacement for the existing Benefit Delivery Network. For efforts like VETSNET to succeed, it is crucial that VBA have in place a disciplined set of software development processes to produce high quality software within budget and on schedule. VBA relies upon its own staff and contractors to develop and maintain software that is crucial to its overall operations. In fiscal year 1995, VBA had 314 full-time equivalents, with payroll expenses of $20.8 million, devoted to developing and maintaining software throughout the organization. It also spent $17.7 million in contract services in these areas. To evaluate VA’s software development capability, version 2.0 of the Software Engineering Institute’s (SEI) software capability evaluation (SCE) method was used by an SEI-trained team of GAO specialists. The SCE is a method for evaluating agencies’ and contractors’ software development processes against SEI’s five-level software Capability Maturity Model (CMM), as shown in table 1. These levels and the key process areas (KPAs) described within each level define an organization’s ability to develop software, and can be used to improve its software development processes. The findings generated from an SCE identify (1) process strengths that mitigate risks, (2) process weaknesses that increase risks, and (3) improvement activities that indicate potential mitigation of risks. We requested that VA identify for our evaluation those projects using the best software development processes implemented within VBA and AAC. VBA and AAC identified the following sites and projects. —Compensation & Pension/Financial Management System —Claims Processing System We evaluated the software development processes used on these projects, focusing on KPAs necessary to achieve a repeatable capability. Organizations that have a repeatable software development process have been able to significantly improve their productivity and return on investment. In contrast, organizations that have not developed the process discipline necessary to better manage and control their projects at the repeatable level incur greater risk of schedule delay, cost overruns, and poor quality software. These organizations rely solely upon the variable capabilities of individuals, rather than on institutionalized processes considered basic to software development. According to SEI, processes for a repeatable capability (i.e., CMM level 2) are considered the most basic in establishing discipline and control in software development and are crucial steps for any project to mitigate risks associated with cost, schedule, and quality. As shown in table 2, these processes include (1) requirements management, (2) software project planning, (3) software project tracking and oversight, (4) software subcontract management, (5) software quality assurance, and (6) software configuration management. We conducted our review between August 1995 and February 1996, in accordance with generally accepted government auditing standards. Highlights of our evaluation of VBA’s software practices using the SEI criteria outlined in appendix II follow. Requirements Management - The purpose of requirements management is to establish a common understanding between the customer and the software project of the customer’s requirements that will be addressed by the software project. The first goal within this KPA states that, “system requirements allocated to software are controlled to establish a baseline for software engineering and management use.” VBA does not manage and control system requirements as required by this goal. Moreover, members of software-related groups are not trained in requirements management activities. Also, changes made to software plans, work products, and activities resulting from changes to the software requirements are not assessed for risk. Software Project Planning - The purpose of software project planning is to establish reasonable plans for performing the software engineering and for managing the software project. VBA projects do not have software development plans, estimates for software project costs are not derived using conventional industry methods and tools, and VBA is unable to show the derivation of the estimates for the size (or changes to the size) of the software work products. Also, individuals involved in the software project planning are not trained in estimating and planning procedures applicable to their area of responsibility. Software Project Tracking and Oversight - The purpose of software project tracking and oversight is to provide adequate visibility into actual progress so that management can take effective actions when the software project’s performance deviates significantly from software plans. VBA does track software project schedules against major milestones; however, as mentioned previously, these schedules and milestones are not derived using conventional industry methods nor is there a comprehensive software plan against which to track activities. Moreover, the size of software work products (or the size of changes to software work products) are not tracked, and the software risks associated with cost, resource, schedule, and technical aspects of the project are not tracked. Software Subcontract Management - The purpose of software subcontract management is to select qualified software subcontractors and manage them effectively. VBA does not have a written organizational policy that describes the process for managing software contracts. Additionally, the software work to be contracted is neither defined nor planned according to a documented procedure. Finally, software managers and other individuals who are involved in developing, negotiating, and managing a software contract are not trained to perform these activities. Software Quality Assurance - The purpose of software quality assurance is to provide management with appropriate visibility into the process being used by the software project and of the products being built. VBA has a software quality and control (SQ&C) group that has a reporting channel to senior management, independent of the project managers. The SQ&C group also performs testing of the software code. However, the SQ&C group does not participate in other software quality assurance (SQA) functions, such as the preparation, review, and audit of projects’ software development plans, standards, procedures, and other work products. Also, projects do not have SQA plans. Software Configuration Management - The purpose of software configuration management is to establish and maintain the integrity of products of the software project throughout the project’s software life cycle. VBA has provided formal training to its staff in defining software processes. However, VBA cannot effectively control the integrity of its software work products because it has no software configuration control board, it does not identify software work products to be placed under configuration management, and it has no configuration management library system to serve as a repository for software work products. VBA has begun improvement activities in this area by (1) establishing a software configuration management group and (2) drafting a software configuration management procedure. Following a presentation of GAO’s SCE results to the Chief Information Officer of VBA, the Director of VBA’s Office of Information Systems forwarded a letter to GAO citing a number of initiatives that are currently underway to address some of the stated deficiencies. Initiatives cited by the VBA include: development and distribution of interim configuration management procedures; identification of a library structure to hold all of the work products from the development process; and initiation of several meetings with SEI to discuss the Software CMM. Similar to VBA, we compared the CMM criteria in appendix II to the software development practices at AAC. Summary results of this evaluation follow. Requirements Management - AAC does not create or control a requirements baseline for software engineering. Also, AAC does not manage or control requirements. AAC does have a process for negotiating periodic contractual arrangements with customers, but this process does not include baselining and controlling software requirements. Software Project Planning - Although AAC documents its schedule estimates for software development projects, there is (1) no defined methodology in use for estimating software costs, size, or schedule, (2) no derivation of estimates for the size (or changes to the size) of software products, and (3) no derivation of the estimates for software project costs. Similarly, AAC uses a project planning tool called “MultiTrak”. However, projects do not have software development plans. Software Project Tracking and Oversight - AAC performs schedule tracking at major milestones. However, the goals for this KPA call for (1) the tracking of actual results and performances against software plans, (2) the management of corrective actions when deviations from the software plan occur, and (3) the affected parties to mutually agree to changes in commitments. AAC does not conform to these goals. For example, AAC does not track (1) the software risks associated with cost, resource, schedule, and technical aspects of the project and (2) the size of software work products (or size of changes to software work products). Software Subcontract Management - Although the goals for this KPA emphasize the selection of qualified software subcontractors and managing them effectively, AAC does not (1) have a documented procedure that explains how the work to be contracted should be defined and planned and (2) ensure that software managers and other individuals who are involved in establishing a software contract are trained to perform this activity. Software Quality Assurance - The goals within this KPA emphasize (1) the verification of the adherence of software products and activities to applicable standards, procedures, and requirements and (2) the reporting of noncompliance issues that cannot be resolved within the project to senior management. AAC has an automated data processing system integrity guideline and a systems integration service (SIS) group that has a reporting channel to senior management and is independent of the project managers. However, projects do not have SQA plans; the SIS group does not participate in certain SQA functions, such as the preparation, review, and audit of projects’ software development plans, standards, and procedures; and members of the SIS group are not trained to perform their SQA activities. Software Configuration Management - AAC performs software (i.e., code only) change control using a tool called “ENDEVOR,” and its employees are trained in the use of this tool. However, the scope of the goals within this KPA cover all products in the entire software life cycle and not just the software code. AAC has not identified software work products (with the exception of software code) that need to be placed under configuration management, established a configuration management library system that can be used as a repository for software work products, or established a software configuration control board. Unless both VBA and AAC initiate improvement activities within the various KPAs and accelerate those already underway, they are unlikely to produce and maintain high-quality software on time and within budget. Because VBA and AAC do not satisfy any of the KPAs required for a level 2 (i.e., repeatable) capability, there is no assurance that (1) investments made in new software development will achieve their operational improvement objectives or (2) software will be delivered consistent with cost and schedule estimates. To better position VBA and AAC to develop and maintain their software successfully and to protect their software investments, we recommend that the Secretary of Veterans Affairs take the following actions: Delay any major investment in software development beyond that which is needed to sustain critical day-to-day operations until the repeatable level of process maturity is attained. Obtain expert advice to assist VBA and AAC in improving their ability to develop high-quality software, consistent with criteria promulgated by SEI. Develop an action plan, within 6 months from the date of this letter, that describes a strategy to reach the repeatable level of process maturity. Implement the action plan expeditiously. Ensure that any future contracts for software development require the contractor have a software development capability of at least CMM level 2. VBA comments responded to its SCE results, and VA comments responded to the SCE results for AAC. In commenting on a draft of this report, the Veterans Benefits Administration (VBA) agreed with four of our recommendations and disagreed with one recommendation. VBA stated that while it agreed that a repeatable (i.e., level 2) level of process maturity is a goal that must be attained, it disagreed that “...all software development beyond that which is day-to-day critical must be curtailed...” VBA further stated that the payment system replacement projects, the migration of legacy systems, and other activities to address the change of century must continue. While we agree that the software conversion or development activities required to address issues such as the change of century or changes to legislation must continue, we would characterize these as sustaining critical day-to-day operations. However, major system development initiatives in support of major projects such as the system modernization effort, which involves several system replacement projects and the migration of legacy systems, and VETSNET, which includes several payment system replacement projects, should be reassessed for risk of potential schedule slippage, cost overrun, and shortfall in anticipated system functions and features. Shortcomings such as these are more likely from organizations with a software development maturity rating below level 2 (i.e., the repeatable level). Therefore, to minimize software development risks, we continue to believe that VBA should delay any major investment in software development unless it is required to sustain day-to-day operations, until a maturity rating of level 2 is reached. Regarding the remaining four recommendations, we are pleased to see that VBA is already initiating positive actions, including acquiring the assistance of the Software Engineering Institute. VA stated that we did not demonstrate a willingness or flexibility in relating AAC documentation products, activities, and terms to the SEI terms. We reviewed all documentation provided to us by VA including the documents listed in their comments on our draft report. As called for by the SCE methodology, we carefully compared all this documentation to the SEI CMM criteria. As stated throughout our report, we found some strengths but in many cases, VA’s documentation was not commensurate with that called for by the SCE methodology. Our comments on the specific key process areas follow. The VA comments stated that the OFM/IRM Business Agreement, dated September 1994, contains guidelines which mandate the management of software requirements. However, in our review of the documentation listed under requirements management (Enclosure 1: Documents Addressing Key Process Area), we found no evidence that these documents addressed any of the goals of this KPA. For example, (1) the allocated requirements are neither managed, controlled, nor baselined, and (2) no software development plans were developed based on the allocated requirements. VA feels that the AAC Business Agreement and the negotiated quarterly contract satisfies this KPA; however, we found that AAC does not perform a majority of the activities required to meet the goals within this KPA. For example, AAC was not able to submit evidence for estimating software size and cost, nor did AAC demonstrate any methodology used for estimating schedules. VA stated that project size and risk remain consistent throughout the development/implementation cycle. However, AAC did not provide our SCE team with any evidence validating this assertion and, as discussed on page 8, AAC does not track this information. VA claims that specific written policies and procedures are followed when managing software contracts; however, AAC staff interviewed were unable to provide us with any specific policies or procedures used for software contracting. The AAC staff acknowledged that they do not track (1) software contractor performance at the coding level (i.e., track functionality only) or (2) contractor produced software documentation. Regarding training for software contract management, VA stated that its COTRs receive training in procurement, project management, and evaluating contractor performance. However, there is no indication that these courses are specific to software contracting. In addition, other individuals involved in establishing the software contract for the projects reviewed had not received contract management training related to software. VA states that its ADP System Integrity Guide, dated September 1994, contains detailed procedures directing the SIS group in specific SQA functions. Although this is a good first step, the AAC is still deficient because it does not have project specific software quality assurance plans that are implemented for individual projects, as requuired by this KPA within the CMM. Furthermore, we were not provided with any evidence showing that the ADP System Integrity Guide has been officially issued or whether its use will be mandatory or discretionary. The VA comments do not present any additional evidence that would help to satisfy the criteria for this KPA. Specifically, communication between the SIS, AAC staff, and customer do not substitute for the rigor and discipline of a software configuration control board, which VA acknowledged they do not have. Furthermore, the placement of software code under configuration management is not sufficient to satisfy this KPA because other software work products—such as system design specifications, database specifications, and computer program specifications—are also required. Finally, although the AAC does maintain a library of those software work products that it does produce, the products are not maintained under a formal software configuration management discipline, which would include version control and rigorous requirements traceability. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House and Senate Committees on Veterans Affairs and the House and Senate Committees on Appropriations; the Secretary of Veterans Affairs; and the Director, Office of Management and Budget. Copies will also be made available to other interested parties upon request. This work was performed under the direction of William S. Franklin, Director, Information Systems Methodology and Support, who can be reached at (202) 512-6234. Other major contributors are listed in appendix IV. The following is GAO’s comment on the Department of Veterans Affairs’ May 24, 1996, letter. 1. This issue is not addressed in our report. To establish a common understanding between the customer and the software project of the customer’s requirements that will be addressed by the software project. Goal 1 System requirements allocated to software are controlled to establish a baseline for software engineering and management use. Goal 2 Software plans, products, and activities are kept consistent with the system requirements allocated to software. To establish reasonable plans for performing the software engineering and for managing the software project. Goal 1 Software estimates are documented for use in planning and tracking the software project. Goal 2 Software project activities and commitments are planned and documented. Goal 3 Affected groups and individuals agree to their commitments related to the software project. To provide adequate visibility into actual progress so that management can take effective actions and when the software project’s performance deviates significantly from software plans. Goal 1 Actual results and performances are tracked against the software plans. Goal 2 Corrective actions are taken and managed to closure when actual results and performance deviate significantly from the software plans. Goal 3 Changes to software commitments are agreed to by the affected groups and individuals. To select qualified software subcontractors and manage them effectively. Goal 1 The organization selects qualified software subcontractors. Goal 2 The organization and the software subcontractor agree to their commitments to each other. Goal 3 The organization and the software subcontractor maintain ongoing communications. Goal 4 The organization tracks the software subcontractors’ actual results and performance against its commitments. (continued) To provide management with appropriate visibility into the process being used by the software project and of the products being built. Goal 1 Software quality assurance activities are planned. Goal 2 Adherence of software products and activities to the applicable standards, procedures, and requirements is verified objectively. Goal 3 Affected groups and individuals are informed of software quality assurance activities and results. Goal 4 Noncompliance issues that cannot be resolved within the software project are addressed by senior management. To establish and maintain the integrity of products of the software project throughout the project’s software life cycle. Goal 1 Software configuration management activities are planned. Goal 2 Selected software work products are identified, controlled, and available. Goal 3 Changes to identified software work products are controlled. Goal 4 Affected groups and individuals are informed of the status and content of software baselines. David Chao, SCE Team Leader Gary R. Austin, SCE Team Member K. Alan Merrill, SCE Team Member Madhav S. Panwar, SCE Team Member Keith A. Rhodes, SCE Team Member Paul Silverman, SCE Team Member 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. | Pursuant to a congressional request, GAO reviewed software development processes and practices at the Department of Veterans Affairs' Veterans Benefits Administration (VBA) and Austin Automation Center (AAC). GAO found that: (1) neither VBA nor AAC satisfy any of the criteria for a repeatable software development capability; (2) VBA and AAC do not adequately define systems requirements, train personnel, plan software development projects, estimate costs or schedules, track software project schedules or changes, manage software subcontractors, or maintain quality assurance and software configuration procedures; (3) VBA initiatives to improve its software development processes include developing and distributing interim configuration management procedures, identifying a library structure for all work products, and meeting with the Software Engineering Institute (SEI) to discuss software development; (4) VBA and AAC cannot reliably develop and maintain high-quality software on any major project within existing cost and schedule constraints; and (5) VBA and AAC can use their strengths in software quality assurance and their improvement activities in software configuration management as a foundation for improving their software development processes. |
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Each insurance company is chartered under the laws of a single state, known as its state of domicile. Although an insurance company can conduct business in multiple states, the regulator in the insurer’s state of domicile is its primary regulator. States in which an insurer is licensed to operate, but in which it is not chartered, typically rely on the company’s primary regulator in its state of domicile to oversee the insurer. Regarding Year 2000 issues, NAIC has emphasized this approach by encouraging each state to focus its Year 2000 oversight efforts on its domiciliary companies. In total, state-regulated insurance entities wrote an estimated $895.2 billion in direct premiums sold nationally during 1998. Life/health and property/casualty insurance companies represent the key industry segments, accounting for 85 percent of the total direct premiums written in that year. HMOs; HMDIs; and other entities, such as fraternal organizations and title companies, accounted for the remaining 15 percent. To update our previous assessment of the regulatory oversight of the insurance industry’s Year 2000 readiness, we interviewed NAIC officials and reviewed documentation related to NAIC’s efforts to facilitate state oversight of the industry’s Year 2000 readiness. We also reviewed available state examination reports and executive summaries covering companies’ Year 2000 preparations, which were available at NAIC. While we did not verify the accuracy of the reports, this review included well over 200 reports and summaries prepared by or on behalf of 22 states. To the extent available through NAIC, we present updates pertaining to regulatory oversight through November 1999. In addition, we conducted follow-up work of Year 2000 validation efforts at the same 17 state insurance departments on which we reported in April. Our follow-up work for the 17 states included (1) a second survey administered in July 1999 that covered their Year 2000 oversight activities, including examination efforts in the area; (2) site visits to 6 of the 17 states to interview regulatory officials and review guidelines for conducting Year 2000-related examinations as well as available reports, summaries, and workpapers covering companies’ Year 2000 preparations; and (3) additional contacts in October 1999 with regulatory officials from each of the 17 states for a final update of their Year 2000-related examination efforts. The domiciliary companies of these 17 state insurance departments collectively accounted for 76 percent of the insurance sold nationally during 1998. See appendix I for a list of the 17 states and their respective domiciled insurers’ market shares. Our review of examination-related documents was limited by restrictions at two of the states we visited and at NAIC, which had examination report summaries for the same two states. For one state, regulatory officials cited an existing law that restricted access to its examination reports and related workpapers by external parties. Regulatory officials for another state explained that, under special agreements reached with insurers prior to conducting Year 2000 examinations, their department was precluded from sharing examination-related documents with other states or external entities without the consent of the companies involved. Although one of the two states provided some limited access to their examination documents, we were unable to independently verify the adequacy of Year 2000 examination efforts for either state. To determine the status of the insurance industry’s Year 2000 readiness, we surveyed all 50 state insurance departments on the state of readiness of their domiciled companies as of September 30 and the extent of the departments’ on-site verification efforts. For each state, NAIC provided a Year 2000 contact to assist us in this survey effort. Appendix II contains a copy of the Year 2000 survey we administered to the states. With NAIC’s assistance, we obtained a 100-percent response rate from the 50 states. To obtain updated insights regarding the industry’s Year 2000 outlook pertaining to readiness and liability exposure issues, we contacted representatives of key rating companies, including A.M. Best Company, Standard and Poor’s, Moody’s Investors Service, and Weiss Ratings, Inc. We also obtained and reviewed information from (1) the Gartner Group, which is a business and technology advisory company that conducts research on the global state of Year 2000 readiness; (2) the American Academy of Actuaries, which is a public policy organization that presents actuarial analyses, comments on proposed federal regulation, and works with state officials on insurance-related issues; and (3) the Casualty Actuarial Society, which is a professional organization to advance knowledge of actuarial science applied to property, casualty, and similar risk exposures. In addition, we spoke to representatives of Milliman and Robertson, Inc., an actuarial and consulting firm, and the American Bar Association. We performed our work between June 1999 and December 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from NAIC. Its written comments, which are included in appendix III, are discussed near the end of this letter. Since March 1999, NAIC has stepped up its Year 2000 efforts by (1) issuing expanded guidance to state regulators on how to examine companies’ preparedness and (2) encouraging state regulators to do on-site validation reviews of companies with the greatest potential public impact. NAIC reports that many of the nation’s state regulators have also made substantial progress in conducting Year 2000 validation reviews. They were projected to complete, by the end of November, on-site Year 2000 reviews for 91 percent of the nationally significant companies that accounted for about 84 percent of the direct premiums written by life/health and property/casualty insurers in 1998, according to NAIC. Despite this progress, uncertainties remain regarding the extent that on- site validation reviews have been conducted for some states’ companies, including some major health insurers and other segments of the insurance industry, such as HMOs and managed care organizations. In November 1999, NAIC was still in the process of quantifying the extent to which on- site verification was conducted at some of the major health insurers that did not fall into the category that NAIC had designated as nationally significant and at the larger managed care organizations, which had not been specifically covered by NAIC’s earlier efforts. After we reported on the insurance industry’s Year 2000 readiness in March and April, 1999, NAIC stepped up its efforts to facilitate state actions to verify insurers’ reported information on their Year 2000 preparations. For example, one undertaking involved NAIC’s provision of expanded examination guidance for assessing companies’ Year 2000 preparations and related training. Another important part of NAIC’s stepped up efforts has been its initiative that was aimed at prioritizing companies for review and encouraging states to perform on-site validation reviews. With only 9 months remaining before 2000 and 5,247 state- regulated insurance companies to account for, NAIC developed a pragmatic approach of focusing on the companies with the greatest potential impact on the public if they were to experience major computer problems. NAIC also worked with the states and encouraged them to implement this focused approach. In April 1999, NAIC provided the states with an enhanced version of the Financial Examiners Handbook, which provided additional guidance for performing Year 2000 readiness reviews. According to NAIC, the guidance was borrowed from audit programs developed by the Federal Financial Institutions Examination Council for federal examiners’ reviews of the Year 2000 readiness of U.S. financial institutions and a few of the state insurance departments that had been especially active in their Year 2000 oversight. NAIC also contracted for the services of a national consulting firm to develop and provide training to help state examiners better understand the review procedures and assist them in incorporating the procedures into their examinations. According to an NAIC official, this 2-day training, which was provided during the latter part of April in Atlanta, Chicago, and Denver, was attended by examiners representing almost 20 states. Compared to the timing of guidance provided by the banking and securities regulators, such Year 2000-related guidance and training would be considered late. However, we were told that this training and guidance were timely enough to be useful for some state insurance departments because they did not start their targeted Year 2000 examination process until mid-1999. In March, NAIC’s Year 2000 Industry Preparedness Task Force launched an initiative that was intended to (1) encourage states to perform on-site validation reviews and (2) determine the extent to which the states had verified the insurance industry’s Year 2000 readiness. The initiative focused on life/health and property/casualty insurance companies that NAIC had designated as nationally significant. This designation included 1,161 companies, located in 44 states and the District of Columbia, that were responsible for almost $650 billion in total premiums written during 1998. According to NAIC information, the insurance industry is relatively concentrated, with nationally significant companies representing approximately 86 percent of the premiums written for the life/health and property/casualty segments in 1998 and 27 percent of the 4,325 companies in the two insurer segments. It is also noteworthy, however, that many insurers that far exceeded NAIC’s criteria for the level of direct premiums written were not considered nationally significant because they did not meet the second criteria of being licensed in 17 states or more. These companies tended to conduct a significant amount of business on a more localized rather than national basis. We noted, for example, that 36 life/health insurers and 195 property/casualty insurers that each wrote more than $100 million in direct premiums during 1998 were not covered by NAIC’s nationally significant designation. Over the past several months, NAIC’s Year 2000 initiative focusing on nationally significant companies has involved an ongoing, interactive process with the individual state insurance departments. In April, NAIC administered a survey to all 50 states and the District of Columbia to develop preliminary baseline information on state efforts to conduct on- site examinations of companies’ Year 2000 compliance status, particularly, the compliance of nationally significant companies. From June through August, 1999, NAIC also facilitated a series of conference calls that included members of the Year 2000 Industry Preparedness Task Force and, successively, representatives from each of the 50 states. According to NAIC officials, these conference call discussions focused on each state’s general approach to overseeing the industry’s Year 2000 preparations as well as its efforts to conduct on-site examinations to verify the Year 2000 compliance status of its domiciled insurance companies, particularly its nationally significant companies. These conference calls were a key mechanism that NAIC used to encourage states to conduct more on-site verification reviews and facilitate critical Year 2000 information-sharing among the participating states regarding, for example, licensed companies that wrote a large amount of insurance in a state but were domiciled elsewhere. Finally, these conference calls with each of the states enabled NAIC to quantify on a national basis the extent of the states’ on-site verification reviews of their nationally significant companies. To document its Year 2000 initiative, NAIC has maintained a summary schedule of all nationally significant companies with information on, among other things, whether each company had been subject to an on-site Year 2000 verification review. A company was considered to have been subject to an on-site verification review if the state of domicile, or another state where the company was licensed and doing business, indicated to the task force that a review had been completed or was scheduled to be completed by the end of September. A company was also considered to have been subject to an on-site verification review if it had been indirectly covered or would have been covered by the end of September through an on-site review of an affiliated company with which its computer system was fully integrated. On the basis of information obtained from the conference calls that were completed in August 1999, NAIC reported that 1,037 nationally significant companies were to have been subject to an on-site Year 2000 review, 106 were not to have been subject to an on-site review, and the remaining 18 discontinued operations during 1999. The task force directed additional attention to certain companies that were viewed to be of particular concern. In a few cases, for example, NAIC officials noted that a state reconsidered its original position that an on-site verification was not needed. In one situation, NAIC provided financial assistance to facilitate the Year 2000 examination of a few key nationally significant companies in a particular state. In another case, a state agreed to conduct a targeted Year 2000 examination for a company domiciled in another state that had no plans to conduct on-site verification of the company. By November 1999, NAIC reported that the number of companies that would be subject to an on-site Year 2000 review by the end of November had increased to 1,059 companies, and it reported that the remaining 84 companies would not be subject to an on-site review. NAIC officials explained that, for the most part, the task force was satisfied with the level of information available on the remaining nationally significant companies that were not to be subject to on-site verification. NAIC has also taken the position that some comprehensive surveys were thorough enough to be equivalent to an examination. As we stated in our April 1999 report and continue to believe, the use of Year 2000 examinations is a principal mechanism for verifying self-reported information and providing assurances pertaining to the Year 2000 progress and readiness of regulated institutions. The ability to provide such assurances is particularly important for the industry’s nationally significant companies and others that do a substantial amount of business. In total, the number of companies that were to be subject to an on-site Year 2000 review by the end of November represented 98 percent of the direct premiums written by nationally significant companies. Regarding the total life/health and property/casualty insurer segments, the identified coverage through NAIC’s initiative suggests that companies that accounted for at least 84 percent of the direct premiums written during 1998 had been or were to have been subject to an on-site Year 2000 review by the end of November. The extent of on-site validation for the rest of the industry (including large HMO and HMDI companies), which accounted for an additional $137 billion in direct premiums written during 1998, was still unknown as of November 1999. In October 1999, NAIC reported that the Year 2000 Industry Preparedness Task Force had recently expanded the scope of its review process to include the nation’s largest managed care organizations together with all of the Blue Cross and Blue Shield Plans, which represented some of the major health care insurers not designated as nationally significant. NAIC estimated that the companies that fall into this category represent about 80 percent of the direct premiums written for all HMOs and HMDIs in 1998. The first task force conference to collect and summarize information on the status of on-site Year 2000 reviews for these managed care organizations was held in November 1999. NAIC officials acknowledged that with the Year 2000 deadline close at hand, the task force’s main objective was to quantify the extent of on-site verification that had been completed and identify any companies that may be of regulatory concern. During 1999, most of the 17 state insurance regulators we reviewed increased their efforts to conduct targeted examinations that were aimed at verifying companies’ Year 2000 readiness. In the beginning of the year, 10 of the 17 states were in the process of conducting targeted examinations or were planning to conduct such examinations, and the remaining 7 states were either not planning to conduct such examinations or were uncertain whether they were going to conduct them, as shown in table 1. By June 1999, the 17 states were either in the process of conducting targeted examinations or indicated that they planned to conduct them. Some states that started targeted Year 2000 examinations in the middle of 1999 used expedited approaches, such as suspending their regular financial examination process to devote their examiners solely to targeted Year 2000 examinations or hiring one or more private consultants to conduct such examinations in a short period of time. By the end of September, all of the 17 states we reviewed had either completed or were in the process of completing their targeted Year 2000 examinations. Specifically, eight states had finished the fieldwork for over one-half of the companies that were targeted to be examined, but corresponding reports for many of these examinations were still pending. We were told that one state was waiting for the completion of all its examination fieldwork before issuing a single summary report for all of its domiciled companies, rather than issuing separate reports for each company. A few states projected that they would not complete their Year 2000 examination process until the end of November, leaving little time for correcting identified deficiencies before the date change. In conducting targeted Year 2000 examinations, the states generally said they used the enhanced guidance that NAIC provided in April or guidelines developed by contractors, or in some cases both guidance, to improve the quality and consistency of their validation efforts. Our review of guidelines provided by the six states we visited indicated that they covered all key areas of Year 2000 conversion cited in our Assessment Guide as well as those areas cited in the federal banking regulator examination guidelines. In turn, our review of reports available for 22 states’ targeted Year 2000 examinations indicated that the reports systematically addressed all major guideline components, and that they gave a particular emphasis to companies’ contingency planning efforts. Like the banking industry, insurers depend on date-sensitive calculations involving, for example, annuities, policy renewals, and claims processing. Recognizing their industry’s high level of date sensitivity, the nation’s banking regulators have completed multiple rounds of on-site examinations for all financial institutions under their jurisdiction.Although 6 of the 17 states we reviewed indicated that their overall goal was to conduct 1 round of targeted examinations for all of their domiciled insurance companies, the remaining 11 states had established varying goals regarding which and how many companies would be subject to targeted Year 2000 examinations. These states’ goals were to cover from 6 to 76 percent of the domiciled companies within their jurisdictions. For the most part, these goals attempted to cover the states’ nationally significant companies. Two exceptions were states that had not planned to conduct on-site examinations for more than one-half of their nationally significant companies. One state official explained that a decision was made at the commissioner’s level that the limited time and staff resources available dictated that the state focus its on-site verification efforts on a select number of key companies. Some state officials believed that insurance companies had a clear incentive to become Year 2000 ready to maintain their business in a highly competitive industry and, therefore, did not require a great deal of regulatory prodding in the area. Several state regulatory officials also explained that they believed that available self-reported information from companies was sometimes sufficient to satisfy regulatory needs, and that this information obviated the need for an on-site verification review. We found that the extent of such information available to state regulators ranged from one department that had, among other things, access to required quarterly reports of its companies’ Year 2000 progress since 1998 to one that relied primarily on company responses to a few Year 2000 surveys. The latter is of particular concern since the absence of corroborating evidence obtained through on-site verification or multiple contacts with companies to track their progress diminishes the extent of regulatory assurances about Year 2000 readiness. A few state officials also explained that some small companies were not sufficiently computer dependent (e.g., a company may use a single personal computer to conduct business) to experience major problems with the Year 2000 date change and warrant the need for an on-site verification. As we reported in April 1999, 2 of the 17 states we reviewed were comparatively more active in their efforts to ensure that insurance companies become Year 2000 ready. These states opted to forgo on-site examinations for some of their domiciled companies because of a comfort level that officials explained was derived from their close tracking of or continuous interaction with certain companies over time. In some cases, they chose instead to conduct targeted Year 2000 examinations for certain insurance companies that were licensed to write business but were not domiciled in the state. As of September 30, 1 of the 2 states had examined as many as 378 such licensed companies, and the other state had examined 29. Some of the states of domicile for these companies, as well as the Year 2000 Industry Preparedness Task Force, ultimately ended up relying on many of the targeted Year 2000 examinations conducted by the two licensing states to verify their readiness. Information gathered by NAIC’s Year 2000 Industry Preparedness Task Force and responses to our survey of 50 states on U.S. insurers’ Year 2000 readiness indicate that regulators have considerable confidence in the insurance industry’s readiness for Year 2000. In October, NAIC estimated that 3 percent of the nation’s nationally significant insurers had not made their systems Year 2000 ready. State regulators’ responses to our survey indicated that 78 percent of all domiciled insurance companies were considered to be Year 2000 ready and making satisfactory progress in their contingency planning activities as of September 30. Of the remaining 22 percent of these companies, 17 percent, although not completed with their preparations as of September 30, were expected to become ready by December 31. Uncertainties about the status of the remaining 5 percent were largely unresolved at the time of our survey. With one exception, ratings companies and consultants we contacted were generally optimistic about the insurance industry’s Year 2000 outlook. However, some industry observers have raised questions about liability exposure issues, such as the coverage of Year 2000 remediation costs. They have also expressed concerns about insurance companies’ inability to accurately report their potential Year 2000-related liability exposures on their financial statements. In an October 1999 press release, NAIC’s Year 2000 task force reported that information obtained from its initiative focusing on nationally significant insurers indicates that the insurance industry is expected to experience little disruption when 2000 begins. The task force pointed out that state assessments of insurers’ readiness have identified a relatively small number of insurers for follow-up and continued monitoring. It also noted that regulators were expecting few problems in the new year, estimating that only 3 percent of the industry’s nationally significant companies had not made their systems Year 2000 ready. The task force chairman further stated that efforts by individual states indicated that most of the companies that were not designated as nationally significant were also on schedule, but data on the extent of validation efforts conducted for these companies had not been compiled at the time of our fieldwork in November. Our review of the 17 states previously discussed was intended to provide information on the status of regulatory oversight efforts. Separate from this effort, we conducted a survey of all 50 state insurance departments to obtain information on the Year 2000 readiness of insurance companies domiciled in each state as of September 30. Appendix IV provides the number of insurance companies by type of company identified by the 50 state respondents. For purposes of the survey, a company was to be considered Year 2000 ready if the regulator was satisfied that the company had made adequate efforts to complete Year 2000 remediation, testing, and implementation activities for all mission-critical systems in preparation for 2000. Although our survey collected data on companies’ Year 2000 contingency planning activities, we did not specify that companies should have completed such activities to be considered Year 2000 ready. This definition of Year 2000 readiness was consistent with NAIC’s industry expectation that the last 6 months of 1999 should be used by companies to focus on less critical applications and systems and develop contingency plans in the event of a failure. Individual states were to base their responses to our questions about companies’ readiness and contingency planning activities on information obtained through their Year 2000 oversight efforts. State oversight efforts pertaining to Year 2000 could include (1) surveys administered to obtain information on companies’ Year 2000 preparations, (2) required Year 2000 disclosures with financial report filings, and (3) on-site verification reviews conducted as part of the state’s regular financial examination cycle or its targeted Year 2000 examination program. State responses to survey questions on the number of Year 2000 examinations conducted in 1998 and 1999 indicated that states were engaged in varying levels of on-site verification. Table 2 shows the proportion of states’ domiciled companies that, as of September 30, had been subject to an on-site verification review of their Year 2000 readiness. Our survey indicated that state regulators had considerable confidence about the adequacy of the insurance industry’s preparation for the Year 2000 date change. Seventy-eight percent of the states’ domiciled insurance companies were considered Year 2000 ready as of September 30 (see fig. 1). State regulators also generally viewed these insurers as making satisfactory progress in their contingency planning efforts. The remaining 22 percent of the states’ domiciled insurance companies represented companies that were (1) not Year 2000 ready by September 30, but that were projected to be ready by December 31; (2) not subject to categorization due to the lack of adequate information to determine their readiness status; or (3) considered at risk of not being ready. Some uncertainties exist, specific to the companies included in the last two categories, about their ability to become fully ready by the end of the year. These categories are discussed in the following sections. State responses indicated that 17 percent of their domiciled insurance companies were not Year 2000 ready by September 30 but were projected to be ready by December 31. These companies missed NAIC’s milestone calling for all mission-critical systems to be Year 2000 ready by June 30, 1999. States estimated that on average, 84 percent of the companies progressing toward becoming Year 2000 ready by December 31 were considered to be making satisfactory progress in their contingency planning efforts, which suggests that the remaining companies were not making adequate progress. This lack of adequate progress is of particular concern for companies that may be fully preoccupied with remediating their mission-critical systems during the last quarter of the year, leaving them little time to attend to their contingency plans. These companies would also have an increased likelihood of a system failure if any of their compliant mission-critical systems happen to be integrated with less critical systems that have not been fully remediated. Viable contingency plans are especially important for larger companies that may have complex systems that were not projected to be Year 2000 ready until the end of the year. Survey responses indicated that while 887, or 83 percent, of the companies not ready by September 30, but projected to be Year 2000 ready by December 31, were small, the remaining 188 companies each wrote $100 million or more in net premiums nationwide, as shown in table 3. The states indicated that as of September 30 they lacked sufficient information to determine the Year 2000 readiness of 4 percent of their domiciled insurance companies. Specifically, 14 states placed 235 companies in this category. Many of these states indicated that they had some self-reported information from these companies, such as responses to the state’s Year 2000 surveys or the company’s Management Discussion and Analysis Year 2000 disclosures. However, these states believed that they could not determine their readiness from information that had not been corroborated by an on-site verification review. One state official, for example, explained that although survey responses did not indicate any reason to question the prospective readiness of these companies, on-site examinations had not been performed to verify survey information or determine the companies’ readiness. On the basis of similar reasoning, an official from another state noted that he was waiting for the results of ongoing examinations at some companies before reaching any conclusions about their readiness. One situation involved a state where the insurance department was responsible for monitoring the annual statements submitted by HMOs but depended on another state department for survey and examination information. The insurance department was told that a Year 2000 survey had been administered to the HMOs, but their responses had not yet been received. Therefore, the insurance department identified these HMOs as companies for which it did not have adequate information to determine their Year 2000 readiness. In response to our survey, the states reported that about 1 percent of their domiciled insurance companies were viewed as at risk of not being Year 2000 ready by the end of the year. Specifically, 13 states identified 49 companies, consisting mostly of small property/casualty insurers, that they considered at risk of not being ready by the end of the year, as shown in table 4. Thirty-eight of the companies considered at risk were small, 9 were medium, and the remaining 2 were large HMOs. On average, states estimated that 57 percent of these at risk companies had not made satisfactory progress in their contingency planning efforts as of September 30, 1999. Virtually all of the states that identified companies as at risk of not being Year 2000 ready by the end of the year noted that they would continue to focus on the adequacy of these companies’ contingency plans during the last quarter of 1999. Other actions the states planned to take to deal with at risk companies included conducting management conferences and requiring monthly Year 2000 progress reports. In a few isolated cases, a state had resorted to or was planning to resort to enforcement actions. In reviewing state survey responses regarding the Year 2000 readiness of companies by type, we found that states identified a slightly lower level proportion of HMOs considered to be Year 2000 ready when compared to insurers in other categories. As of September 30, 1999, 69 percent of the states’ companies classified as HMOs, including managed care organizations, were considered Year 2000 ready. Of the remaining 31 percent, 23 percent had mission-critical systems that were not Year 2000 ready as of September 30 but that were projected to be ready by December 31, 6 percent were not subject to categorization due to the lack of adequate information, and 2 percent were considered at risk of not being ready by December 31. In contrast, 72 to 80 percent of insurers in the property/casualty, life/health, and other insurer categories were considered Year 2000 ready. Appendix V provides a graphic that compares the readiness status of companies by type of insurer. According to a task force official, health insurers represent one area that remains vulnerable because such insurers depend on hospitals and doctors’ offices becoming Year 2000 ready. A recent report issued by the President’s Council on Year 2000 Conversion states that many health care providers and managed care organizations continue to exhibit troubling levels of readiness. The report refers to July/August survey data indicating that (1) only 40 percent of the health care providers and organizations reported that they were Year 2000 ready and (2) roughly 25 percent of the organizations did not have documented Year 2000 plans. In July 1999, we reported that many surveys had been completed in 1999 on the Year 2000 readiness of health care providers, but none provided sufficient information with which to assess the Year 2000 status of the health-care-provider community. We later testified in September 1999 that the Health Care Financing Administration, with assistance from a contractor, performed a Year 2000 risk assessment of 425 managed care organizations. This June 1999 risk assessment identified 22 percent of the organizations as being high risk, 74 percent as medium risk, and 17 percent as low risk. During our fieldwork in November, we were told that NAIC was in contact with the Health Care Financing Administration to determine whether any of the managed care organizations assessed by the agency overlapped with those that were regulated by the state insurance departments. The industry observers we contacted generally maintained a favorable view of the insurance industry’s Year 2000 preparedness efforts, but they continued to express uncertainty over potential costs associated with Year 2000-related liability exposures. With one exception, rating companies and consultants with whom we spoke have remained confident about the industry’s efforts to prepare and become ready for 2000. For instance, the Gartner Group continues to place the insurance industry among the industry leaders in becoming Year 2000 ready, on the basis of its August report. Likewise, several rating companies we contacted, including Standard and Poor’s; A.M. Best; and Moody’s, indicated that, as of October, they had not downgraded any insurer’s rating due to Year 2000 readiness issues. One rating firm, Weiss Ratings, Inc., tempered the generally optimistic view of readiness in the industry by reporting that 13 percent of the companies responding to its survey had made inadequate progress in their Year 2000 preparations. The response rate to this June 1999 survey was about 19 percent. While Weiss Ratings, Inc., considered a company’s progress to be inadequate if its mission-critical systems were not renovated and tested by August 1999, it also indicated that those companies viewed to be making inadequate progress still had a good chance of achieving Year 2000 compliance in the time remaining. Considerable uncertainty remains concerning the potential magnitude of insurers’ Year 2000-related liability exposures. In our April report, we noted that insurers’ liability exposures could not then be reasonably estimated because, among other factors, a claims history for the event did not exist and questions about key legal issues that could affect insurance policy coverage were still unresolved. Since then, the industry observers we contacted have continued to express uncertainties. The rating companies we contacted in October indicated that it was still too early to tell how liability exposures might affect insurance companies. For this reason, the rating companies had not factored liability exposures into their ratings. One actuarial consulting firm estimated that costs from Year 2000-related claims and legal expenses among U.S. property/casualty insurers could range between $15 billion and $35 billion. The firm acknowledged that its estimates were based on several assumptions associated with claims and legal outcomes that have not yet been realized. The industry observers we contacted generally said that insurance companies will not likely be in a position to report their potential Year 2000-related liability exposures on their 1999 financial statements, because their liability exposures are not yet reasonably estimable due to uncertainties over claims and legal outcomes. Legal debates over insurance coverage for Year 2000-related mishaps, as well as for costs to avoid such mishaps, have yet to be fully resolved. Our previous report described some of the legal debates associated with coverage for Year 2000-related problems and damages, including the coverage-related issues of “fortuity” and “triggers.” For example, it is not clear whether a Year 2000-related loss would be considered a fortuitous event covered by insurance, rather than an expected event that may not be covered. For some types of policies, coverage also depends on what event triggers coverage. Specifically, questions arise when coverage was activated for a particular policy. Other debates focus on whether an insured party that takes remedial action to reduce its vulnerability to Year 2000-related problems may recover remediation costs under a particular policy. The Y2K Act, enacted in July 1999, does not directly address many of the unresolved legal issues that could affect insurers’ potential liability exposures. The primary purposes of the act include facilitating alternative modes of dispute resolution, limiting certain liabilities for Year 2000- related claims, and providing pre-Year 2000 remedial measures aimed at reducing an insured’s vulnerability to Year 2000-related mishaps. The act also sets forth procedural requirements for class action suits and affirmative defenses for temporary noncompliance with certain federal standards caused by a Year 2000-related problem. The act, however, does not contain substantive standards to guide courts in deciding whether Year 2000-related mishaps or remediation costs should be covered. Such issues will principally be a matter of state law. Some current cases involving insurance coverage disputes and additional provisions of the Y2K Act are described in appendix VI. Since we first expressed concerns about the states’ regulatory oversight of the insurance industry in March 1999, NAIC actively emphasized the value of state regulators’ validating insurance companies’ Year 2000 preparations through on-site examinations, particularly those undertaken by nationally significant insurers. We also found that, partly in response to this emphasis, some states have increased their efforts to conduct on-site examinations of their domiciled insurance companies’ Year 2000 preparations. Even with this increased emphasis, however, not all of the nation’s insurance companies will be subject to an on-site verification review. Gaps in Year 2000 verification coverage of the insurance industry can be attributed to several factors. One factor has been the late start of some states in conducting on-site verification reviews and the resulting need for them to focus on the potentially higher impact companies rather than conducting examinations of all domiciled insurance companies. Another factor has been regulators’ belief that, in some cases, comprehensive surveys were acceptable substitutes for examinations. Differing regulatory perspectives have constituted yet another factor contributing to state decisions to forgo on-site examinations for some companies. Such perspectives ranged from satisfaction with the adequacy of off-site monitoring in a few states that had closely tracked the progress of their companies over the last few years to the view in a few other states that Year 2000 readiness would likely be adequately covered by insurers motivated to remain competitive without regulatory prodding. Finally, insurance regulators have indicated that some small insurance companies are not sufficiently dependent on computers to experience major problems with the Year 2000 date change. The strategy promulgated by NAIC to focus on nationally significant companies appears reasonable given the large number of state-regulated insurance companies subject to oversight and the limited time remaining before 2000. However, states’ generally late start in assuming a more proactive role regarding Year 2000 has affected their ability to complete their regulatory oversight of all the insurers they supervise. As of mid- November, for example, some states had not finished the planned on-site validation process for their companies, and NAIC was still in the process of collecting information about states’ regulatory assessments of the nation’s largest managed care organizations and major health insurers not designated as nationally significant. In addition, uncertainties exist about the readiness outcome for the 4 percent of the companies for which regulators did not have sufficient information, and 1 percent of the companies that regulators viewed at risk of not being ready by December 31 but were closely monitoring. Although they were projected to be ready by the end of the year, questions also remain unresolved regarding whether all of the 17 percent of the insurance companies that were not ready as of September 30, 1999, can complete all conversion activities to become fully compliant within the remaining time. Lastly, and arguably outside of the regulators’ control, uncertainties regarding insurers’ Year 2000 liability exposures continue to represent an area of concern that is being monitored by rating companies, and other industry observers, that can affect the overall Year 2000 outlook of the insurance industry. In summary, the intensive regulatory activity of the past several months provides additional support for the level of confidence that regulators place on the insurance industry’s Year 2000 preparations and their belief that most policyholders should not be concerned about their coverage. However, as previously indicated, remaining gaps in the on-site verification of insurance companies’ Year 2000 readiness and unfinished regulatory efforts in the area leave uncertainties about the self-reported status of some companies’ readiness. As a point of comparison, banking regulators, who have conducted multiple examinations of all their financial institutions, can provide stronger assurances to support their assertions that, with relatively few exceptions, all banks were Year 2000 ready as of September 30, 1999. Insurance regulators, on the other hand, can say with some conviction that most insurance is sold by companies that are Year 2000 ready or appear to be on course to become ready by the end of the year. It remains true that a portion of the industry had not completed its Year 2000 preparations by September 30, 1999, and that some of these companies had not made satisfactory progress in contingency planning. However, the welcome news is that most consumers, especially those insured by nationally significant companies, can have greater confidence that their insurers will likely provide uninterrupted services into the new year. NAIC provided written comments on a draft of this report. A reprint of NAIC’s letter can be found in appendix III. NAIC disagrees with a perceived assertion that because states have not performed on-site verification of Year 2000 preparations of every insurance company, it represents an inability of states to complete their regulatory oversight of the industry. As noted on page 22, we attribute the inability of states to complete their regulatory oversight of the industry to states’ generally late start in assuming a more proactive role regarding year 2000. This late start, among other factors, has caused some states to forgo conducting Year 2000 on-site verifications for some of their domiciled companies which has, in turn, limited the level of assurances to support regulatory assertions of their companies’ readiness. We acknowledge on page 10 that, according to NAIC information, 98 percent of the direct premiums written by nationally significant companies had been or were to be subject to an on-site Year 2000 review by the end of November. However, the extent of on-site validation for the life/health and property/casualty companies that were not nationally significant and the other insurer segments, which together represent 27 percent of the total direct premiums written by the industry as a whole, was unknown at the time of our review. We continue to believe that most consumers, especially those insured by nationally significant companies, can have greater confidence that their insurer will likely provide uninterrupted services into the new year. The same level of assurances, however, cannot be provided for the portion of the industry that may not have been subject to an on-site verification or for which the extent of on-site verification is unknown. NAIC believes that the draft report erroneously overemphasized statistics based on the number of insurance companies verified or the number of states performing on-site examinations and suggests that these statistics should focus on information supplied by the NAIC and, more emphatically, on premium-based statistics from our survey of the 50 states. Premium- based information supplied by the NAIC can be found throughout this report, but specifically on pages 2, 6, and 10 as it relates to the on-site verification of nationally significant companies. We did not provide premium-based statistics from our survey primarily because we found inconsistencies when we compared responses from many of the states to similar information provided by NAIC. For example, the total net premium volume written nationwide reported by 15 states to have been subject to an on-site verification was, on average, 126 percent more than the total net premium volume written nationwide identified by NAIC for each of these states. Such inconsistencies may have been the result of the states reporting gross premiums rather than net premiums as our survey requested or the result of duplicative counting for companies that may have been subject to Year 2000 on-site verifications conducted during both a regular and a targeted examination. Regardless of the reasons for such inconsistencies, they rendered the survey responses on net premiums subject to on-site verification unusable for reporting purposes. NAIC also indicated that statistics based on the number of companies impart an unnecessary negative bias because a significant number of companies either write a very small amount of premiums, are so small as to have no risk of Year 2000 failure, are dormant companies, or are companies that have been acquired by or merged into other insurers since 1998. To help minimize this type of bias, we have made an adjustment to the table on page 15 that shows the percentage of states’ domiciled companies that were subject to on-site verification examinations. Specifically, companies whose Year 2000 readiness status was not viewed by the states as relevant were excluded; this covered, for example, companies in liquidation, companies operating without computer systems, and shell companies with no business. The effect of this adjustment on the number of states falling into each category of on-site verifications conducted was minor. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days from its date. At that time, we will provide copies to Representative Thomas Bliley, Chairman, House Committee on Commerce, and Senator Robert Bennett, Chairman, and Senator Christopher Dodd, Vice Chairman, Senate Special Committee on the Year 2000 Technology Problem. We will also provide copies of this report to other interested parties and will make copies available to others on request. Key contributors to this assignment are acknowledged in appendix VII. Please call me or Lawrence Cluff on (202) 512-8678 if you or your staff have any questions. We focused part of our review on the same 17 state insurance departments visited during our previous review. These state departments’ domiciled insurance companies collectively accounted for almost 76 percent of insurance sold nationally during 1998. The departments represented the top 12 states, whose domiciled companies had combined market shares ranging from 3.4 percent to 14 percent, and 5 states with relatively smaller market shares ranging from 0.3 to 2.1 percent. As previously noted, our April report described some of the prevalent issues involved in coverage disputes. Some recent court cases raised a new issue involving businesses seeking to recover from their insurers remediation costs they have incurred in their efforts to help prevent or reduce the costs of Year 2000-related mishaps. On the basis of an interpretation of a provision commonly referred to as the “sue and labor” clause, in some of the cases, the insured entities claimed that their insurance policies cover remediation costs. Some insurance policies, generally property/casualty insurance policies, contain a sue and labor provision accompanied by language specifically obligating the insurer to contribute to the expenses incurred by the insured in acting under the provision. The sue and labor clause originated centuries ago in ocean marine policies. Its purpose was to encourage or require policyholders to prevent or minimize imminent potential loss or damage covered by the policy without forfeiting recovery under the policy, thereby reducing the insured loss. According to one commentator, the classic example is the captain who orders the crew to jettison cargo to prevent the ship from foundering in stormy seas. The value of the jettisoned cargo is recoverable under the sue and labor clause. At least three cases were brought in 1999 seeking coverage of remediation costs under sue and labor provisions. The insured plaintiffs in those cases reportedly sought to recover remediation costs of at least $400 million and $183 million. Cases of this type contribute to the uncertainties associated with insurers’ potential liability exposure. Insurers opposing claims to recover remediation costs have raised several arguments. For example, they contend that remediation costs are covered only if they were incurred to protect against an insured loss, and that Year 2000 remediation costs are not insured losses. Among other things, costs recoverable pursuant to a sue and labor provision typically involve remedial measures to prevent or recover damage arising from covered events, such as lightning, fire, or theft. Insurers contend that Year 2000 remediation costs arise from a defect or inherent limitation in a product and not in connection with an insured event. In addition, insurers assert that the majority of losses an insured business seeks to protect against through remediation measures are not losses attributable to the physical loss or damage of insured property, but instead are uninsured economic losses, such as a decrease in market share, a loss of investor or consumer confidence, or regulatory sanctions. Another argument is that the loss to be minimized or avoided must be actual or imminent. According to this argument, the Year 2000 event should not be considered imminent, because insured entities have been aware of it for several years and in many cases began remedial measures as early as the mid-1990s. Insurers argue that such remediation costs should be considered ordinary costs of doing business. The Y2K Act does not create any new causes of action. Instead, for “Year 2000 actions,” it modifies existing state or federal procedures and remedies concerning nonpersonal injury liability arising from Year 2000 failures.Among other things, the act (1) requires that notice of a Year 2000 claim be given to potential defendants before a “Year 2000 action” is filed; (2) establishes heightened pleading requirements; (3) sets caps and limitations on punitive damage awards; and (4) provides for the apportionment of damages, rather than joint and several liability, except in cases where it is found that the defendants acted with specific intent to injure the plaintiff or knowingly committed fraud. The act applies to any “Year 2000 action” brought after January 1, 1999, for an actual or potential “Year 2000 failure” occurring before January 1, 2003. The following is an overview of some provisions of the act that could have a direct or indirect impact on the amounts for which insurance companies may be liable. Most of the Y2K Act focuses on the litigation process. Under the notice provisions, prospective plaintiffs in a Year 2000 action (except for claims for injunctive relief) must send a written notice to each prospective defendant containing information about the pertinent event and including the remedy sought. Within 30 days after receiving the notice, the prospective defendant must provide each plaintiff with a written statement describing what, if any, remediation measures or alternative dispute resolution processes would be acceptable. If the defendant proposes a plan to remediate the problem, the prospective plaintiff must allow the prospective defendant an additional 60 days from the end of the 30-day notice period to complete the proposed remedial action before bringing suit. The purpose of this 90-day notice requirement is to create a procedure that might facilitate the parties’ resolution of the problem through voluntary efforts or through alternative dispute resolution. The Y2K Act also contains rules for pleading affirmative defenses, damages, warranty and liability disclaimers, proportionate liability, and class actions. One purpose of the pleading requirements is to reduce the potential for frivolous claims by requiring the plaintiff in a Year 2000 action to articulate certain bases for the claim and remedy. Provisions of the act for preserving warranties and contracts also are intended to discourage frivolous lawsuits. As previously discussed, the act generally requires that all written contract terms, including exclusions of liability and disclaimers of warranty, are to be strictly enforced unless those terms are contrary to any applicable state statute in effect as of January 1, 1999. The Y2K Act limits liability exposure and damages. Some limitations depend upon whether the lawsuit is a contract action or a tort action. For example, in tort actions, the act provides for proportionate liability, except with respect to certain suits brought by consumers. Generally, defendants will be liable only for that portion of a judgment that corresponds to their proportionate share of the total fault for the plaintiff’s loss, unless the defendants are found to have committed fraud in connection with the Year 2000 problem or to have specifically intended to injure the plaintiff. Such a finding would render the defendant jointly and severally liable. Other limitations include the following: (1) elimination of strict liability, (2) heightened proof requirements as a condition for recovering punitive damages and a cap on the amount of such damages for individuals with net worth of less than $500,000 and small employers, and (3) limitations on the recovery of certain “economic losses” of the plaintiff alleged in connection with a tort claim. These losses, which include lost profits, business interruption losses, and consequential and indirect damages, may be recovered only if a contract provides for their recovery or the losses result directly from damage to tangible real or personal property caused by the Year 2000 failure. The limitation does not apply to claims of intentional torts. For contract actions, no category of damages may be awarded unless such damages are allowed by the contract expressly or, if the contract is silent on the matter, under applicable state or federal law. The act contains a special provision that excludes from damages the amount the plaintiff reasonably could have avoided by utilizing any available or reasonably ascertainable information “concerning means of remedying or avoiding the Year 2000 failure involved in the action.” Prospective plaintiffs are provided with an incentive to take reasonable steps to limit their damages. This duty to mitigate is in addition to any such duty imposed under state law. The duty is not absolute, however. Where a defendant intentionally misrepresents facts concerning the potential for a Year 2000 failure in the “device or system used or sold by the defendant” that caused plaintiff’s harm, the plaintiff will be relieved from this statutory mitigation duty. Depending upon the effects of the settlement incentives and litigation- related limitations contained in the Y2K Act, insurance liability exposure could be less than would be the case if liabilities for Year 2000 actions were determined under less limiting state laws. Whether an insurance policy covers a particular Year 2000 event, however, could depend upon a number of factors, including the extent to which state laws and cases apply to insurance coverage litigation. In addition to the persons named above, Evelyn E Aquino, Gerhard Brostrom, Barry A. Kirby, May M. Lee, Alexandra Martin-Arseneau,and Paul G. Thompson 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 touch- tone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the readiness of the insurance industry to meet the year 2000 date change, focusing on: (1) an updated assessment, as of September 30, 1999, of state regulatory oversight of the insurance industry's year 2000 preparations; and (2) the status of the industry's year 2000 readiness. GAO noted that: (1) since GAO's last report, the National Association of Insurance Commissioners (NAIC) stepped up its efforts to assess the insurance industry's year 2000 readiness by: (a) issuing expanded guidance to state insurance regulators on how to examine companies' preparedness; and (b) encouraging state regulators to conduct on-site examinations of insurers with the greatest potential public impact; (2) some of the nation's state regulators increased their use of examinations aimed at verifying the year 2000 readiness of their insurers, particularly for their nationally significant life/health and property/casualty insurers; (3) six of the 17 states reviewed indicated that their goal was to conduct year 2000 readiness examinations for all of the insurance companies domiciled in their states; (4) the remaining 11 states had set varying goals regarding which companies were to be subject to year 2000 examinations, but most of these states attempted to cover their nationally significant insurers; (5) in October 1999, NAIC's Year 2000 Industry Preparedness Task Force reported the insurance industry expected to experience little disruption when 2000 begins; (6) state responses to a nationwide survey GAO conducted indicated considerable confidence in the insurance industry's preparation for the year 2000 date change; (7) uncertainties about the ability of the remaining 5 percent of the companies to be year 2000 ready were largely unresolved at time of survey; (8) regulators indicated they did not have adequate information to determine the readiness status for 4 percent of the companies and considered 1 percent to be at risk of not being ready by December; (9) states appeared to have a slightly lower level of confidence in the readiness of health maintenance organizations and managed care organizations than those in other insurance segments; (10) according to a task force official, health insurers represent one part of the industry that remains vulnerable because they depend on hospitals and doctors' offices becoming year 2000 ready; (11) industry observers continued to express uncertainty over potential costs associated with year 2000-related liability exposures; (12) legal debates had yet to be resolved over insurance coverage for year 2000-related mishaps as well as liability for costs that policyholders incur to avoid such mishaps; and (13) rating companies indicated that it was still too early to tell how liability exposures might affect insurance companies, and for this reason, the rating companies had not factored these exposures into their ratings. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 significantly changed the system for providing assistance to low- income families with children by replacing the existing entitlement program with fixed block grants to states to provide Temporary Assistance for Needy Families (TANF). TANF provides about $16.5 billion annually to states to help families become self-sufficient, imposes work requirements for adults, and limits the time individuals can receive federal assistance. However, accessing entry-level jobs to meet TANF work requirements can be challenging for low-income individuals, many of whom do not ow n cars or have poorly maintained cars that are not equipped to drive long distances. As we reported in 2004, many rural TANF recipients cannot afford to own and operate a reliable vehicle and public transportation to and from employment-related services and work is often not available. Existing public transportation systems cannot always bridge the gap between the location of individuals’ homes and jobs for which they not to mention child care and other domestic responsibilities and employment-related services. These systems were originally established to allow urban residents to travel within cities and bring suburban residents to central-city work locations. According to 2007 U.S. Census Bureau data, a higher proportion of people in metropolitan areas who are below poverty level live in cities in those areas than in the corresponding suburbs. Furthermore, employees at many entry-level jobs must work shifts in the evenings or on we ekends, when public transit services are either unavailable or limited. As a result, Congress created the JARC program in the Transportation Equity Act for the 21st Century (TEA-21) to support the nation’s welfare- reform goals. The purpose of the program was to improve the mobility of low-income individuals by awarding grants that states and localities cou use to provide additional or expanded transportation services and thus provide more opportunities for individuals to get to work. JARC funds ld were awarded to grantees designated for project funding in the conference reports that accompanied appropriations acts. TEA-21 also required GAO to review the JARC program every 6 months. In a series of reports from December 1998 to August 2004, GAO found, among other things, that JARC had increased coordination among transit and human service agencies, but that FTA was slow in evaluating the program. These reports included recommendations to assist FTA in improving its evaluation process. In response to these recommendations, FTA developed specific objectives, performance criteria, goals, and performance measures for the JARC program, although GAO noted limitations in the performance measures and recognized that FTA planned to continue to develop more comprehensive and relevant performance measures. SAFETEA-LU made several changes to the JARC program that affected recipients. Most notably, SAFETEA-LU created a formula to distribute funds beginning with fiscal year 2006: SAFETEA-LU requires that 40 percent of JARC funds each year be apportioned among states for projects in small urbanized and rural areas—those with populations of 50,000 to 199,999 and less than 50,000, respectively. It also required that the remaining 60 percent be apportioned among large urbanized areas—those with populations of 200,000 or more. As a result, rural and small urbanized areas were each apportioned a total of $27.3 million in fiscal year 2006, while large urbanized areas were apportioned a total of $82 million (see table 1). The change to a formula grant program significantly altered the allocation of JARC funds because some states and large urbanized areas that did not formerly receive funds now receive them, and others receive different amounts than they received in the past. For example, total funds available in Florida and Virginia increased by more than 1,200 percent from fiscal years 2005 to 2006 (from $594,708 to $8.3 million and from $84,249 to $2.5 million, respectively). Similarly, the funds available for the large urbanized area of Tampa/St. Petersburg increased 64 percent from 2005 to 2006 (from $594,708 to $978,029). However, the total funds available to Alaska and Vermont decreased by more than 80 percent (from $1.7 million to $207,503 and from $991,182 to $186,885, respectively), and the funds available to the Birmingham, Alabama, area decreased 88 percent from 2005 to 2006 (from $3 million to $356,107). In addition, 18 states were apportioned JARC funds for fiscal year 2006 that did not receive funds in fiscal year 2005. Recipients have up to 3 years in which to apply for funds for each fiscal year. For example, recipients could apply for fiscal year 2006 funds until September 30, 2008. Any funds not applied for by then lapsed and would have been reapportioned among all recipients for fiscal year 2009. Similarly, fiscal year 2007 funds are available until September 30, 2009 and fiscal year 2008 funds will be available until September 30, 2010. The amount of available JARC funds is relatively small compared to FTA’s primary grant programs. For example, FTA’s Urbanized Area Formula Grant program (Section 5307), which provides transit funding for large and small urbanized areas, was apportioned $3.9 billion for fiscal year 2008, while FTA’s Rural Area Formula Grant program (Section 5311) was apportioned about $416 million in fiscal year 2008. In contrast, the total amount of JARC funds available for the 3 fiscal years 2006 through 2008 is $436.6 million. SAFETEA-LU also requires JARC recipients to fulfill specific requirements and follow specific processes (see fig. 1): SAFETEA-LU required that a recipient be designated to award JARC funds. This recipient is responsible for distributing funds to other agencies. The governor of each state designated a recipient—almost always the state department of transportation—for JARC funds at the state level for small urbanized and rural areas. For large urbanized areas, the governor, local officials, and public transportation operators selected designated recipients, often a major transit agency or metropolitan planning organization (MPO). SAFETEA-LU required that designated recipients certify that JARC projects are derived from locally developed coordinated public transit-human services transportation plans. The coordinated planning process must include representatives of public, private, and nonprofit transportation and human services providers and participation by the general public. In general, among the states we contacted, either the designated recipient or MPO has taken the lead in developing coordinated plans in large urbanized areas. For small urbanized and rural areas, some designated recipients at the state level have generally delegated responsibility to develop plans to agencies at the local level, while in others the designated recipients have taken the lead. Local officials must ensure that appropriate transportation and human services providers participate in the process. Under SAFETEA-LU, designated recipients at the state level must develop a solicitation process for small urbanized and rural areas to apply for funds. States must use a competitive selection process to select projects for these areas. Large urbanized areas must also develop and conduct a competitive selection process for their projects. After projects are selected, states and large urbanized areas must apply to FTA to fund the projects and certify that selected projects were derived from a locally developed, coordinated public transit-human services transportation plan. SAFETEA-LU allows states and large urbanized areas to use 10 percent of JARC funds for administrative activities, including planning and coordination activities. Under TEA-21, the use of JARC funds for planning and coordination activities was prohibited. To ensure designated recipients fulfill their stewardship roles, FTA requires designated recipients to submit a management plan describing how they plan to administer the JARC program. Designated recipients for large urbanized areas submit program management plans, while state agencies that are designated recipients for small urbanized and rural areas submit state management plans. States have submitted management plans in the past for other transit programs. FTA allows states to amend existing management plans to include the JARC program. SAFETEA-LU increased the federal government’s share of capital costs to no more than 80 percent. Under TEA-21, the federal match for capital projects was 50 percent, which was inconsistent with the federal share for capital projects in other FTA programs. As under TEA-21, JARC recipients must identify and raise 50 percent of the funds for operating projects. Matching funds may come from other federal programs that are not administered by DOT, such as TANF block grants, as well as from non-cash sources, such as in-kind contributions, employer contributions, and volunteer services. SAFETEA-LU also requires that two other FTA programs that provide funding for transportation-disadvantaged populations certify that projects be derived from a locally developed coordinated human services transportation plan. One of these, the New Freedom program, was created by SAFETEA-LU to support new public transportation services and public transportation alternatives beyond those required by the Americans with Disabilities Act. According to FTA, the program is intended to fill gaps between human service and public transportation services and to facilitate integrating individuals with disabilities into the workforce as well as full participation in the community. The program provides alternatives to assist individuals with disabilities with transportation, including transportation to and from jobs and employment support services. The second program, the Elderly Individuals and Individuals with Disabilities program (commonly referred to as the Section 5310 program), has existed since 1975. The Section 5310 program originally provided formula funding for capital projects to help meet the transportation needs of elderly individuals and persons with disabilities. However, in 1991, Congress expanded the Section 5310 program to allow funds to be used to acquire services to promote the use of private-sector providers and to coordinate with other human service agencies and public transit providers. These purchases are also considered to be capital expenses. As indicated in tables 2 and 3, Congress apportioned $283.3 million and $408 million for the New Freedom and the Section 5310 programs, respectively, from fiscal years 2006 through 2009. Similar to the JARC program, the New Freedom and Section 5310 programs are relatively small in comparison with FTA’s regular transit formula programs. Recipients apply separately for funds for each of these programs. In our last evaluation of FTA’s progress—our first report under SAFETEA- LU, issued in November 2006—we noted that, in response to our previous concerns over performance evaluation, FTA was taking steps to further improve its evaluation process, such as revising the JARC performance measures. We also noted that FTA was developing its strategies to evaluate and oversee the program and had not yet issued final guidance to implement JARC, and states were still working to meet the new requirements. At that time, 3 states and 9 out of 152 large urbanized areas had received fiscal year 2006 funds as of the end of that fiscal year; these funds represented less than 4 percent of the fiscal year 2006 JARC funds apportioned to states and large urbanized areas. In our report, we recommended that FTA update its existing oversight processes to include the JARC program and specify how often it will monitor recipients that are not subject to its existing oversight processes. FTA agreed to consider our recommendations and has incorporated oversight provisions for the JARC program into its review processes. FTA also issued final guidance implementing the changes to JARC in May 2007. As part of that guidance, FTA established policies and procedures for agencies to implement the program and established two performance measures to evaluate the performance of JARC projects: number of rides and number of jobs accessed. FTA has awarded 48 percent (about $198.0 million) of JARC funds for fiscal years 2006 through 2008 to 49 states and 131 of 152 large urbanized areas. However, about 14 percent of fiscal year 2006 funds lapsed— primarily in small urbanized areas—for various reasons, including delays in fulfilling administrative requirements under SAFETEA-LU. According to FTA data, recipients plan to use the funds awarded thus far primarily to operate transit services as opposed to capital and other projects. Overall, FTA has awarded almost half of the apportioned $436.6 million available for fiscal years 2006 through 2008 (about 48 percent) to 49 states and 131 of 152 large urbanized areas, as of March 2009. This level represents significant improvement since GAO’s last evaluation of FTA’s progress in 2006, when 3 states and 9 large urbanized areas had received fiscal year 2006 funds. As shown in figure 2, FTA has awarded about $118 million (around 86 percent) of fiscal year 2006 JARC funds, approximately $56.7 million (around 39 percent) of fiscal year 2007, and around $23.2 million (about 15 percent) of fiscal year 2008. The majority of the fiscal year 2006 JARC funds (about 64 percent) were awarded in fiscal year 2008 before the September 30, 2008, deadline. Recipients we spoke with who did not apply for these funds until fiscal year 2008 said they delayed applying partly because of FTA’s delay in issuing guidance and other challenges discussed later in the report. However, about $18.6 million (roughly 14 percent) of fiscal year 2006 funds lapsed and will be reapportioned to all recipients with the fiscal year 2009 JARC funds apportionments. While the largest amount of funds that lapsed were for large urbanized areas (about $10.9 million, or about 13 percent of the amount allocated for those areas), a greater proportion lapsed in small urbanized areas (about $5.2 million, or 19 percent of the amount allocated for those areas). Thirty-three out of 152 large urbanized areas (about 22 percent) allowed a portion of the fiscal year 2006 JARC funds to lapse. While 5 out of the 33 large urbanized areas allowed less than 1 percent of their allocated funds to lapse, about 64 percent of those recipients allowed all of the allocated funds to lapse. For instance, Miami, Florida, allowed all of its appropriated JARC funding—almost $2.8 million—to lapse. For small urbanized areas, 11 states and one U.S. territory had about $5.2 million funds lapse, with 6 states and U.S. territories having the entire allocated funds lapse. Finally, for rural areas, five states and one U.S. territory had about 9 percent (about $2.5 million) lapse. (See app. II for a complete list of areas that allowed fiscal year 2006 funds to lapse.) According to FTA officials, fiscal year 2006 JARC funds lapsed for various reasons. Some areas encountered delays in developing the coordinated public transit human service transportation plan, and did not complete the plans in time to apply to FTA for fiscal year 2006 funds. (The next section of the report discusses these challenges in more detail.) Despite the lapse of fiscal year 2006 funds, FTA is making progress to award the funds remaining for fiscal years 2007 and 2008 before the deadlines at the end of fiscal years 2009 and 2010, respectively. According to FTA, regional and headquarters staff have contacted stakeholders in areas where funds lapsed to explore ways for these communities to use the remaining funds. For example, in March 2009, FTA headquarters and Region 4 staff in Atlanta, Georgia., conducted a conference call with Miami transit providers and MPOs to discuss strategies for the large urbanized area to use its remaining JARC funds. During the call participants agreed to select a designated recipient, finalize coordinated plans, and conduct a competitive selection in time to apply for the area’s fiscal year 2007 JARC funds. As of May 2009, the Governor of Florida has selected a designated recipient and the competitive selection process for JARC projects within the Miami area is underway. As a result of such efforts, FTA has awarded more fiscal year 2007 and 2008 JARC funds, relative to the rate at which it awarded fiscal year 2006 funds. For example, FTA awarded about 3.9 percent of fiscal year 2006 funds in the first year of availability, compared with approximately 5.0 percent and 14.3 percent awarded in the first year of available fiscal years 2007 and 2008 funds, respectively. FTA officials and designated recipients we interviewed attributed the increase in the rate of awarding funds to various factors, including availability of and improvements to the final guidance, overcoming the initial learning curve in implementing the program, and awarding projects on a 2-year funding cycle. FTA expects to award more than 90 percent of fiscal year 2007 funds—slightly more than the 86 percent for fiscal year 2006—before the September 30, 2009, deadline. Recipients have used or plan to use JARC funds primarily to operate or expand existing transit routes in an effort to target low-income populations. Recipients have the discretion to use JARC funds for three types of expenditures: (1) operating assistance to subsidize the cost of operating new or existing transit services, such as staffing, advertising costs, insurance and fuel; (2) capital assistance, such as purchasing vehicles and equipment; and (3) administrative costs. Designated recipients can use up to 10 percent of allocated JARC funds for administrative costs, such as the cost to conduct coordinated planning and competitive selection processes, but have discretion on how to use the remaining allocated amount—whether for operating assistance or capital projects. As shown in figure 3, recipients have used or plan to use about 65.3 percent of fiscal year 2006 funds primarily for operating assistance, compared to about 27.5 percent for capital expenses and 7.2 percent for administrative costs. Many recipients we interviewed are using funds to help cover the cost to operate existing transit routes, or to expand transit services targeted at low-income populations. For example, the Rochester-Genesee Regional Transportation Authority, a designated recipient in a large urbanized area in upstate New York, plans to use JARC funds to operate an existing reverse commute, fixed route service during evenings and on weekends from the city of Rochester to employment locations in outlying suburban areas. Similarly, New Jersey Transit awarded the North Jersey Transportation Planning Authority funds to offset operating costs for its demand response transit service in Bergen County, New Jersey Recipients also plan to use funds to operate other types of transit projects eligible under JARC, such as bicycle loan or auto repair programs. For instance, the Southwestern Wisconsin Community Action Program is currently using JARC funds to operate an auto loan program to assist low- income workers in rural areas in purchasing vehicles for shared rides to work, while the Kenosha Achievement Center in the Kenosha, Wisconsin, small urbanized area is using JARC funds to operate a bike loan program that would provide transportation to jobs for low-income job seekers. Fewer JARC recipients we interviewed plan to use the funds for capital assistance. Although JARC provides up to 80 percent of federal funds for recipients’ capital assistance and 50 percent for operating assistance, recipients noted that the available funding is not generally sufficient to start new services and/or purchase vehicles and equipment—both of which can be costly—and continue operating services after receiving JARC funds. For instance, representatives of a designated recipient in Georgia told us that they would like to establish and operate new bus routes to transport low income workers to a new employment center being developed. The designated recipient was allocated about $192,000 for fiscal year 2006, but officials indicated that this amount would only allow them to purchase one transit bus, which typically costs about $300,000 to purchase and $200,000 per year to operate. The funding would not cover additional buses or sustain operations beyond 1 year. The designated recipient may apply for fiscal year 2007 and 2008 funds but would still have difficulty continuing the routes under current budget constraints in the region. Nevertheless, other recipients we contacted do plan to use JARC funds for capital expenses, such as purchasing a van for a vanpool or a global positioning system to assist in operating a mobility management program. For instance, the Coastal Georgia Regional Development Center plans to use its fiscal years 2006 and 2007 JARC funds to operate 12 regional vanpools that will serve eight passengers per vehicle and provide two trips per day in the southern rural areas of Georgia, while the Lower Savannah Council of Governments plans to use some of its funds to defray the cost of operating a new mobility management program in its rural and small urbanized regions. A few designated recipients also indicated that they plan to use some of their JARC funds to implement such a program. Finally, many designated recipients chose not to use the funds for administrative purposes because they wanted to use the funds for transportation rather than support services. Recipients and local authorities we interviewed cited multiple challenges throughout the process for implementing JARC-funded projects. Although many of these recipients and local authorities have addressed these challenges and have received JARC funding, a common concern we heard is that, overall, the amount of effort required to obtain JARC funds is disproportionate to the relatively small amount of funding available compared to other transit programs. FTA officials are taking steps to address these challenges, and noted that some challenges—such as the amount of funding and flexibility in using JARC funds—are rooted in statute and would need to be addressed by Congress in the next surface transportation reauthorization. Although many designated recipients we interviewed commented that FTA has made progress in implementing JARC, some noted that issues with FTA’s guidance hindered implementation. First, FTA did not issue its final guidance until May 2007, almost 2 years after SAFETEA-LU was enacted in August 2005 and 2 months after FTA initially planned to issue it. As we previously reported, FTA used an extensive public participation process to develop the guidance and received a large volume of public input, partially in response to requests from transit agencies and stakeholders. While this process helped FTA develop the final guidance, it also delayed its issuance. Consequently, FTA’s interim guidance included a “hold harmless” provision stating that the final guidance requirements would not apply retroactively to grants awarded before FTA issued the final guidance. Some designated recipients chose to implement JARC programs using FTA’s interim guidance. Others, however, were hesitant to do so because of uncertainties in interpreting policies and procedures and chose to wait for the final guidance. This ultimately reduced the time available for these recipients to apply for JARC funds appropriated in fiscal year 2006. Second, some JARC recipients found FTA’s interim and final guidance vague and overly broad. Designated recipients noted that the guidance did not provide sufficient specific information on whether a project was eligible for JARC funds or the standards of oversight for subrecipients. Specifically, designated recipients in Arizona, California, and Pennsylvania commented that FTA’s guidance does not provide enough information on overseeing and managing subrecipents. For example, one recipient was unsure of the parameters for funding and monitoring JARC auto loan projects. Recipients were also unsure how to oversee and manage projects that cross boundaries throughout the region, such as large and small urbanized and rural areas. For example, a recipient and subrecipient in Arizona were unsure about how to develop a cost-allocation method for demand response and fixed route projects that operate across large and small urbanized and rural boundaries. An FTA official stated that the guidance was intended to provide a broad framework for implementation and allow states and large urbanized areas flexibility to administer programs that best meet local and regional needs without being overly prescriptive. FTA also noted that the final JARC circular includes examples and detailed lists to supplement the guidance. In addition, some designated recipients and an industry association representative commented that FTA provided inconsistent information. For instance, one FTA regional office required all designated recipients in its jurisdiction to submit locally developed, coordinated public transit- human services transportation plans to verify that project applications for JARC funds were derived from the plans. However, this practice was not consistent with other FTA regions. FTA subsequently directed regional offices to instead rely on JARC applicants’ certification that projects were derived from the plans. They also directed regional offices to confirm that the individual applicants and projects submitted are included in the program of projects required to receive JARC funds. An FTA official acknowledged inconsistent information and interpretation of its guidance among some regional offices and stated that FTA has been using a document entitled “Questions and Answers on the Section 5310, JARC, and New Freedom Programs” posted on its Web site to reduce inconsistencies among regional offices. An FTA official also noted that the agency has periodically taken advantage of its regularly scheduled bi- weekly meetings between headquarters and regional staff to clarify JARC program guidance and to provide additional guidance to regional staff. Some recipients commented that delays in identifying designated recipients in large urbanized areas contributed to delays in awarding fiscal year 2006 funds and implementing transit projects. Some states and large urbanized areas did not identify designated recipients until fiscal year 2008. Moreover, although the majority of designated recipients have been identified, as of September 2009, 5 out of 152 large urbanized areas had not yet identified a designated recipient; these 5 areas allowed fiscal year 2006 funds to lapse. This may be because prospective designated recipients are reluctant to take on the role. Officials with the New York Metropolitan Transportation Authority reported that they did not want to be the designated recipient primarily because they were not sure they could fulfill the requirements with the limited amount of funds available to administer and manage the program. Specifically, SAFETEA-LU allows non-profit agencies to receive JARC funding and FTA requires that designated recipients ensure that subrecipients, which could include non- profit agencies, comply with federal requirements. Some non-profit agencies have not received FTA funds in the past and local officials were not confident these agencies had the financial capability to manage JARC funds and comply with FTA’s requirements. These agency officials expressed concern that they would be held liable if non-profit agencies ultimately did not comply with those requirements. In particular, many New York City transit agencies had these concerns and, as a result, the New York State DOT agreed to become the designated recipient for the New York City portion of the New York-Newark large urbanized area. Concerns about taking on the designated recipient role were not limited to areas without designated recipients. For instance, the Port Authority of Allegheny County, the major transit agency in the Pittsburgh large urbanized area, plans to transfer the designated recipient role to the area’s MPO—the Southwestern Pennsylvania Commission—because the administrative requirements exceeded its capacity and regional jurisdiction. Additionally, 8 states—4 of which we contacted—took on the role of designated recipient for 16 large urbanized areas. According to officials in New York and Wisconsin, the state departments of transportation took on the responsibility primarily because they did not want funds to lapse and local authorities did not want to take on the responsibilities, respectively. For instance, officials with the MPOs in Madison and Milwaukee told us they asked the Wisconsin DOT to be the designated recipient for those large urbanized areas because the state had experience with administering the program under TEA-21 and the MPOs had insufficient resources to take on the responsibilities. Because the process of identifying designated recipients in some areas took more than 2 years after SAFETEA-LU was enacted, it reduced the time available for those areas to conduct a coordinated planning process, develop a coordinated human services transportation plan, conduct a competitive selection process, and apply to FTA for funds before the September 30, 2008, deadline to award fiscal year 2006 funds. Designated recipients that were not identified until fiscal year 2008 were at a particular disadvantage because they had less time to apply for JARC funds. Designated recipients in large urbanized areas in California and Georgia and a subrecipient in Chicago all commented that the process for identifying and selecting designated recipients ultimately delayed applications to FTA for fiscal year 2006 funds and hindered implementing projects. Some recipients indicated that assigning multiple designated recipients to administer and manage JARC funds has resulted in additional steps to administer JARC. Under SAFETEA-LU, state agencies must be the designated recipients for small urbanized and rural areas, while local agencies, such as a major transit agency or MPO, can serve as designated recipients in large urbanized areas. However, the jurisdiction of some local agencies that were selected as designated recipients in large urbanized areas may include small urbanized and rural areas. Specifically, officials in Sacramento, Los Angeles, and San Francisco/Oakland in California, and Phoenix, Arizona, indicated that this infrastructure is disjointed and confusing because states are responsible for rural and small urbanized areas that may also be under the jurisdiction of designated recipients for other FTA programs in large urbanized areas. For example, the Sacramento Area Council of Governments—the MPO and designated recipient for Sacramento—has jurisdiction over the large urbanized area as well as the small urbanized and rural areas in the region for the federally required Transportation Improvement Program. Subrecipients that provide transit services for the large urbanized area as well as rural areas need to apply to both the state and the designated recipient in a large urbanized area to receive funds for the urbanized and rural areas as well as report to both the MPO and state. To facilitate coordination and share resources, some states, such as Arizona and California, have delegated the administration of JARC projects in small urbanized areas to designated recipients in large urbanized areas, while retaining jurisdiction over rural areas. For instance, California delegated the responsibility for conducting a competitive selection process to the Metropolitan Transportation Commission in the San Francisco-Oakland area and the Sacramento Area Council of Governments in Sacramento for small urbanized areas under those agencies’ jurisdiction. While delegating administration of JARC projects in small urbanized areas to designated recipients in large urbanized areas may facilitate coordination, it also results in additional work for designated recipients for both the state and large urbanized areas. As the designated recipient for small urbanized areas, the state is ultimately responsible for all aspects of funding distribution and oversight of subrecipients in those areas. Thus, it must ensure and certify that the statewide competitive selection process resulted in a fair and equitable distribution of funds. Consequently, states may want to review and assess projects for small urbanized areas that were selected as part of the large urbanized area’s competitive selection process to ensure that they were derived from the locally developed, coordinated public transit-human services transportation plan. Some states may want designated recipients for large urbanized areas to apply for small urbanized area funds through the state’s designated recipient, rather than directly to FTA. For instance, a designated recipient for a large urbanized area in California that was delegated responsibility to oversee the competitive selection process for small urbanized areas instructed the agency to send its selected JARC projects to the state for additional review and competition with other small urbanized areas in the state. The state then applied to FTA for funding. This process increased the time and effort to award funds for small urbanized areas. As previously mentioned, a greater proportion of funds lapsed in small urbanized areas, compared to funds allocated to large urbanized and rural areas. Some designated recipients suggested allowing states discretion to select designated recipients for small urbanized and rural areas, rather than requiring the state to take on that role. However, SAFETEA-LU requires that the state be the designated recipient for small urbanized and rural areas. Moreover, although SAFETEA-LU’s formula allocating funds by large and small urbanized and rural area classifications provides funds to areas that had not previously received JARC funds, some designated recipients indicated that the funding allocations between urban and rural areas limited them from distributing funds where they are most needed. Some recipients we contacted would like discretion to use funds where they are most needed in the state and the region. Currently, large urbanized areas receive more funding than small urbanized and rural areas, since the funding formula is based on the population and number of eligible low- income residents. In some cases this may meet needs, but officials from New Jersey Transit commented that transportation needs of New Jersey’s small urbanized and rural areas have been disproportionately affected by the formula, making it difficult to meet the transit needs of small urbanized and rural areas because allocated funds cannot be transferred from large urbanized areas. Additionally, officials from the Oregon Department of Transportation indicated that the state could not transfer funds from its small urbanized areas to its rural areas, even if the state received more applications from rural areas than from small urbanized areas. In another case, officials from the Metropolitan Transportation Commission indicated that they had difficulties awarding JARC funds to potential recipients in Petaluma, California—a relatively wealthy, small urbanized area in northern California—because the area did not have a large concentration of low-income residents and did not qualify for the funds that were allocated to the area. As mentioned earlier, California was one of the states in which funds lapsed for small urbanized and rural areas. Designated recipients in California, New Jersey, and Wisconsin suggested eliminating the urbanized area classifications established in SAFETEA-LU and giving local agencies discretion to allocate funds where they are most needed in the region. According to officials, this would give designated recipients flexibility to transfer funds to areas that may need more funds, such as rural areas with fewer resources than large urbanized areas. Furthermore, designated recipients in large urbanized areas that cross state lines—such as New York City, New York and Newark, New Jersey— had to take additional steps to administer the program. Industry associations noted concerns about how large urbanized areas that crossed state lines would implement changes to JARC. Although the designated recipients in multi-state jurisdictions we interviewed indicated that awarding JARC funds was not as much of an issue as expected, the process did require additional administrative and coordination efforts. For instance, in several multi-state large urbanized areas—like Chicago, Illinois - Northwestern Indiana; Augusta, Georgia -Aiken, South Carolina; and New York City, New York - Newark, New Jersey—the cities in one of the states decided not to apply for or use all of the allocated JARC funding. Specifically, officials in northwestern Indiana, Augusta, and New York City decided not to apply for or use all of the allocated JARC funding. Each of these cities transferred JARC funding to the city in the other state to ensure that the funds would be used. For example, the New York City Metropolitan Transportation Authority decided not to apply because it already provides extensive transit services 24 hours a day, 7 days a week and did not need the relatively small amount of JARC funds available. However, to accomplish this transfer, the designated recipients had to agree on how to split the apportionment and notify FTA annually of the split and the geographic area each recipient would manage. For example, when New York transferred some of the New York City portion of the JARC funds to New Jersey so that it could be used for a project in Newark, officials had to negotiate the formula to use to determine the amount of the funds to transfer to New Jersey for Newark’s use. These negotiations took some time, which subsequently delayed New Jersey Transit’s efforts to award JARC funds in the Philadelphia, Pennsylvania.-Camden, New Jersey area. In another instance, northwestern Indiana was not able to use its JARC funding during the summer of 2008 and transferred the funds to Illinois for Chicago to use. Officials with Chicago’s Regional Transportation Authority stated that they had to quickly identify projects to include in its application so that the funds would not lapse. Many state and designated recipient officials we interviewed considered the coordinated planning process beneficial and worthwhile. Recipients noted that including stakeholders from transit and planning agencies as well as human services agencies provided different perspectives and resources and brought together agencies that traditionally do not work together. As a result, the coordination process helped identify transit service needs and gaps. One planning agency stated that the coordinated planning requirement helped build on efforts it previously had in place because it compelled agencies to work together to receive federal funds and forced them to plan more strategically. However, designated recipients cited multiple factors that challenged coordination efforts: Lack of sufficient funds, resources, and expertise Many designated recipients noted that the limited amount of funds, lack of resources and, in some cases, lack of planning expertise, made coordination difficult: Some designated recipients that used the 10 percent of JARC funds SAFETEA-LU allows for administration and planning commented that the amount is insufficient to cover the cost of planning. For instance, a designated recipient in a large urbanized area in Georgia hired a consultant to conduct the coordinated planning process and develop a plan, but the allowance did not cover the cost of the consultant. In another case, Oregon can use about $59,800—the allowed amount for fiscal year 2006—for administrative purposes. However, officials noted that, in total, the state spent about $400,000 to develop coordinated plans for its 46 local and tribal agencies. Similarly, Arizona obtained a grant from the United We Ride initiative to help defray—but not entirely cover—the cost to develop a coordinated public transit-human services transportation plan for small urbanized and rural areas. Although FTA allows designated recipients to also combine JARC funds with 10 percent of the funds from the New Freedom and the Elderly Individuals and Individuals with Disabilities (commonly referred to as Section 5310) programs, some designated recipients decided not to use the funds for administrative activities because they wanted to use the relatively small amount of allocated funds for transportation services rather than support services. Six of the nine state-level designated recipients we spoke with indicated that rural areas, in particular, have fewer resources and thus find JARC’s coordinated planning requirements more challenging than do large and small urbanized areas. One state official stated that while some rural areas have used Section 5311 rural formula program funds to pay for planning and coordination costs, others that do not receive other FTA funds have no funds available for planning and coordination. In other areas, state budget issues may limit how funds can be used. For instance, Georgia applied to use JARC funds for administrative purposes, but current state budget problems have prohibited funds from being used to hire additional staff to coordinate and develop plans for rural areas. Rural areas in some states do not have a regional planning infrastructure or staff with planning expertise to conduct and develop coordinated public transit-human services transportation plans. For instance, Wisconsin officials indicated that their state does not have a regional rural planning infrastructure because the state develops rural area policies and derives projects from that process. An Illinois official commented that rural areas had never developed public transportation plans before SAFETEA-LU. The state hired planning coordinators to help develop coordinated plans in rural areas because those areas lacked staff with planning expertise. Nevertheless, recipients in other rural areas indicated that the planning process did not present challenges in rural areas, and coordinated planning in rural areas is critical because these areas are isolated and coordination is critical to providing transit services. Despite these concerns, many recipients have developed coordinated public transit-human services transportation plans. These plans will need to be periodically updated. Recipients noted that challenges in coordinating and periodically updating plans will continue, particularly if stakeholders are asked to meet regularly but are not guaranteed to receive funds, given the limited amount of JARC funding available. Recipients indicated that the amount of effort required to coordinate and develop a plan, along with conducting a competitive selection process, is disproportionate to the small amount of JARC funds available. Difficulties in engaging human services agencies Another coordination challenge cited was convincing other organizations, such as human service agencies, to consistently participate in the planning process. While designated recipients encourage stakeholders from human services agencies to participate in the coordination effort, these agencies are not necessarily required to coordinate. Some designated recipients have required these agencies to participate in the coordinated planning process in order to receive funds. However, according to a designated recipient, the relatively small amount of JARC funds does not offer sufficient incentive for some agencies to participate. Some designated recipients suggested that federal agencies, such as the Department of Health and Human Services, that provide and allow funds to be used for transportation services should require grantees to participate in coordinated planning efforts. According to Department of Health and Human Services officials, federal officials are making efforts to increase participation by other organizations, but ultimately, local human services agencies decide whether or not to participate in the coordinated planning process. Officials with FTA and other federal agencies, including the Department of Health and Human Services and the Department of Labor, reported that they have been working through the Federal Interagency Coordinating Council on Access and Mobility to encourage federal grantees to participate in coordinated transportation planning efforts. In 2003, we recommended that federal agencies develop and distribute additional guidance to states and other grantees to encourage coordinated transportation by clearly defining allowable uses of funds, explaining how to develop cost-sharing arrangements for transporting common clientele, and clarifying whether funds can be used to serve individuals other than a program’s target population. While the respective federal agencies have since issued guidance encouraging grant recipients to share resources with local transit and planning agencies through the Federal Interagency Coordinating Council on Access and Mobility, the agencies are still developing a cost sharing policy. However, officials from the departments of Labor and Health and Human Services indicated that local human services agencies may have other competing priorities that limit their ability to coordinate with transit agencies. Difficulties integrating JARC planning requirements with existing planning requirements Additionally, the different requirements between JARC’s coordinated public transit-human services transportation plan and the state and metropolitan transportation plans can result in additional work for designated recipients. For instance, under SAFETEA-LU, states and MPOs are not required to include human services providers as stakeholders in the transportation planning process; states and MPOs are only required to provide stakeholders a reasonable opportunity to comment on the state and metropolitan transportation plans. JARC, on the other hand, requires designated recipients to include human services agencies in the planning process and have a role in developing the coordinated public transit- human services transportation plan. Some designated recipients indicated that integrating human services agency coordination for JARC into existing transportation planning process would help streamline efforts. Designated recipients in four states and four large urbanized areas commented that identifying and generating matching funds has been challenging, particularly for small urbanized and rural areas. Although the state and local match for capital projects—20 percent—is less than the match for operating projects—50 percent—many recipients use JARC funds for operating projects and thus must identify and raise 50 percent of the cost of these projects. Some states, such as California and Pennsylvania, and large urbanized areas such as Chicago, have a dedicated source of funds, such as state or local sales taxes, to match federal transit programs, but other states, such as Georgia, and large urbanized areas— such as Milwaukee and Madison in Wisconsin and Savannah and Augusta in Georgia—do not. Recipients in locations with dedicated sources of matching funds also noted that those sources are not always stable. For example, a designated recipient and subrecipient relying on sales tax revenues dedicated to transit noted decreased sales tax revenues due to the current economic slowdown. Moreover, dedicated sources of matching funds are not always sufficient to cover program costs. For instance, designated recipients in New York urbanized areas have a dedicated tax that can be used for capital expenditures but not for operating projects. In addition, two recipients noted that funds from other federal agencies, such as TANF funds, are increasingly being used for purposes other than transportation, reducing the amount available for use as matching funds for JARC projects. Although some recipients we contacted indicated that the competitive process has been fair and transparent, regional FTA officials and a few designated recipients expressed concern over the lack of competitive JARC projects in some geographic areas. For instance, the designated recipient for the Phoenix large urbanized area noted that it received only one project application for the competitive selection process for fiscal years 2006 and 2007 funds. Some designated recipients noted that competition does not exist in certain areas because some potential subrecipients, particularly nonprofit organizations, cannot meet federal requirements, limiting the number of candidates that can apply for JARC funds. Several designated recipients indicated that nonprofit organizations may not have the capacity to meet federal mandates, such as FTA’s procurement requirements for purchasing vehicles, and/or manage FTA funded projects. Additionally, large transit agencies that had previously received JARC funds are in a better competitive position, which might discourage smaller transit agencies or nonprofit agencies from applying. For instance, Maricopa County’s Special Transportation Services in Phoenix, Arizona, has experience applying for federal funds, as it has historically received JARC funding since 1999, and is in a good position to compete. The agency has the resources available, such as a fleet of shuttle vans that are already in compliance with federal regulations and requirements. On the other hand, according to the designated recipient, a nonprofit agency in Phoenix that was new to the JARC program withdrew its application for funds after determining that it could not comply with federal regulations and the administrative requirements for purchasing vehicles. Several states and designated recipients in large urbanized areas noted that the requirements to manage and administer JARC duplicate those of FTA’s two other relatively small transit programs, New Freedom and Section 5310. Although some designated recipients voiced concerns about consolidating the programs because they serve populations with different needs, others suggested streamlining or consolidating them because they have similar administrative requirements, such as coordinating with human services agencies and developing a coordinated plan. FTA allows designated recipients to streamline and consolidate planning efforts for all three programs. However, some recipients commented that applying for the funds separately for these programs is redundant and time consuming. For instance, a subrecipient in Arizona submitted two identical applications—one for JARC and one for New Freedom—to the designated recipient, which in turn submitted similar applications to FTA for both JARC and New Freedom funds. Designated recipients noted that consolidating JARC with related FTA programs, such as the New Freedom and Section 5310 programs, would lessen the amount of administrative effort required to receive and manage the programs. Transit industry associations have proposed consolidating JARC with other federal transit programs to streamline and eliminate the administrative burden of coordinating and managing various FTA transit programs. AASHTO proposed consolidating JARC with FTA’s urbanized area and rural area formula grants programs and combining the New Freedom program with Section 5310. The American Public Transportation Association proposed consolidating JARC with New Freedom and Section 5310. Both associations indicated that the intent of the proposals is to reduce the programs’ administrative requirements while still maintaining the programs’ intent to provide transportation services to disadvantaged populations. Nevertheless, associations representing elderly and disabled persons, such as the Easter Seals, AARP, and Association of Programs for Rural Independent Living expressed concern that consolidating these programs would jeopardize advances in providing transportation to these populations. Officials from all of the associations—those representing the transportation agencies as well as those representing elderly and disabled persons—agreed that any changes to the JARC, New Freedom, and Section 5310 programs need to ensure that the programs’ intent remains intact. Although FTA has not completed an evaluation of the JARC program under SAFETEA-LU, recipients we spoke with indicated that projects have benefited low-income individuals by providing a means to get to work. FTA has improved its approach for evaluating the program since 2000 and currently has two studies under way to evaluate the JARC program under SAFETEA-LU. However, both studies—one on performance measures and another on the program’s economic impacts—may have limitations that could affect FTA’s assessment of the program. Although FTA’s evaluations of the JARC program are not yet complete, many designated recipients and subrecipients believe that the program is beneficial because it has helped people access and maintain jobs. State and local officials that we interviewed cited numerous examples in which projects benefited individuals because they provided a means for them to get to work. Officials noted that, without the transportation that JARC services provided, these individuals would not have been able to obtain and maintain jobs. For example, officials in Milwaukee, Wisconsin, noted that JARC bus routes provided 96,000 rides during a 6-month period, suggesting that many people were using the routes to get to jobs or job training. Similarly, in New Jersey, surveys of individuals who use JARC services indicated that 70 percent of them could not get to work without the transportation services being provided. Despite these individual experiences, however, designated recipients and other state and local officials agreed that JARC projects funded under SAFETEA-LU have not been in effect long enough to determine the projects’ impact. Any evaluation of the projects would also have to consider program costs, such as the time and effort designated recipients and others invest to implement the program and comply with its requirements. FTA has contracted with CES and TranSystems—which have been evaluating the JARC program since 2003—to further develop and improve the performance measures established in FTA’s final JARC guidance in May 2007. The current performance measures include the number of rides on JARC-funded projects and the number of jobs accessed. Designated recipients will report data on JARC projects to CES and TranSystems in May 2009. These data will likely include projects funded under SAFETEA- LU, as most of the projects implemented under SAFETEA-LU were awarded in fiscal year 2008. FTA officials anticipate a report in September 2009. However, limitations inherent in the performance measures could affect the usefulness of this evaluation: Actual or estimated number of rides (as measured by one-way trips): According to designated recipients and other state and local agency officials we spoke with, determining the number of rides to access jobs presents challenges because individuals use fixed route services for many reasons in addition to traveling to work, including shopping and medical appointments. For example, for projects that provide bus service to shopping malls, determining whether people are traveling to reach jobs at the malls, shop, or go to restaurants is difficult. In addition, CES and TranSystems noted that anyone can use these services, not just low-income populations. Although transit agency officials noted that people are not comfortable providing information on their income, FTA officials noted that they are not asking designated recipients to report the number of riders served or the incomes of these riders. FTA officials also noted that because SAFETEA-LU requires that JARC projects be derived from a coordinated plan identifying priorities to meet the transportation needs of low-income individuals traveling to employment or related activities, they believe they can presume that projects serve predominantly low-income populations. Nevertheless, because anyone can use JARC services, FTA will not know with certainty whether the targeted population is using the services to find work or better paying jobs. Number of jobs accessed: Although FTA does not plan to have designated recipients provide information on the number of jobs accessed, CES and TranSystems representatives, designated recipients, and other local officials we spoke with expressed concerns about determining the number of jobs accessed. They noted that assessing this performance measure is difficult because many designated recipients and local agencies do not have the information necessary to determine the number of jobs accessed in a given area by people using JARC services. Even if agencies could determine the number of jobs accessed, agencies would likely calculate it differently, resulting in inconsistent information. For example, while one official indicated his agency could survey riders, others indicated they would estimate the number of jobs accessed based on employment data or the number of businesses in the area. FTA officials and CES and TranSystems representatives explained that, rather than ask designated recipients to provide the number of jobs accessed, they intend to request that designated recipients provide data on the geographical areas in which they provide JARC services. For fixed route projects, designated recipients will provide information on the geographic area surrounding the length of the route. For demand response services, designated recipients will provide the geographic area—such as the state or county—in which the service is provided. CES and TranSystems will use this information to estimate the number of jobs accessed. CES and TranSystems officials noted that, in some cases, the actual number of jobs accessed is known. For example, a subrecipient in Ohio provides transportation that only serves temporary employees traveling to jobs in a manufacturing plant. Consequently, the provider knows the number of jobs being accessed and can report that number rather than information on the geographical area. In addition to limitations in the performance measures, the method to estimate the number of jobs accessed has limitations. CES and TranSystems plan to use the geographic data to calculate a very rough estimate of the number of jobs accessed. CES and TranSystems will use a Census Bureau program, the Longitudinal Employer-Household Dynamic (LEHD), to estimate the number of jobs accessed by calculating the number of jobs in a given geographical area. For example, for fixed route services, CES and TranSystems will estimate the number of jobs within a ½-mile “zone” along the route, i.e., ¼-mile on either side of the route. For demand response services, CES and TranSystems will estimate the number of jobs within a geographical unit, such as the county in which a service is provided. According to CES and TranSystems officials, this approach only estimates the number of jobs accessed at a national level and cannot be used to estimate the number of jobs at a state or local level. This approach has other limitations: The LEHD program does not include information from all 50 states. As of September 2008, 47 states supplied data. Of those, 42 were included in the program. For demand response services, CES and TranSystems can estimate the total number of jobs and low-wage jobs within specific geographic boundaries, such as a county or state. However, if the demand response service area does not correspond directly to specific geographic units, job information is not available. FTA officials acknowledged these limitations and noted that CES and TranSystems have been working with FTA to improve the quality of the jobs accessed measure. Specifically, CES and TranSystems noted that this performance measure actually estimates the potential number of jobs, which overstates the number of jobs accessed. Consequently, CES and TranSystems developed two alternatives: translating ridership into jobs reached by assuming that individuals make round trips when traveling for work-related purposes, and dividing the number of trips by two; and comparing theoretical capacity to jobs accessed by determining the number of individuals who could be served and dividing by two (again assuming round trips). CES and TranSystems noted that each of these approaches have advantages and disadvantages. For example, while the first alternative directly translates ridership into jobs, it also assumes that all riders are traveling to jobs, which is not realistic. Moreover, it does not consider that different people use services on different days. As a result, the estimates could misstate the number of jobs accessed. The second approach, which compares theoretical capacity to jobs accessed, considers the transit system’s capacity. However, CES and TranSystems acknowledge that this approach may not be realistic as services are not necessarily filled to capacity while in operation. Although these approaches attempt to address the weaknesses of the current efforts to estimate jobs accessed, they could still misstate the extent to which the target population benefits from the JARC program. CES and TranSystems have also developed measures for other JARC services allowed under SAFETEA-LU that cannot be measured using the number of riders and number of jobs accessed, such as informational services and capital projects. CES and TranSystems are using a matrix to capture key information regarding the projects such as the number of requests for information services mobility managers received or the number of additional vehicles purchased. The second study, conducted under contract with the University of Illinois at Chicago (UIC), will focus on analyzing the economic impact of the JARC program using data from a survey of JARC service users, program managers, and coordinated human services transportation plan participants. As of May 2009, researchers were in the process of finalizing the survey instruments for this study. FTA expects UIC to issue a report in the spring of 2010. According to FTA officials and UIC researchers, the survey design and analysis for the planned 2010 report will use a methodology similar to a June 2008 survey-based economic analysis that UIC conducted on JARC outcomes under TEA-21. In the 2008 study, the researchers estimated the benefits and costs associated with the program. Potential benefits of the JARC program include higher paying jobs that participants may gain as a result of being able to travel to areas with better paying jobs. Potential costs include those associated with operating the program. However, we noted several limitations in the 2008 study, including weaknesses in the design of the survey as well as the analysis of data obtained from the survey. Although all surveys are potentially subject to sources of error, the researchers did not use standard practices that would help minimize these sources of error when developing and implementing the survey used in the 2008 report. This limitation could affect the reliability of the survey data used to estimate the economic impacts. Specifically, the researchers may have overstated the benefits to the target population. For example, the survey estimates were reported as if they were based on a probability sample and were generalizable to the population that the JARC program targets. However, the estimates were not based on a probability sample and, therefore, should not be generalized. In addition, they did not disclose this fact or take it into account when developing overall economic impacts. According to FTA officials, the researchers were careful to not generalize the results of their survey research. While the report does note that generalizing the results is difficult, the report made several conclusions that, as written, appear to apply to the population of JARC users as opposed to the survey sample. For example, the report concluded that employment transportation services are providing valuable services to users and that those services are being appropriately targeted. In addition, the report indicates that the individuals using the services are greatly dependent on them, and that the benefits to the users are high and likely to persist over time. However, the report does not qualify the results to clarify that they apply only to the users surveyed. Without this qualification, the report appears to extend the results to all users, which would be inappropriate because the users surveyed were not selected as part of a probability sample. The absence of this qualification thus limits the usefulness of their assessment. In addition, the researchers did not consider the need to qualify the results when developing overall economic impacts. In addition, the survey used in the 2008 study is subject to nonsampling errors, including coverage error, non-response error, and measurement error: The 2008 survey is subject to coverage error, which results when all members of the survey population do not have an equal or known chance of being sampled for participation. Standard practice is to note to whom and when the surveys are disseminated. For example, if the transportation system providing JARC services operates 24 hours a day, researchers would have to survey across all days and time frames. Otherwise, individuals using the service on days and times that researchers do not survey would have a zero chance of being selected. The researchers indicated that they rode the selected services for 6 to 12 hours so they could cover at least one if not both rush-hour periods and, where appropriate, they also rode during off- peak hours including late night and early morning. In addition, researchers said that in a few cases they administered surveys over multiple days to ensure that they surveyed a sufficient number of respondents. However, the researchers did not include in the study a detailed sampling plan that would fully explain how coverage issues were addressed. As a result, the extent of coverage error is unknown, and the 2008 survey results should not be generalized to all JARC users. The 2008 survey also suffers from nonresponse error, which results when people responding to a survey differ from sampled individuals who did not respond, in a way that is relevant to the study. Standard practice to minimize this type of error includes using a systematic sampling approach when disseminating surveys and noting, to the extent possible, who is not participating, to see if non-respondents differ from respondents. For the June 2008 study, UIC researchers indicated that they boarded buses and developed a rapport with some riders. However, the researchers acknowledged that not all riders were willing to complete the survey. In addition, the study does not identify the survey response rate and did not consider potential differences between respondents and nonrespondents. Without this information, the extent to which the estimates are biased is unknown. Finally, the wording for the questions used in the 2008 survey may have resulted in inaccurate or uninterpretable responses. In general, standard practice includes pretesting and technical review of the instrument before administering to help minimize measurement error. Although the researchers indicated that they pretested the survey instrument and made changes based on the pretests and believed that the pretest was thorough, we found obvious weaknesses in the survey instrument. For example, we found that some response categories in the survey were not mutually exclusive or exhaustive, questions appeared ambiguous, and instructions for responding were not clear. Collectively, we believe that these potential sources of error raise questions about the validity of the survey data as it was used to estimate the economic effect of the JARC program in the 2008 study. We found similar limitations in the draft survey instrument that the researchers have proposed to use for the 2010 study and provided specific technical review feedback to FTA and the researchers regarding these limitations. FTA officials indicated that the researchers had made numerous changes that incorporated our comments as well as the results of pretests and their own internal reviews. We also identified limitations in the economic analysis used to estimate the benefits and costs of the JARC program in the June 2008 study. For example, the researchers used a before-and-after approach to analyze the benefits and costs. That is, the program was analyzed in terms of its effect on individuals (for example, on changes in earnings) before and after using the service. However, this approach does not indicate what would have happened without the program. For example, an individual’s earnings may have increased over time even without the program. The researchers said that because they implemented the survey just after the JARC service started, they believe they primarily captured the program’s effects. The researchers also indicated that they plan to refine the survey questions for the next study to more precisely capture the program’s effect and exclude significant life events that might also affect an individual’s earnings. In addition, the researchers found that, overall, the net benefits of the program are positive. However, when analyzing more specific aspects of the program, such as the benefits and costs of fixed route and demand response services, the researchers reported that the program’s net benefits are negative. The researchers attribute this conflicting result to their use of averages in computing net benefits and indicated that they used averages to smooth out irregularities in the survey responses. For example, the study indicates that the survey data had a wide distribution with some large positive and negative values (for example, some survey respondents may have lost higher-paying jobs before using the JARC service and took a lower-paying job after using the service.) However, the extent to which the reported irregularities in the survey data are reasonable differences in responses between riders or are due to the survey limitations discussed above is not clear. In addition, the reported economic results make it difficult to ascertain whether the program is generating positive net benefits and whether it is an efficient use of society’s resources. The researchers acknowledged some of these limitations and indicated they have taken steps to improve their research design for the current study, such as incorporating changes into their survey instrument. They also indicated that they plan to make other improvements. We believe that changes to address the limitations could improve the usefulness of the results in assessing the economic effect of the JARC program. Nevertheless, FTA does not have a comprehensive process in place to ensure that evaluations of the impact of the JARC program use generally accepted survey design and data analysis methodologies. Although FTA officials indicated that an FTA economist reviewed the researchers’ proposed data collection and evaluation methodology at the beginning of the project, FTA did not review the draft report. FTA officials indicated that they did not have the expertise to do so and noted that another entity—such as the Bureau of Transportation Statistics within DOT’s Research and Innovative Technology Administration—would need to assist with this type of evaluation. Since the study was published in 2008, FTA officials said that the results did not inform FTA’s decisions about how to implement the JARC program. However, FTA indicated that the results of the study as well as other evaluations contribute to discussions on the program’s future. FTA has made progress in awarding JARC funds since Congress passed SAFETEA-LU in 2005, although FTA’s delay in issuing final guidance and other challenges contributed to a lapse in some fiscal year 2006 funds. Now that the final guidance has been issued and recipients have had experience implementing the program, the expectation is that more fiscal year 2007 and 2008 funds will be awarded to implement more projects, and accordingly, less funds will lapse in the future. Recipients have faced several challenges in implementing JARC. A message we consistently heard from designated recipients and subrecipients is that the requirements for the current program are extensive considering the relatively small amount of funding available. Although FTA and recipients are becoming accustomed to the new formula program and its requirements—which could lessen the severity of these challenges in the future—recipients told us that they continue to face challenges in a number of circumstances, such as when: designated recipients for large urbanized areas have jurisdiction over small urbanized and/or rural areas and when the service provided by an individual transit provider overlaps two or more of these areas; designated recipients are responsible for ensuring that organizations that do not traditionally receive FTA funding comply with FTA requirements; local agencies, particularly those in rural areas, have limited staff, funding, and/or expertise needed to update coordinated public transit-human services transportation plans; and JARC requirements duplicate the requirements for other programs, such as New Freedom and Section 5310. The results of FTA’s evaluations of the JARC programs under SAFETEA- LU may have limitations that could affect FTA’s assessment of the program. FTA’s current performance measures—number of rides and number of jobs accessed—have limitations that could misstate the program’s performance. FTA’s ongoing study of JARC’s economic outcomes, conducted by UIC, may also have limitations if it utilizes the same survey design and data analysis methodology used in UIC’s June 2008 study of the JARC program under TEA-21. While FTA does not have the expertise to review the methodologies used in these studies, other entities, such as the Bureau of Transportation Statistics within DOT’s Research and Innovative Technology Administration, could assist with this review. Recognizing that FTA has improved its evaluation approach over time and that the JARC program is relatively small compared with FTA’s regular transit formula programs, drawing on this expertise within DOT could provide additional assurances that the methodologies used in the evaluations follow generally accepted survey design and data analysis practices without expending significant additional resources. We recommend that the Secretary of DOT direct the FTA to: Determine what actions FTA or Congress could take to address the challenges agencies have encountered. For example, these actions could include providing more specific guidance to assist large urbanized areas with jurisdiction over small urbanized or rural areas, or suggesting that Congress consider consolidating the application processes for JARC and other programs with similar requirements. Ensure that program evaluations use generally accepted survey design and data analysis methodologies by conducting a peer review of current and future program evaluations, including UIC’s current study of the JARC program. This review could be conducted with the assistance of another agency within DOT, such as the Bureau of Transportation Statistics within DOT’s Research and Innovative Technology Administration. DOT reviewed a draft of this report and provided comments by e-mail requesting that we incorporate information providing additional perspective on FTA’s progress in implementing the JARC program, including its evaluations of the program, which we have done. For example, DOT officials noted that FTA’s current evaluation framework responds to prior GAO concerns by using an access to jobs measure rather than an access to employment sites measure. We agree that FTA’s current methodology for evaluating the JARC program—although still limited in some respects—represents an improvement over the agency’s previous approaches and that the agency has been responsive to GAO’s prior concerns. DOT also provided technical corrections, which we have incorporated as appropriate. We are sending copies of this report to congressional committees with responsibility for transit issues; the Secretary of Transportation; the Administrator, Federal Transit Administration; and the Director, Office of Management and Budget. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-2834 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. We are mandated to evaluate the Job Access and Reverse Commute (JARC) program every 2 years under the Safe, Accountable, Flexible, Efficient Transportation Equity Act-A Legacy for Users (SAFETEA-LU). This report addresses (1) the extent to which FTA has awarded available JARC funds for fiscal years 2006 through 2008 and how recipients are using the funds since the changes went into effect under SAFETEA-LU, (2) the challenges recipients have faced in implementing the program, and (3) how FTA plans to evaluate the JARC program. To determine the extent to which FTA awarded available JARC funds, we collected and analyzed JARC grants award data from FTA’s Transportation Electronic Awards Management (TEAM) System. To assess the reliability of TEAM data, we (1) reviewed existing documentation related to the data source and (2) obtained information from the system manager on FTA’s data reliability procedures. We also brought discrepancies we found in the data to FTA officials’ attention so they could resolve them before we conducted our analyses. We determined that the data were sufficiently reliable for the purposes of our report. To examine how recipients have used JARC funds since SAFETEA-LU went into effect, we interviewed 26 designated recipients—9 states and 17 agencies representing large urbanized areas—and 16 subrecipients that were selected from a nonprobability sample. Table 4 lists the 26 designated recipients and table 5 lists the 16 subrecipients we interviewed. We collected and reviewed information from these recipients on the different types of JARC projects being planned or implemented, including demand response and fixed route transit services, auto loan projects, mobility management services, and vanpool services. We selected the designated recipients based on a diverse range of criteria that included states and large urbanized areas that: received an increase or a decrease in JARC funds as a result of changing to the formula program; were previously interviewed for our November 2006 report; had awarded all or portions of fiscal year 2006 funds, as of May 2008; had not identified a designated recipient as of May 2008; and FTA and industry association officials suggested. We also chose large urbanized areas that crossed multiple states and considered the geographic locations of states and large urbanized areas to obtain a wider range of geographic coverage and dispersion. We selected subrecipients that covered the three types of areas that were apportioned JARC funding under SAFETEA-LU—large and small urbanized as well as rural areas—and were based on recommendations from designated recipients. These interviews cannot be generalized to the entire JARC recipient and stakeholder population because they were selected from a non-probability sample. To identify the challenges recipients have encountered in implementing the program, we interviewed officials from our selected non-probability sample of designated recipients and subrecipients as well as 19 stakeholders, such as metropolitan planning organizations and local public transit agencies, to obtain their views on challenges associated with implementing the JARC program. Table 6 lists the 19 stakeholders we interviewed. In addition, we interviewed the applicable FTA regions responsible for the states and large urbanized areas we visited to obtain their perspective on challenges identified in the region. We also interviewed officials from industry associations, including the American Association of State Highway and Transportation Officials (AASHTO), the American Public Transportation Association, the Community Transportation Association of America, and the National Association of Regional Councils to identify challenges faced by the agencies these associations represent. Our interviews with AASHTO included discussions with officials from state departments of transportation from California, Illinois, Iowa, New York, North Dakota, Oregon, and Texas. We summarized our interview responses to identify common challenges in implementing the program. We also reviewed relevant laws and regulations, including SAFETEA-LU and FTA’s final guidance on administering JARC, and other FTA information, such as the Frequently Asked Questions document posted on FTA’s Website, to clarify the guidance. To identify challenges faced by human services agencies associated with the coordinated human services transportation planning process, we interviewed officials from the U.S. Department of Labor and U.S. Department of Health and Human Services. Additionally, we interviewed officials of associations representing the elderly and disabled, including Easter Seals, AARP, the Association of Programs for Rural Independent Living, and North Country Independent Living to obtain their perspectives on consolidating JARC with other FTA transit programs, such as the New Freedom, Elderly Individuals and Individuals with Disabilities, and urbanized and rural area programs. To determine how FTA plans to evaluate the JARC program, we reviewed previous evaluations and interviewed officials from FTA and two contractors, TranSystems/CES and the University of Illinois at Chicago (UIC), that are evaluating the JARC program. For each evaluation, we assessed the contractors’ scope and methodology. Specifically, for the TranSystems/CES evaluation, which focuses on JARC performance measures, we determined the contractor’s plans to collect and analyze data on JARC projects. We also interviewed designated recipients, subrecipients and other state and local officials to obtain their perspectives on FTA’s JARC performance measures. For the UIC evaluation, which focuses on JARC’s economic impact and outcomes, we reviewed UIC’s June 2008 evaluation of the JARC program under TEA-21 using standard survey and economic principles and practices as criteria, and interviewed UIC researchers to identify similarities and differences between UIC’s methodologies for the prior and current studies and the implications those methodologies could have on UIC’s current evaluation. We also reviewed and assessed the survey document UIC used on the prior evaluation as well as the survey documents UIC plans to use in the current study and provided feedback to the researchers. Lapsed Amount (percent) Aguadilla-Isabela-San Sebastian, Puerto Rico $ 530,843 (100%) Daytona Beach-Port Orange, Florida Philadelphia, Pennsylvania-New Jersey-Delaware- Maryland 406,084 (100%) 238,265 ( 74.9%) 14,105 (18.8%) 191,671 (100%) 149,168 (30.6%) 136,539 (100%) 18,975 (12.4%) 152,079 (100%) 154,803 (100%) 116,718 (100%) 118,352 (100%) 296,056 (100%) 188,181 (100%) 125,080 (100%) 2,798,658 (100%) 307,613 (52.5%) 110,760 (100%) 162,591 ( 100%) 156,161 (7.2%) Port St. Lucie, Florida 134,102 (100%) 138,244 (100%) Lapsed Amount (percent) 108,520 (100%) 292,557 (90.0%) 347,894 (33.9%) 3,175,710 (100%) 178,704 (100%) 130,784 (100%) $10,879,217 (76.8%) $10,879,217 (13.3%) Small urbanized areas in the state $1,050,607 (36.9%) 47,028 (100%) 51,652 (100%) 18,627 (2.8%) Total allocated to small urbanized areas 250,000 (31.5%) 142,431 (100%) 37,708 (100%) 426,704 ( 83.1%) 550,122 (63.1%) 2,571,505 (100%) 1,535 (1.2%) 97,515 (100%) $5,245,434 (59.8%) $5,245,434 (19.2%) Lapsed Amount (percent) Non-urbanized, rural areas in the state 880,209 (63.2%) Total allocated to non-urbanized rural areas 60,739 (100%) 312,252 (57.1%) 862,267 (62.6%) 354,265 (100%) $2,469,732 (66.2%) $2,469,732 (9.0%) Other key contributors to this report were Sara Vermillion (Assistant Director), Lynn Filla-Clark, Kathleen Gilhooly, Timothy Guinane, Jennifer Kim, Heather May, Jaclyn Nelson, Karen O’Conor, Lisa Reynolds, Terry Richardson, and Amy Rosewarne. | Established in 1998, the Job Access and Reverse Commute Program (JARC)-administered by the Federal Transit Administration (FTA)--awards grants to states and localities to provide transportation to help low-income individuals access jobs. In 2005, the Safe, Accountable, Flexible, Efficient Transportation Equity Act--A Legacy for Users (SAFETEA-LU) reauthorized the program and made changes, such as allocating funds by formula to large and small urban and rural areas through designated recipients, usually transit agencies and states. SAFETEA-LU also required GAO to periodically review the program. This second report under the mandate examines (1) the extent to which FTA has awarded JARC funds for fiscal years 2006 through 2008, and how recipients are using the funds; (2) challenges faced by recipients in implementing the program; and (3) FTA's plans to evaluate the program. For this work, GAO analyzed data and interviewed officials from FTA, nine states, and selected localities. FTA is making progress in awarding funds and has awarded about 48 percent of the $436.6 million in JARC funds apportioned for fiscal years 2006 through 2008 to 49 states and 131 of 152 large urbanized areas. Recipients plan to use the funds primarily to operate transit services. However, about 14 percent of fiscal year 2006 funds lapsed. According to FTA officials, these funds lapsed for several reasons. For example, some applicants did not meet administrative requirements in time to apply for funds. FTA officials are working with states and localities to reduce the amount of funds that lapse in the future. Recipients plan to use 65 percent of fiscal year 2006 funds to operate transit services, 28 percent for capital projects, and 7 percent for administrative costs. States and local authorities GAO interviewed cited multiple challenges in implementing the JARC program; a common concern is that, overall, the effort required to obtain JARC funds is disproportionate to the relatively small amount of funding available. One challenge cited by recipients was that FTA's delay in issuing final guidance and the process to identify designated recipients reduced the time available to secure funds before the funds expired. In addition, although recipients considered the coordinated planning process beneficial, many cited factors that hindered coordination, including lack of resources and the reluctance of some stakeholders to participate. Moreover, although the JARC program requires human service providers to be included as stakeholders, other transportation planning requirements do not, complicating the coordinated planning process. Some designated recipients also expressed concerns about identifying stable sources of matching funds and duplicative efforts in administering JARC with other FTA programs. These challenges have delayed applications for funds and project implementation, and contributed to the lapse in fiscal year 2006 funds. Although FTA has not completed an evaluation of the JARC program under SAFETEA-LU, recipients we spoke with indicated that projects have benefited low-income individuals by providing a means to get to work. Since 2000, FTA has refined its approach for evaluating the program and currently has two studies under way to evaluate the JARC program under SAFETEA-LU. However, both studies may have limitations that could affect FTA's assessment of the program. One of these studies--due in September 2009--will evaluate projects using FTA's performance measures; specifically, the number of rides provided and number of jobs accessed. However, collecting reliable data for these measures is problematic, particularly for the number of jobs accessed. The other study--due in the spring of 2010--will include results of a survey of JARC recipients and individuals using JARC services and will focus on the program's impact on those using the services. However, this study will use a methodology similar to that used in a prior study which had limitations in the survey instrument design and data analysis. FTA does not have a comprehensive process in place to assess whether its researchers use generally accepted survey design and data analysis methodologies. |
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Treasury created CPP to help stabilize the financial markets and banking system by providing capital to qualifying regulated financial institutions through the purchase of preferred shares and subordinated debt. Rather than purchasing troubled mortgage-backed securities and whole loans, as initially envisioned under TARP, Treasury used CPP investments to strengthen the capital levels of financial institutions. Treasury determined that strengthening capital levels was the more effective mechanism to help stabilize financial markets, encourage interbank lending, and increase confidence in the financial system. On October 14, 2008, Treasury allocated $250 billion of the original $700 billion, later reduced to $475 billion, in overall TARP funds for CPP. In March 2009, the CPP allocation was reduced to $218 billion to reflect lower estimated funding needs, as evidenced by actual participation rates. On December 31, 2009, the program was closed to new investments. Institutions participating in CPP entered into securities purchase agreements with Treasury. Under CPP, qualified financial institutions were eligible to receive an investment of 1 percent to 3 percent of their risk-weighted assets, up to $25 billion. In exchange for the investment, Treasury generally received preferred shares that would pay dividends. As of the end of 2014, all the institutions with outstanding preferred share investments were required to pay dividends at a rate of 9 percent, rather than the 5 percent rate that was in place for the first 5 years after the purchase of the preferred shares. EESA requires that Treasury also receive warrants to purchase shares of common or preferred stock or a senior debt instrument to further protect taxpayers and help ensure returns on the investments. Institutions are allowed to repay CPP investments with the approval of their primary federal bank regulator, and after repayment, institutions are permitted to repurchase warrants on common stock from Treasury. Treasury continues to make progress winding down CPP. As of December 31, 2016, Treasury had received repayments and sales of original CPP investments for more than 97 percent of its original investment. For the life of the program, repayments and sales totaled almost $200 billion (see fig.1). In 2016, institutions’ repayments totaled about $25 million. Moreover, as of December 31, 2016, Treasury had received about $227 billion in returns, including repayments and income, from its CPP investments, which exceeds the amount originally disbursed by almost $22 billion. Income from CPP totaled about $27 billion, and included about $12 billion in dividend and interest payments, almost $7 billion in proceeds in excess of costs, and about $8 billion from the sale of warrants. After accounting for write-offs and realized losses from sales totaling about $5 billion, CPP had about $0.2 billion in outstanding investments as of December 31, 2016. Investments outstanding represent about 0.1 percent of the amount Treasury disbursed for CPP. Treasury’s most recent estimate of lifetime income for CPP (as of Sept. 30, 2016) was about $16 billion. As of December 31, 2016, 696 of the 707 institutions that originally participated in CPP had exited the program (see fig. 2). A total of 6 institutions exited CPP in 2016. Among the institutions that had exited the program, 262 repurchased their preferred shares or subordinated debentures in full. Another 165 institutions refinanced their shares through other federal programs. In addition, 190 institutions had their investments sold through auction, 43 institutions had their investments restructured through non-auction sales, and 32 institutions went into bankruptcy or receivership. The remaining 4 merged with other CPP institutions. The method by which institutions have exited the program has varied over time. From 2009 through 2011, a total of 336 institutions exited the program. During this 3-year period, most institutions exited by fully repaying the investment or by refinancing the investment through another program. From 2012 through 2016, a total of 360 institutions exited the program. During this 5-year period, most institutions exited by Treasury selling the investment through an auction, repaying the investment to Treasury, or restructuring the investment. Repayments. Repayments allow financial institutions to redeem their preferred shares in full. Institutions have the contractual right to redeem their shares at any time provided that they receive the approval of their primary regulator(s). Institutions must demonstrate that they are financially strong enough to repay the CPP investments to receive regulatory approval to proceed with a repayment exit. As of December 31, 2016, 262 institutions had exited CPP through repayments. Restructurings. Restructurings allow troubled financial institutions to negotiate new terms or discounted redemptions for their CPP investment. Treasury requires institutions to raise new capital from outside investors (or merge with another institution) as a prerequisite for a restructuring. With this option, Treasury receives cash or other securities that generally can be sold more easily than preferred stock, but the restructured investments sometimes result in recoveries at less than par value. According to Treasury officials, Treasury facilitated restructurings as an exit from CPP in cases where new capital investment and the redemption of the CPP investment by the institutions otherwise was not possible. Treasury officials said that they approved the restructurings only if the terms represented a fair and equitable financial outcome for taxpayers. Treasury completed 43 such restructurings through December 31, 2016. Auctions. Auctions allow Treasury to sell its preferred stock investments in CPP participants. Treasury conducted the first auction of CPP investments in March 2012, and has continued to use this strategy to sell its investments. As of December 31, 2016, Treasury had conducted a total of 28 auctions of stock from 190 CPP institutions. Through these transactions, Treasury received over $3 billion in proceeds, which was about 80 percent of the investments’ face amount. As we have previously reported, thus far Treasury has sold investments individually but noted that combining smaller investments into pooled auctions remained an option. Whether Treasury sells CPP investments individually or in pools, the outcome of this option will depend largely on investor demand for these securities and the quality of the underlying financial institutions. As of December 31, 2016, 11 institutions remained in CPP (see fig. 3). The largest outstanding investment, about $125 million, accounted for almost two-thirds of the outstanding CPP investments. The investments at the 10 other institutions ranged from about $1.5 million to $17 million. As figure 4 illustrates, Treasury’s original CPP investments were scattered across the country in 48 states and Puerto Rico and the amount of investments varied. Almost 4 percent (25) of the investments were greater than $1 billion and almost half (314) of the investments were less than $10 million. The largest investment totaled $25 billion and the smallest investment totaled about $300,000. The 11 institutions that remained in CPP as of December 31, 2016 were in Arkansas, California (2), Colorado, Florida, Kentucky, Maryland (2), Massachusetts, Missouri, and Puerto Rico. Treasury officials said that they expect the majority of the remaining institutions will require a restructuring to exit the program in the future because the overall weaker financial condition of the remaining institutions makes full repayment unlikely. However, they added that repayments, restructurings, and auctions all remain possible exit strategies for the remaining CPP institutions. Since we last reported in May 2016, Treasury continues to maintain its position of not fully writing off any investments. Treasury officials anticipate that the current strategy to restructure the remaining investments will result in a better return for taxpayers. According to officials, any savings achieved by writing off the remaining CPP assets and eliminating administrative costs associated with maintaining CPP would be limited, because much of the TARP infrastructure, such as staff resources, will remain intact for several years to manage other TARP programs. Treasury officials also noted that writing off the remaining assets, thereby not requiring repayment from the remaining institutions, would be unfair to the institutions that have already repaid their investment and exited the program. Treasury officials told us that they continue to have discussions with institutions about their plans to exit the program. Overall, the financial condition of institutions remaining in CPP as of December 31, 2016, appears to have improved since the end of 2011. As shown in figure 5, the median of all six indicators of financial condition that we analyzed improved from 2011 to September 30, 2016. However, some institutions show signs of financial weakness. As figure 5 illustrates, the median for the first three financial condition indicators—Texas ratio, noncurrent loan percentage, and net chargeoffs to average loans ratio—have decreased, which indicates stronger financial health. The median for the remaining three financial condition indicators—return on average assets, common equity Tier 1 ratio, and reserves to nonperforming loans—have increased, which also indicates stronger financial health. However, some institutions show signs of financial weakness. For example, 5 of the 11 institutions had negative return on average assets for the third quarter of 2016. Six institutions had a lower return on average assets for the third quarter of 2016, compared to the third quarter of 2011. The remaining institutions also had varying levels of reserves for covering losses, as measured by the ratio of reserves to nonperforming loans. For example, 4 institutions had lower levels of reserves for covering losses for the third quarter of 2016 compared to the third quarter of 2011. For 1 institution, four of the financial indicators had weakened from the third quarter of 2011 to the third quarter of 2016. Treasury officials stated that the remaining CPP institutions generally had weaker capital levels and poorer asset quality relative to institutions that had exited the program. They noted that this situation was a function of the life cycle of the program, because stronger institutions had greater access to new capital and higher earnings and were able to exit, while the weaker institutions had been unable to raise the capital or generate the earnings needed to exit the program. Of the remaining 11 CPP institutions as of December 31, 2016, 1 of the 9 required to pay dividends made the most recent scheduled dividend or interest payment. The 8 institutions that are delinquent have missed an average of 28 quarterly dividend payments, with 19 being the fewest missed payments and 32 being the most. Institutions can choose whether to pay dividends and may choose not to pay for a variety of reasons, including decisions they or their federal or state regulators make to conserve cash and capital. However, investors may view an institution’s ability to pay dividends as an indicator of its financial strength and may see failure to pay as a sign of financial weakness. Treasury officials told us that Treasury regularly monitors all institutions remaining in the program. For example, Treasury’s financial agent has provided quarterly valuations and credit reports for all of the institutions remaining in the CPP portfolio. In addition, Treasury has requested to attend the Board of Directors meetings at nine of the remaining institutions and has observed meetings at eight institutions. One institution has declined Treasury’s request. Treasury officials said that the agency currently does not plan to take any other actions with respect to its request to send a board observer to that institution but will continue to monitor the institution’s financial condition. As discussed previously, Treasury officials told us that they have continued to have discussions with institutions remaining in the program. We provided Treasury with a draft of this report for review and comment. Treasury provided technical comments that we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Treasury, and other interested parties. 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 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. In addition to the contact named above, Karen Tremba (Assistant Director), Anne Akin (Analyst-in-Charge), William R. Chatlos, Lynda Downing, Risto Laboski, John Mingus, Tovah Rom, Jena Sinkfield, and Tyler Spunaugle have made significant contributions to this report. | CPP was established as the primary means of restoring stability to the financial system under the Troubled Asset Relief Program (TARP). Under CPP, Treasury invested almost $205 billion in 707 eligible financial institutions between October 2008 and December 2009. CPP recipients have made dividend and interest payments to Treasury on the investments. The Emergency Economic Stabilization Act of 2008, as amended, includes a provision that GAO report at least annually on TARP activities and performance. This report examines (1) the status of CPP, including repayments, investments outstanding, and number of remaining institutions; and (2) the financial condition of institutions remaining in CPP. To assess the program's status, GAO reviewed Treasury reports on the status of CPP. In addition, GAO reviewed information from Treasury officials to identify the agency's current efforts to wind down the program. Finally, GAO used financial and regulatory data to assess the financial condition of institutions remaining in CPP. GAO provided a draft of this report to Treasury for its review and comment. Treasury provided technical comments that GAO incorporated as appropriate. The Department of the Treasury (Treasury) continues to make progress winding down the Capital Purchase Program (CPP). As of December 31, 2016, investments outstanding stood at almost $0.2 billion (see figure), which represents about 0.1 percent of the original amount disbursed. Treasury had received almost $200 billion in repayments, including about $25 million in 2016. Further, Treasury's returns for the program, including repayments and income, totaled about $227 billion, exceeding the amount originally disbursed by almost $22 billion. Of the 707 institutions that originally participated in CPP, 696 had exited the program, including 6 institutions in 2016. Treasury officials expect that the majority of the remaining institutions will require a restructuring to exit the program. Restructurings allow institutions to negotiate terms for their CPP investments. With this option, Treasury requires institutions to raise new capital or merge with another institution and Treasury agrees to receive cash or other securities, typically at less than par value. Treasury officials expect to rely primarily on restructurings because the overall weaker financial condition of the remaining institutions makes full repayment unlikely. The financial condition of the institutions remaining in CPP as of December 31, 2016, appears to have improved since the end of 2011, but some institutions show signs of financial weakness. For example, 5 institutions had negative returns on average assets (a common measure of profitability) for the third quarter of 2016. |
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DOD faces a number of long-standing and systemic challenges that have hindered its ability to achieve more successful acquisition outcomes, such as ensuring that DOD personnel use sound contracting approaches and maintaining a workforce with the skills and capabilities needed to properly manage the acquisitions and oversee contractors. While the issues encountered in Iraq and Afghanistan are emblematic of these systemic challenges, their significance and effect are heightened in a contingency environment. For example, in 2004, we raised concerns about DOD’s ability to effectively administer and oversee contracts in Iraq, in part because of the continued expansion of reconstruction efforts, staffing constraints, and the need to operate in an unsecure and threatening environment. Similarly, we reported in July 2007 that DOD had not completed negotiations on certain task orders in Iraq until more than 6 months after the work began and after most of the costs had been incurred, contributing to its decision to pay the contractor nearly all of the $221 million questioned by auditors. In 2008, we reported that not having qualified personnel hindered oversight of contracts to maintain military equipment in Kuwait and provide linguistic services in Iraq and questioned whether DOD could sustain increased oversight of its private security contractors. The contract closeout process includes verifying that the goods or services were provided and that all final administrative steps are completed, including an audit of the costs billed to the government and adjusting for any over- or underpayments on the final invoice. To close a contract, DOD must complete a number of tasks, including making final payment to the contractor, receiving a release of claims from the contractor, and deobligating excess funds, among other tasks (see fig. 1). A contract is eligible to be closed once the contract is physically complete, which is generally when all option provisions have expired and the contractor has completed performance and the government has accepted the final delivery of goods or services in the form of a receiving report or the government has provided the contractor a notice of complete contract termination. From this point, contracts should be closed within time frames set by the FAR—6 months for firm-fixed price contracts and 36 months for cost-type contracts and time and materials contracts. Additional time is allowed for the closeout of these latter contract types as the contracting officer and DCAA may need to ensure any incurred costs are allowable, allocable, and reasonable. Additional time is also needed to set the final indirect overhead rates, which determine, in part the contractor’s final payment on cost-type contracts. When the contract completion statement, also known as the DD 1594, is signed by the contracting officer, the contract is considered closed and contract documents can be stored and retained. A contract not closed within the FAR time frames is considered to be over age for closeout and increases an organization’s exposure to a number of financial issues. If contract closeout does not take place in a timely manner and funds are not deobligated when currently available, the agency loses the use of those funds for new obligations. Even if funds are expired when they are deobligated, the agency can still use them for up to 5 years after they expire to pay for authorized increases to existing obligations made from the same appropriation. Any funds remaining after the 5-year period are considered canceled and must be returned to Treasury. If closeout does not take place until after they are canceled, and the agency identifies a need for the government to pay the contractor for an unanticipated cost, the government must use other funds that are currently available. Additionally, the risk of late payments to contractors increases when contracts are not closed within required time frames and in turn may result in the government paying interest. Further, the longer an organization waits to close a contract the more difficult it becomes to identify and recover improper payments to contractors. In addition, closing a contract years after the performance is complete can be more time consuming because key documentation, such as invoices and receiving reports, and contracting personnel with first-hand knowledge of the contract may no longer be available. DOD does not have visibility into the total number of its Iraq contracts eligible for closeout, but our analysis of available data indicates that relatively few of these contracts will be closed within the time frames prescribed by the FAR. C3, which awarded the majority of the Iraq contracts, did not have sufficient internal controls to ensure its contracting data were accurate and complete, and was further affected by limitations of its contracting systems, turnover in contracting personnel, and other competing demands. In 2009, to help reduce the backlog of contracts to be closed, C3 transferred 66,760 Iraq contracts and 14,336 contracts in which a place of performance was not specified to the Task Force. As it was unclear how many of these contracts were closed before being shipped, Task Force personnel are in the process of reviewing each contract and, as appropriate, closing any open contracts. As of April 2011, however, over 54,000 of these contracts still needed to be reviewed. DOD officials noted that record keeping generally improved for C3’s firm-fixed price contracts awarded after fiscal year 2008. C3 also improved visibility of its large, cost-type contracts awarded between fiscal year 2003 and 2010 after delegating contract administration, including closeout responsibilities, to DCMA Southern Europe in 2008. Based on available data provided by C3 and the other DOD contracting organizations we reviewed, there are at least an additional 4,298 Iraq contracts—90 percent of which are already over age—that need to be closed. C3 and its predecessor organizations awarded the majority of DOD’s contracts to support reconstruction and stabilization efforts, yet weak internal controls, turnover in contracting personnel, and competing demands contributed to incomplete or inaccurate information that hindered management oversight of its contracting activities, including whether it was meeting FAR closeout requirements. DOD officials noted C3 did not have a contract writing and management information system in Iraq between 2003 and 2008, which contributed to the use of multiple manual databases. Each regional contracting center awarded manually written contracts and documented contract actions on independent spreadsheets. C3 and Army officials noted some of the challenges with manually written contracts included duplicate or inaccurate contract numbers and inaccurate period of performance dates. They also noted that each regional contracting center maintained and managed its contract data on spreadsheets differently as there was not an Iraq-wide standard for how to maintain contract data and that data input was often unverified. These contract documentation challenges were exacerbated by the constant turnover of contracting personnel and the command’s emphasis on awarding contracts to support the warfighter. Additionally, C3 and Army officials said that an unknown number of contracts were never input into C3’s database and could not be accounted for because contract files were lost, damaged, or destroyed. Our analysis of C3’s data on its Iraq contracts found at least 55,000 contracts were recorded as being awarded between fiscal years 2003 and 2008, but we determined that the data had numerous discrepancies. These discrepancies, which included missing or invalid period of performance and physical completion dates as well as invalid or duplicative contract numbers, affect the data needed to maintain visibility on the contracts eligible to be closed. Army officials acknowledged that the contract information reflected in C3’s database through fiscal year 2008 was unreliable for determining the actual number of contracts it awarded or which contracts were eligible to be closed. Consequently, the Army underestimated the total number of contracts that the Task Force needed to close. In 2008, the Army estimated that the Task Force would need to close approximately 24,000 contracts awarded by C3 in Iraq and Afghanistan from 2003 to 2008, but the Task Force recorded that C3 sent it 103,693 contracts (see table 1). Our analysis of the Task Force’s data indicates that C3 transferred at least 66,760 Iraq contracts, including approximately 8,500 more contracts awarded between fiscal years 2003 and 2008 than what was reflected in C3’s database. Additionally, the Task Force inventoried another 14,336 contracts for which the place of performance was not specified. Army officials stated that C3 had closed some of these contracts before sending the files to the Task Force, but acknowledged that the C3 data did not accurately reflect which contracts were closed. Therefore, the Army required Task Force personnel to review each contract and close those that remain open. Army officials stated, however, that there have been no attempts to reconcile the C3 contracting data with the Task Force’s findings. The extent to which the contracts that have not yet been reviewed by Task Force personnel and will need to be closed is uncertain, in part, because some that were reportedly closed by C3 still required contract administration. For example, Task Force personnel stated that contracts sometimes included a signed DD 1594 even though the contracts still required administrative actions. To improve the management of its contracts, C3 began using the Standard Procurement System in fiscal year 2009. Both Army and C3 officials stated that the Standard Procurement System had better quality control checks to generate valid contract numbers with automated prompts requiring contracting personnel to insert required data fields, such as period of performance, at the time of award. These officials also said that the quality control checks improved the completeness and quality of C3’s data and provided better insight needed to manage the contract closeout process. Army officials said that once the Standard Procurement System was deployed in Iraq, the regional contracting centers were able to transmit data back to Army locations in the United States which could be used to run automated reports on contracts closed, eligible for closeout, and over age for closeout. Army and C3 officials acknowledged that while the data improved, C3 continued to identify problems with the data input by contracting personnel. In a July 2010 memorandum, C3 directed its personnel to take actions to improve the overall quality, accuracy, and timelines of C3’s contracting actions. For example, it identified specific data fields, including those that help to determine a contract’s eligibility for closeout, that personnel are required to capture in C3’s data systems. C3 obtained better visibility of its firm-fixed price contracts awarded in fiscal years 2009 and later as well as their large, cost-type contracts. C3’s data on these firm-fixed price contracts indicates that C3 closed over 9,600 of its Iraq contracts awarded between fiscal years 2009 and 2010. Similarly, DOD officials indicated that C3 had better visibility of its large, cost-type contracts awarded between fiscal years 2003 and 2010, in part because it generally delegated contract administration for these contracts, including closeout responsibilities, to DCMA Southern Europe in 2008. DCMA officials reported that when it accepted C3’s cost-type contracts, the files were in generally poor condition and missing documents. DCMA officials reported, however, that they devoted the resources necessary to collect missing information for these contracts and developed their own data to manage the closeout of these contracts and task orders. Our analysis of these firm-fixed price and cost-type contracts indicates that 97 percent were over age as of May 2011 (see table 2). ACC-RI, AFCEE, and USACE officials indicated that the use of existing contracting systems at the onset of military operations in Iraq provided them better visibility into the number of contracts they had awarded to support efforts in Iraq. Agency officials acknowledged, however, that they sometimes encountered challenges with using their existing systems. For example, USACE officials noted that the standard reports used to determine which Iraq contracts needed to be closed were initially inaccurate because period of performance or physical completion dates were not correctly entered into their contracting systems. As a result, USACE officials found in March 2011 that USACE’s closeout reports underestimated the number of contracts eligible and over age for closeout due to inaccurate period of performance dates. USACE revised its reports using period of performance dates from other data sources, which identified that 639 contracts were eligible to be closed, more than 300 contracts than its initial report reflected. Similarly, AFCEE’s data indicate that the period of performance ended for 154 of its Iraq contracts but the data did not reflect whether final goods and services had been delivered and whether the contract was physically complete. Our analysis indicates that the period of performance ended at least 3 years ago for 37 of these contracts, but AFCEE personnel stated that they cannot close these contracts until they receive final documentation that the goods and services have been delivered. Overall, we estimate that about 66 percent of these organizations’ 907 eligible contracts are over age (see table 3). Our analysis of data provided by these contracting organizations reflects a higher percent of eligible firm-fixed price contracts that are over age compared to eligible cost-type contracts, in part due to the longer period of time allowed by the FAR to close out cost-type contracts. For example, our analysis indicates that about 81 percent of the firm-fixed price contracts eligible to be closed were over age compared to approximately 40 percent of eligible cost-type contracts. Nevertheless, these organizations have closed few of their cost-type Iraq contracts. For example, USACE data indicate that it had closed 7 of its 77 Iraq cost-type contracts and AFCEE had closed just 10 of its 239 Iraq cost-type contracts awarded since 2003. DOD’s ability to close the contracts it awarded to support efforts in Iraq is hindered by several factors, including the failure to plan for or emphasize the need to close these contracts until reconstruction efforts were well underway, staffing shortfalls, and contractor accounting issues. DOD did not plan for or focus on closing its Iraq contracts until 2008, in part because DOD’s contingency contracting policy and guidance do not emphasize the need to plan for contract closeouts during the early stages of a contingency operation. DOD has taken steps to reduce the number of firm-fixed price contracts it needs to close, but ACC-RI has not been able to hire enough personnel to replace Task Force personnel during the transition of closeout responsibilities, which has slowed these efforts. Similarly, efforts to close its large, cost-type contracts is hindered by staffing shortages at DCAA and unresolved issues with contractors’ cost accounting practices that preclude completing the necessary audits of the contractors’ incurred costs. As a result, DOD is unlikely to close 226 cost- type contracts with over $19.1 billion in obligations in the near future. DOD contingency contracting doctrine and policy do not specifically include closeout as part of the advanced planning for a contingency operation. Since 2006, a contract support integration plan annex termed Annex W—which provide details on the contractor support required during a contingency, including the military’s organizational requirements needed to acquire and oversee such support—has been required to be in DOD’s most detailed operation plans. In October 2008, DOD established its first doctrine to standardize guidance for planning, conducting, and assessing operational contract support integration, contractor management functions, and contracting command and control in support of joint operations in its Joint Publication 4-10, Operational Contract Support. In part, this doctrine provides guidance for contingency contracting requirements that should be planned for within the Annex W. While it states that an Annex W should outline all activities necessary to execute contract support integration requirements in an operational area, it does not specifically direct DOD commands to determine an approach for closing contracts in advance or even during the initial stages of a contingency operation. Joint Publication 4-10 advises that contracts be closed as performance is completed, consistent with the requirements established in the FAR, but makes no reference for the need to plan for the resources needed to close contracts within required time frames. Instead, contract closeout is described as part of the redeployment and contract termination phase, the fourth and final operational phase of a contingency. In 2009, DOD issued a template for planners to use when developing Annex Ws and plans to incorporate the template into planning policy. The template does not, however, specifically call attention to the need to plan for the closeout of contracts. Furthermore, in March 2010, we reported that few of the operation plans approved by the Secretary of Defense or his designee even included an Annex W and when they did, those annexes restated broad language from DOD’s high-level guidance on operational contract support. The contracting organizations included in our review generally did not conduct any planning to close the contracts they awarded to support operations in Iraq until several years after the contracts were initially awarded. DOD officials noted that the department initially assumed that post-conflict stability and reconstruction efforts would not last for an extended period and as such, any organization that awarded contracts to support these efforts would close contracts under the organization’s standard processes. Officials acknowledged that as these efforts continued and the level of contracting activity increased, C3’s predecessors attempted to close contracts as time and resources permitted, but did not develop a plan needed to do so. For example, The Army did not develop a plan to close its Iraq contracts until 2008, long after reconstruction efforts were underway in Iraq. According to the Army, the 2007 Gansler Commission report’s finding that only 5 percent of eligible Iraq contracts were closed prompted the Army to begin planning for and taking steps to address the backlog of over- age Iraq contracts. To do so, in October 2008, the Army established the Task Force and delegated responsibility to DCMA Southern Europe to close a number of C3’s cost-type contracts. According to USACE personnel, they began focusing on contract closeouts after the Army identified that the Army had more than 660,000 over-age contracts as of January 2009 and established a goal to close all of its over-age contracts by the end of fiscal year 2011. In January 2011, USACE established a contract closeout cell in Winchester, Virginia. AFCEE personnel, with 96 over-age Iraq contracts, stated they have not developed an Iraq contract closeout plan and continue to close these contracts as part of their routine contracting activities. AFCEE personnel stated, however, only two contracting personnel are assigned to closing the Iraq contracts and do so only when time and other responsibilities permit. DOD officials also noted that the need to focus limited staff resources on fulfilling urgent requirements in support of the war effort, and other contingency-related challenges, contributed to the backlog of contracts to be closed. One senior Army official noted that as there were not enough contracting officers in theater to handle both awards and closeouts, the command focused its attention on awarding contracts. Similarly, C3 and USACE contracting personnel we spoke with stated that they were responsible for awarding, administering, and closing contracts, but to meet urgent requirements, they prioritized contract awards over other activities. In addition, an Army official noted that contracting personnel have little incentive to close contracts, as their success is often measured by contracts awarded. Contracting personnel who are responsible for closing contracts stated, however, that emphasis on timely contract closeout is especially important in a contingency environment because the longer the time from when the contractor completes its work and when the contract is closed, the more difficult it becomes to determine the status of contracts, resolve documentation and administration issues, obtain a release of claims, and negotiate final payments. For example, To close a $16.8 million guard services contract, contracting personnel in Iraq described the process of determining how payments were made as “putting together pieces of a puzzle.” Personnel stated that they spent several weeks identifying what the contractor billed and was paid by reviewing invoices, contract modifications, and e- mails. Similarly, contracting personnel in Iraq stated that resolving an overpayment of over $500,000 has delayed the closeout of another $17 million guard services contract. The contracting officer who awarded and administered the contract was no longer in Iraq when the contracting personnel began closing the contract. These personnel stated that they relied on e-mails in the contract file and obtained payment information from DFAS to determine the extent to which the contractor was overpaid and are awaiting further guidance from DFAS on what steps are needed to recover funds from the contractor. Task Force personnel noted that while closing a $1.3 million contract for life support services, they found that there was no documentation in the contract file to explain why services were not performed at three camp sites listed in the contract. The contractor told Task Force personnel that he was instructed not to perform the services but was never provided anything in writing. Task Force personnel noted that the contractor then refused to sign the release of claims, so personnel unilaterally deobligated the remaining funds on the contract to close the contract. According to one senior C3 official, contracting officers sometimes relied on documents provided by the contractor to resolve claims because they were not maintained in the contract files. In one instance, while closing a vehicle lease contract, C3 personnel stated that they found 149 damage claims for vehicles, but oversight personnel often did not keep records or pictures of the condition of the vehicles when they were picked up and dropped off by the contractor. The contracting personnel stated that they are coordinating with the payment office and resource managers but said that it may not be possible to locate someone who can verify or dispute the claims. Task Force personnel stated that they often needed to perform routine contract administration tasks on contracts, including reconciling payments and obligations, acquiring receiving reports, contacting contractors in theater to obtain invoices and release of claims, and piecing together incomplete contract files to provide reasonable assurance that the government received what it paid for and the contract could be closed. Task Force personnel illustrated some of the challenges they often encounter in the following two examples: In one case involving the closeout of a $55 million contract for shotguns, goggles, and radios, Task Force personnel stated that they had to reconcile payments against nine different task orders because payments were not made to the correct task orders, including one lump-sum payment for $8 million that did not correspond to any task order, and the contract was missing receiving reports and payment documents. Task Force personnel contacted DFAS to determine how much should have been paid on the task order and verified payments through a data system. Task Force personnel eventually closed all of the task orders between March and December 2010. During the closeout of another contract for $101,000 to lease buses from an Iraqi contractor, Task Force personnel found that the contractor was not paid for 1 month of service and not compensated for damages to two of the buses. After contacting DFAS and determining that there were enough funds on the contract to cover the missing payment and repair costs, Task Force personnel notified the payment office to make a final payment to the contractor. Task Force personnel were able to close the contract after the contractor was paid and a release of claims was received. C3 has taken steps to reduce the number of firm-fixed price contracts it needs to close, but difficulties with hiring ACC-RI personnel have slowed these efforts. The Army and C3 initially established the Task Force to address the backlog of C3’s firm-fixed price contracts awarded before fiscal year 2009 and planned at that time to close any contracts awarded in fiscal year 2009 and later in theater. To ensure the contracts remaining in theater were closed, a senior C3 official established closeout goals in October 2010 and required each regional contracting center to appoint personnel responsible for completing contract closeout. While Army data indicate that progress was made in closing contracts in Iraq, C3 officials told us that closeout goals were tracked informally and acknowledged that some regional contracting centers were unable to meet these goals. By February 2011, the Army changed its strategy and decided that when the Task Force is shut down in September 2011, all C3 contracts, including those awarded after fiscal year 2009, would eventually be transferred to ACC-RI for closeout. According to C3’s commanding general, this decision was made because ACC-RI has a workforce that can handle complex contract actions and has expertise in southwest Asia contracting. By June 2011, the Army had transferred about 15,000 Iraq and Afghanistan contracts awarded between fiscal years 2008 and 2010 from the Task Force to ACC-RI. According to the Army, ACC-RI personnel are in the process of inventorying these contracts and identifying which are closed or require additional administration. Army officials stated that they are reviewing ACC-RI closeout procedures and data collection efforts to ensure Army data are accurate and complete. During this transition period, ACC-RI has not been able to hire the number of individuals it estimated it needed to manage the anticipated workload and the number of contracts reviewed and closed by the Task Force has fallen considerably. According to Army officials, ACC-RI will need to hire 25 individuals by the time it fully assumes the Task Force’s responsibilities. Army officials stated that ACC-RI has experienced challenges hiring contracting personnel in part due to potential applicants’ hesitation to accept these positions, which are term positions that expire by October 2012. Army officials stated as of June 2011, ACC-RI had only hired 4 staff but efforts are underway to hire additional personnel. Until these positions can be filled, other ACC-RI personnel are temporarily supporting the closeout efforts. In addition, in July 2011, the ACC-RI issued a task order for contract closeout support to AbilityOne, which provides job opportunities on federal contracts for individuals who are blind or have other disabilities. According to one ACC-RI official, ACC-RI plans to hire nine AbilityOne employees under this contract. It remains uncertain, however, when the Army will be able to review and, as necessary, close the contracts that remain at the Task Force. Similarly, Army officials stated that the Task Force’s capacity to close contracts has decreased, as 10 of its 25 staff have resigned in advance of the Task Force’s planned closure. During the week of September 3, 2010, the Task Force closed 439 contracts but by the week of June 9, 2011, the Task Force only closed 267 contracts. DOD’s efforts to close its large, cost-type contracts are hindered by staffing shortages at DCAA and unresolved issues with contractors’ cost accounting practices. DOD reported that it had 226 over-age, cost-type Iraq contracts with approximately $19.1 billion in obligations (see table 4). A critical step to closing these contracts is to determine how to allocate a contractor’s general administrative and overhead costs to each of its contracts. To do so, DCAA performs annual incurred cost audits on a contractor-by-contractor basis—versus a contract-by-contract basis—by reviewing incurred cost proposals from the contractor for each year of performance. DCAA auditors test direct and indirect costs to determine whether they are allowable, allocable, and reasonable. The direct and indirect costs form the basis for DCAA’s recommended indirect cost rate, which is usually used by the contracting officer to negotiate a final rate with the contractor. When the indirect cost rate for the final year of contract performance is settled and the final price of the contract is determined, contract closeout may proceed. DOD’s cost-type contracts related to Iraq often spanned multiple years and as such DCAA must complete incurred cost audits for each year of performance. For example, on one contract with performance from 2004 through 2008 and 5 divisions of the contractor claiming costs, DCAA is required to complete 25 audits of costs incurred, one for each year of performance per division. DCAA, however, is still completing audits for this contractor for costs incurred in 2004 and 2005, with audits of the remaining years scheduled for 2011 and after. DCAA officials told us that this condition is due in part to a DCAA-wide shortage of auditors. DCAA data indicates that from fiscal years 2000 to 2011, its workforce grew by 16 percent while DOD research and procurement spending, an indicator of DCAA’s workload, increased by 87 percent. In addition, DCAA officials stated that in response to GAO’s finding in 2009 on problems with DCAA’s audit quality, including insufficient testing of contractors’ support for claimed costs, DCAA now requires more testing and stricter compliance with government auditing standards, which adds to the amount of staff time required to complete each audit. DCAA officials stated that as their workload increased and resources remained relatively constant, auditors prioritized time-sensitive activities, such as audits to support new awards, and incurred cost audits were not completed, creating a backlog. In planning for its fiscal year 2011 workload requirements, DCAA determined that it had the resources to complete only about half of its entire portfolio of required audits and activities, including both Iraq and non-Iraq work. As a result, DCAA prioritized its high-risk audits, which included the backlog of incurred audits for C3’s 106 over-age, cost-type contracts. As of July 2011, DCAA reported that of the 116 incurred cost audits needed to close these C3 contracts, it had completed 27 audits and estimated another 19 audits will be completed by the end of fiscal year 2011. The remaining 70 audits are planned to be completed after fiscal year 2011. DCMA contracting officials responsible for closing C3’s cost-type contracts stated that regardless of whether DCAA completes the 19 audits as planned, none of the C3 contracts can be closed by the end of fiscal year 2011 because most of the contractors claimed costs through 2008 or 2009, and the audits will only be completed for costs incurred mostly through 2004 and 2005. Further, there are an additional 31 AFCEE over-age cost-type contracts that will not have final incurred cost audits completed before the end of fiscal year 2011. To address its resource challenges, DCAA officials reported that it hired over 500 new employees in the past 2 years. DCAA has also requested authority to hire 200 auditors per year over each of the next 5 years. DCAA officials noted, however, that it often takes several years before auditors are properly trained to conduct an incurred cost audit. In addition, in January 2011, DOD issued a memorandum that shifted some audit responsibilities, such as lower dollar price proposal audits and purchasing system reviews, to DCMA to allow DCAA to devote more resources to high-risk work, like the incurred cost audits needed to support the closeout of Iraq contracts. DCAA officials also stated that they plan to dedicate additional auditors to solely focus on conducting incurred cost audits in fiscal year 2012. DCAA has identified a number of deficiencies at major defense contractors, which provided support in Iraq, that need to be resolved before the incurred cost audits can be completed. These deficiencies include accounting practices that are not compliant with cost accounting inadequate incurred cost proposals and cost documentation; inadequate contractor business systems; standards, leading to misallocation of costs; delays in providing DCAA access to needed records; disputes with contractors over unallowable costs; and other challenges, such as those due to ongoing litigation. The following examples illustrate the challenges that DCAA reported for several contractors. Due to inadequate incurred cost proposals, DCAA has completed incurred costs audits only through 2003 for one major Iraq contractor that incurred costs through 2010. In total, DOD has $15.3 billion in obligations on over-age, cost-type Iraq contracts awarded to this contractor. DCAA reported that it issued the 2003 incurred cost audit 5 years after the costs were incurred, in part because the contractor repeatedly submitted inadequate incurred cost proposals and did not provide adequate support for costs (see fig. 2). Further, DCAA officials stated that the incurred cost proposals submitted by the contractor for 2004 through 2009 are inadequate but will continue its audits of the 2004 and 2005 proposals. Additionally, DCAA reported that this contractor had deficient accounting systems, unresolved issues associated with unallowable costs, noncompliant accounting practices, and legal investigations that further delayed incurred cost audits. In 2006, DCAA reported that the contractor had significant deficiencies in its accounting system that resulted in the contractor charging over $370 million to incorrect task orders from 2002 to 2004, requiring reclassification of costs to the proper task orders. The reclassifications were completed in January 2005. Then, in 2009 and 2010, DCAA found over $185 million in unallowable costs that are pending negotiations with DCMA and settlement of contractor claims. In 2010, DCAA auditors found the contractor did not comply with the cost accounting standard associated with insurance costs, which resulted in an estimated $1.6 million in costs that were misallocated. DCAA reported that the contractor did not respond to DCAA’s finding because it had not completed its management review of the allocated costs. Further, according to the auditors, DCAA’s incurred cost audit reports could be delayed as the auditors coordinate the issuance of audit reports with various investigative agencies. DCAA auditors do not expect to complete the 2004 and 2005 incurred cost audits for this contractor before the end of fiscal year 2011. In May 2011, the contractor withdrew its 2006 through 2009 incurred cost proposals and stated that it plans to delay its submission of the 2010 incurred cost proposal until November 2011. For another major contractor, DCAA identified that the contractor’s accounting practices were not compliant with cost accounting standards. DOD has $316 million in obligations on over-age, cost-type Iraq contracts awarded to this contractor with performance between 2004 and 2009. DCAA reported in 2006 that the contractor’s accounting practices did not sufficiently remove unallowable costs from a cost proposal, which DCAA auditors stated put additional onus on them to test whether the costs were allowable. In one case, DCAA auditors found the contractor had included over $500,000 in bonuses to senior executives in the incurred cost proposal, even though these costs are expressly unallowable under law. The contractor disagreed with DCAA’s findings but agreed to remove these costs from its proposal. As of July 2011, DCAA has completed 5 of the 18 incurred cost audits required to close the contracts. DCAA identified deficient subcontract management systems, disputes over unallowable costs, and challenges with access to records as contributing to delays in completing incurred cost audits for another contractor. DOD has $212 million in obligations on over-age, cost-type Iraq contracts awarded to this contractor. In 2005, 2006, and 2009, DCAA auditors reported significant deficiencies in the contractor’s subcontract management system that resulted in potential unreasonable and unallowable costs being billed to the government, subcontracts being awarded noncompetitively, and inadequate price analysis. As a result, DCAA auditors had to audit the subcontractors’ costs, even though doing so is generally the prime contractor’s responsibility. The contractor generally disagreed with DCAA’s findings but stated it would evaluate and revise its procedures where necessary to comply with DCAA’s recommendations. In addition, in 2010 and 2011, DCAA auditors reported the contractor had over $22.5 million in unallowable subcontract costs, some of which have been appealed by the contractor and some of which are being settled by DCMA. Finally, in 2010, DCAA auditors repeatedly requested but were denied access to support for the 2006 incurred cost proposal, including a $2.3 million procurement file. DCAA reported that its auditors requested the data over a period of 5 months and stated that when the contractor provided the data, they were still inadequate in supporting the claimed costs. DCAA auditors stated as a result, it deemed those costs as unallowable for reimbursement. DOD has taken steps to address the challenges with auditing contractors’ incurred costs. For example, effective June 2011, the FAR was revised to list the minimum information that contractors must include for proposals to be adequate to address the delays resulting from inadequate incurred cost proposals. Also, to improve its oversight of contractor business systems, DOD revised the Defense Federal Acquisition Regulation Supplement in May 2011 to more clearly define contractor business systems, including accounting, estimating, and purchasing, and to allow payments to be withheld from contractors if their business systems contain significant deficiencies. DOD has taken steps to identify unspent contract funds and recover improper payments, but limited visibility into its contracts has hindered such efforts. For example, DOD has deobligated some funds to make them available to meet other DOD needs, but there remains at least $135 million that will potentially not be available for use by DOD at the end of fiscal year 2011. DOD generally cannot identify to which contracts these funds are associated. Additionally, instances of improper payments and potential fraud were sometimes found years after final deliveries were made, but contracting personnel may not be able to recover funds owed to the government. DOD prioritizes deobligating funds that may potentially be returned to Treasury at the end of each fiscal year so these funds would be available for other DOD uses. DOD contracting organizations, however, have varying degrees of visibility into the amount of funds remaining on their Iraq contracts. Contracting organizations we met with generally could not identify the total and unliquidated obligations associated with their Iraq contracts, in part because the systems used to track contracting information were not linked with systems used to track financial and payment data. Similarly, DOD resource managers, who are responsible for maintaining information on the availability of funding, tracked unspent funds at the appropriation level but did not always have such information on a contract-by-contract basis. DOD estimates that at least $135 million in contract funding could return to Treasury by the end of fiscal year 2011 if not deobligated but there may be additional funds not yet identified (see table 5). C3, AFCEE, and USACE contracting organizations generally do not track unspent funds that could be returned to Treasury on a contract-by- contract basis. As a result, resource management personnel stated they are responsible for notifying contracting personnel of these funds. Resource management personnel, however, reported that identifying the appropriate contracting personnel can be time-consuming and labor- intensive, in part because of the rapid turnover of contracting personnel, which often caused the contact information listed in the data systems to be invalid. Contracting personnel stated that once they were aware that funds may be potentially returned to Treasury, they took steps to prioritize deobligating these funds, including checking whether there were pending invoices or claims requiring payments. For example: C3 did not maintain visibility of unspent funds at the contract level, in part due to limitations in its contracting and financial management systems, but available data indicate that DOD may lose $18.6 million for its use and which will be returned to Treasury at the end of fiscal year 2011. While C3 officials noted that some contracting officers may have tracked unspent funds for contracts for which they were responsible, we found that C3’s contracting data systems did not maintain such financial data. After being delegated closeout responsibility for C3’s large, cost-type contracts, DCMA Southern Europe undertook efforts to manually track unspent funds on a contract-by-contract basis. DCMA personnel reported that $15.0 million of funds that could be returned to Treasury remained on C3’s cost-type contracts as of May 2011, but anticipated having most of these funds deobligated by the end of July 2011. Similarly, without visibility into which firm-fixed price contracts had unspent funds, Task Force personnel focused their efforts on reviewing C3 contracts awarded in fiscal year 2006 to deobligate funds but told us they do not believe they will be able to close all of these contracts before these funds are returned to Treasury. Resource managers at U.S. Army Central—which manages the funds associated with C3’s contracts—stated they believe that, as of June 2011, $3.6 million on these contracts will potentially be returned to Treasury. AFCEE contracting personnel stated that they generally do not maintain visibility into AFCEE’s unspent funds at the contract level. For AFCEE’s own contracts, contracting personnel generally deobligate funds down to 10 percent of the total obligated amount, or $100,000, whichever is less, to pay for any additional costs that may be identified during DCAA’s incurred cost audits. AFCEE contracting personnel reported that for these contracts, they do not believe any funds will be returned to Treasury at the end of fiscal year 2011. AFCEE contracting personnel stated that for the contracts awarded on behalf of other organizations, they are notified by the customers of unspent funds on an ad-hoc basis. AFCEE contracting personnel stated that they prioritize the deobligation of these funds when they are made aware of them, but do not track the total amount of funds that may be returned to Treasury. USACE contracting personnel stated that they do not maintain information on unspent funds on a contract level, but rather USACE resource managers tracked funds at the account level. For these accounts, USACE resource managers notify contracting personnel, who attempt to identify which contracts are associated with these funds and, as appropriate, take steps to deobligate these funds. USACE reported, however, that $104.9 million have not been deobligated as of March 2011. USACE personnel stated that a majority of these funds are on contracts awaiting DCAA audits. Conversely, ACC-RI’s LOGCAP office tracked funds that could be returned to Treasury on a contract-by-contract basis. ACC-RI contracting personnel stated that they hold weekly meetings with the contractor and resource managers to reconcile financial records and identify funds that could be deobligated. ACC-RI personnel told us that $12.3 million of funds that could be returned to Treasury have not been deobligated as of June 2011, but anticipated having most of these funds deobligated by the end of July 2011. In some instances, DOD discovered improper payments during the contract closeout process years after the contractors delivered the final good or service, but some attempts to recover overpayments were unsuccessful and, at times, late payments to contractors resulted in interest fees. According to DFAS personnel responsible for recovering overpayments made on some Iraq contracts, if contracts were closed immediately after final payments are made, overpayments could be discovered earlier, which increases the likelihood of recovering payments. For example, when the contractor is still conducting business with the government, DFAS can reduce payments on one contract to offset overpayments made on another contract. Task Force personnel noted that for a 2005 vehicle lease contract, contracting personnel in theater found the contractor was overpaid by over $41,000 on several invoices and subsequently DFAS withheld payments on several of the contractor’s other contracts to completely offset the overpayment. DFAS personnel, however, stated that the more time that has passed from when the contractor was mistakenly paid, the more difficult it becomes to recover those payments because the contractor may no longer be in business with the U.S. government or may have changed address or name. In several instances, overpayments on contracts for goods or services delivered in 2007 or earlier were not referred to DFAS until 2010 (see table 6). DFAS personnel stated that in these cases, despite numerous attempts to contact the contractor, they have yet to recover the overpayments. As of June 2011, two of the contracts have been referred to Treasury and one contract has been referred to another DFAS office for further debt collection efforts. In a few instances, Task Force personnel did not refer overpayments to DFAS because they determined the excess payments were relatively small in value or unlikely to be recovered. For example, Task Force personnel found that the U.S. government overpaid a contractor by $8,100 for trash services provided in 2006 and 2007. After unsuccessful attempts to contact the contractor, Task Force personnel closed the contract in 2009, noting that so much time had passed since the final payment that it was unreasonable to expect that the overpayment could be recovered. C3 is unable to mitigate the amount of interest payments that may be associated with late payments because the contracting and financial management systems cannot identify which contracts still require payment, especially for contracts awarded between 2003 and 2007. Task Force personnel stated that given the limitations of these systems, they must review the contract file to determine whether a contract requires additional payment. For example, while closing a $94,500 contract for vehicle lease services in Iraq, Task Force personnel discovered the contractor may not have been paid for 2 months’ worth of vehicle lease services, so the Task Force is attempting to contact personnel in theater to confirm whether services were rendered. Additionally, some contracts requiring final payments were not paid until years after the final delivery, which resulted in interest payments. DFAS personnel reported that DFAS has paid $2.8 million in interest payments on Iraq contracts as of June 2011, though it is not possible to determine the amount of interest payments associated with over-age contracts. DOD took steps to improve its payment processes in Iraq, but some challenges with timely payments remain. According to DFAS officials, in 2008, DFAS became responsible for making payments for contracts awarded in theater with obligations of $25,000 or more and in 2010 DFAS and C3 agreed to lower this threshold to $3,000. DFAS officials stated this decision was made to improve internal controls by ensuring that adequate documentation was available before payments are made in theater. DFAS officials noted, however, there were some payment delays because payment documentation requirements were not always met. One C3 official noted that these payment processing delays led to some Iraqi vendors being unwilling to do business with the U.S. government and walking off job sites. C3’s commanding general stated that when contracts are not closed out and vendors have not been paid for goods and services that they provided to the U.S. government, this contributes to negative perceptions about Americans. Finally, late contract closeouts may hinder efforts to identify and address potential fraud found on the C3 contracts because they were reported to investigators years after the potential fraudulent activities took place and the contract files were poorly maintained. As Task Force personnel reviewed and closed C3 contracts, they identified 151 contracts with potential fraudulent activities and referred these contracts to the Army’s Criminal Investigations Division. For example, in one contract for a cable fiber network, Task Force personnel stated that they found evidence that the contracting officer had made a payment of $84,000 in cash, but the contractor’s invoice was only for $64,000. There was no documentation in the file to account for the $20,000 difference between the disbursement and invoice, so Task Force personnel referred this case to the Army’s criminal investigators. According to an Army investigator, it was difficult to determine whether this case and other cases were due to fraudulent activity or contracting errors, in part because the contracts did not have enough documentation to build a case. Furthermore, the Army investigator stated that many of the referred contracts had been awarded many years ago so following up on these cases has been challenging, as many of the contracting personnel and contractors involved are no longer available. DOD reported that actions are underway to address the lessons learned in Iraq, including developing deployable contract management systems and explicitly requiring that contract closeout requirements be incorporated into contingency contracting planning documents. DOD officials acknowledge, however, they are likely to face similar problems with closing contracts awarded to support efforts in Afghanistan. For example, the backlog of C3’s Afghanistan contracts that need to be closed is growing steadily, but the Army’s capacity to close these contracts in the United States remains in question due to challenges with transitioning closeout responsibilities from the Task Force to ACC-RI. In October 2010, as part of the Army’s Operational Contract Support Lessons Learned Program, C3 identified lessons learned from contracting in Iraq between 2005 and 2010. As part of this effort, C3 identified the need to improve and consolidate data management, improve contract oversight, and increase emphasis on contract administration and closeout. DOD officials told us they had already implemented or planned new practices, as the following examples illustrate. C3 officials noted that they had implemented the Standard Procurement System in both Iraq and Afghanistan to better document information on contracts awarded during and after fiscal year 2009 and have worked to improve the data input into the system. Defense Procurement and Acquisition Policy officials and a representative from the Joint Chiefs of Staff told us they are also identifying and developing deployable contract writing and management systems with the intent that one day contingency contracting personnel will use the same contract management tools in theater that are used in the United States. C3 also identified that contract oversight was a historic problem and noted the need to ensure contracting officer’s representatives fulfilled their oversight responsibilities. In March 2010, the Under Secretary of Defense for Acquisition, Technology and Logistics issued new certification requirements for contracting officer’s representatives to ensure they are experienced and trained before they are appointed to oversee contractor performance. In June 2011, we reported, however, that DOD personnel in Afghanistan were not always fully prepared for their roles and responsibilities to provide adequate oversight there. Defense Procurement and Acquisition Policy has also issued and since updated the Defense Contingency Contracting Handbook, which includes reference material to ensure contingency contracting officers maintain proper contract documentation and complete closeout duties. For example, the handbook includes guidance on the essential documents that should be in a contract file, identifies steps to ensure contracts are properly enumerated to avoid duplicate contract numbers, and recognizes the need to close contracts as soon as possible. Finally, DOD is in the process of determining how it will address the problems C3 attributed to a lack of planning for the contracting requirements in Iraq. A senior C3 official recommended that operational campaign plans include a contracting annex, such as an Annex W. In such cases when an Annex W would be required, we found that Joint Publication 4-10 and DOD’s Annex W guidance do not fully address the need to plan for contract closeout requirements—including identifying responsibilities, either in or outside of theater, for closing contracts. United States Forces-Iraq issued an Annex W in 2011, which included directions for personnel to take steps to close contracts in Iraq, well after C3’s backlog of contracts was identified. Representatives from the Joint Chiefs of Staff responsible for revising Joint Publication 4-10 and the Annex W guidance recognize the need to incorporate more specific language on the need to plan for contract closeout during the contingency contracting planning process. These officials stated that they plan to issue new Annex W guidance by the end of 2011 and intend to add more specific language regarding contract closeout. As was the case in Iraq, C3 officials stated that prior to the build-up of forces in Afghanistan, contract closeout was a challenge because there were not enough contracting personnel in theater to meet competing contracting demands. To address its backlog of contracts awarded before fiscal year 2009, C3 delegated responsibility for closing at least 22,597 Afghanistan inactive contracts to the Task Force. Task Force data indicate that 3,510, or about 16 percent, of these contracts have been reviewed as of April 2011. Task Force personnel stated that they faced the same challenges with closing the Afghanistan contracts as those associated with the Iraq contracts, such as poor contract documentation and improper payments. According to C3’s commanding general and senior contracting officials, these challenges were exacerbated during the build-up of U.S. military personnel in Afghanistan, and the focus remains on meeting the warfighter’s needs. C3 officials told us the number of contracting officers in Afghanistan increased from about 60 in 2008 to about 200 in April 2011. In part, this increase in personnel enabled C3 to close over 18,600 contracts awarded between fiscal years 2009 and 2011. Despite these efforts, however, the number of contracts eligible to be closed continues to grow. For example, as of April 2008, C3 data indicated that 1,471 Afghanistan contracts remained in theater that were eligible but over age for closeout. As of May 2011, the number of contracts eligible but over age for closeout has increased to over 16,900 contracts. Additionally, C3 will have to close over 7,000 other contracts awarded during this period that are eligible but not yet over age for closeout. C3 officials told us they expect that more Afghanistan contracts will be transferred out of theater to be closed by ACC-RI, likely after much of the remaining Iraq contracts are closed. As previously noted, however, the Army’s ability to close contracts remains in question due to challenges with transitioning closeout responsibilities to ACC-RI. Contract closeout is a key step to ensure the government receives the goods and services it purchases at the agreed upon price and, if done in a timely manner, provides opportunities to utilize unspent funds for other DOD needs. In Iraq, however, contract closeout was often an afterthought or was done as time permitted. The complications DOD has faced with closing its Iraq contracts underscore the importance of advanced planning to close contracts awarded in a contingency environment, encouraging a greater command emphasis on completing and overseeing administrative requirements, establishing a process to provide better management visibility and insight into contracting efforts, and ensuring that DOD’s contracting workforce has the capacity to provide appropriate contract administration and contractor oversight. Meeting warfighter needs is paramount, but doing so does not lessen the need to ensure that contracts are properly administered and executed. DOD’s recognition in 2008 that it needed to address the backlog of contracts that are over age for closeout and its establishment of the Task Force came too late in the operation to make a significant difference in closing contracts within the required time frames. By not fully understanding the scope of the backlog and waiting to address it, DOD underestimated the efforts required to close these contracts. Further, the limited visibility provided by the contracting and financial management systems hindered DOD’s ability to identify and address improper payments. Challenges with transitioning closeout responsibilities to ACC- RI appear to have hindered the progress the Army had made in closing its Iraq contracts. With over 100,000 C3 Iraq and Afghanistan contracts that need to be reviewed and closed, as appropriate, further delays in closing these contracts can be expected. Finally, closing the large cost-type contracts is further hindered by DCAA’s shortage of auditors and problems with contractor accounting practices. DOD has recognized the need to increase DCAA’s staffing and address contractor business systems, but fully implementing these initiatives will take several years. To help address the current backlog of contracts supporting the efforts in Iraq and Afghanistan that need to be closed out, we recommend that the Secretary of Defense direct the Secretary of the Army to take steps to ensure ACC-RI’s planned resources are adequate to meet forecasted closeout demands. To help improve DOD’s ability to manage the closeout of contracts awarded in support of future contingencies, we recommend that the Secretary of Defense, in coordination with the Chairman of the Joint Chiefs of Staff, take the following two actions: revise DOD’s contingency contracting doctrine and guidance to reflect the need for advanced planning for contract closeout; and require senior contracting officials to monitor and assess the progress of contract closeout activities throughout the contingency operation so steps may be taken if a backlog emerges. DOD provided written comments on a draft of this report. DOD concurred with the three recommendations and identified a number of ongoing and planned actions to address them. For example, DOD noted that Army Contracting Command-Rock Island will utilize contractors and explore additional options, such as the Wounded Warrior program, to assist in closing contracts. DOD also noted that it recently amended the Defense Federal Acquisition Regulation Supplement and provided additional guidance to DOD personnel to underscore the need to understand the unique requirements and considerations associated with planning and executing contingency contract administration services in contingency operations. DOD also plans to further revise its guidance to address the need for contracting officers to do advance planning for closeout of contracts performed in contingency areas. DOD also indicated it intends to issue a revised Joint Publication 4-10, its contingency contracting planning doctrine, in June 2012 to reflect the need for such planning. DOD also provided technical comments, which were incorporated as appropriate. DOD’s comments are reprinted in appendix II. We are sending copies of this report to the Secretary of Defense, the Secretaries of the Army and Air Force; the Under Secretary of Defense (Acquisition, Technology, and Logistics); the Director, Defense Procurement and Acquisition Policy; the Under Secretary of Defense (Comptroller) and Chief Financial Officer; the Chairman, Joint Chiefs of Staff; the Commander, U.S. Central Command; the Director, Defense Contract Audit Agency; the Director, Defense Finance and Accounting Service; and interested congressional committees. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To assess the Department of Defense’s (DOD) efforts to close its Iraq contracts, under the authority of the Comptroller General to conduct evaluations on his own initiative, we examined the (1) total number of its contracts with performance in Iraq that are eligible for closeout and the extent to which DOD closed these contracts within required time frames, (2) factors that contributed to contracts not being closed within required time frames, (3) steps DOD took to manage the financial risks associated with not closing contracts within required time frames, and (4) how DOD captured and implemented lessons learned from closing its Iraq contracts. To determine the number and value of DOD’s Iraq contracts eligible for closeout and the extent to which DOD will close these contracts within required time frames, we reviewed the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement which provide the time frames and the procedures for closing contracts. For the purpose of our review the term contracts refers to all base contracts, task orders, and blanket purchase agreement call orders. We obtained contract data from four DOD organizations which our prior work indicated had been responsible for awarding the majority of contracts with performance in Iraq: CENTCOM Contracting Command (C3), Army Contracting Command-Rock Island (ACC-RI), US Army Corps of Engineers (USACE), and Air Force Center for Engineering and the Environment. These organizations may retain responsibility for administering and closing the contracts they awarded, or may they may delegate such responsibilities to another organization. In those instances, we obtained contract data from that organization, which includes Defense Contract Management Agency, ACC-RI, and C3’s Contract Closeout Task Force Office (Task Force). From each organization, we requested the following data for contracts for which they are responsible: contract and order numbers, period of performance, contract type, contract status, total obligations, total unliquidated obligations, and physical completion dates. We identified contracts that were eligible for closeout and over age for closeout based on the time frames established in the FAR. We also identified contracts that did not have complete data to determine eligibility for closeout, but we determined these contracts to be eligible and over age according to data available. We assessed the reliability of these data reported by the contracting organizations through interviews with knowledgeable officials and electronic data testing for missing data, outliers, and obvious errors within each database. While we found that C3’s contract data from fiscal years 2003 through 2008 were generally unreliable for determining the closeout status of contracts, they were sufficiently reliable for determining the minimum number of contracts awarded during this time period. We did not evaluate or assess the reliability of the financial management systems used to provide financial data for the purpose of our review. We also did not independently evaluate whether DOD closed individual contracts in accordance with the procedures outlined in the FAR or other DOD guidance. To identify the factors that contributed to contracts not being closed within FAR-required time frames, we analyzed data provided by and interviewed officials at each of the contracting organizations and the Defense Finance and Accounting Service (DFAS), which is responsible for making payments on some of the Iraq contracts. To understand any challenges faced by DOD contracting personnel in closing individual contracts, we reviewed contract documents for 25 firm-fixed price contracts purposefully selected to obtain a variety of closeout organizations and a range of closeout difficulty and interviewed contracting personnel on their experiences with closing them. We also reviewed Task Force and ACC- RI closeout data to assess the Army’s ability to close C3’s contracts. In addition, to identify the factors that affected the closeout of cost-type contracts, we interviewed personnel at each of the contracting organizations. In addition, we purposefully selected eight contractors with varying amounts of over-age cost-type contracts, obligations on contracts, and remaining unliquidated obligations and reviewed DCAA’s incurred cost and other audit reports for these contracts, and interviewed DCAA officials at headquarters and eight field offices to determine the factors affected their ability to complete the audits. We also reviewed Joint Publication 4-10; the Defense Contingency Contracting Handbook; and the Defense Contract Management Agency’s contract closeout guidance and handbook to assess the guidance provided to DOD contracting personnel regarding the need to plan the contract closeout process. To determine the steps DOD has taken to manage the financial risks associated with not closing contracts within FAR time frames, we reviewed the DOD Financial Management Regulation and each contracting office’s closeout guidance. We also interviewed contracting and financial management personnel at the Office of the Under Secretary of Defense, Comptroller; Office of the Assistant Secretary of the Army, Financial Management & Comptroller; U.S. Forces – Iraq, Force Structure Resources and Assessment (J-8); U.S. Army Central Command; and USACE. In addition, we analyzed unliquidated obligation data provided by both the contracting personnel and financial management personnel to determine how these funds were managed. To determine the steps DOD has taken to manage other risks of not closing contracts timely, we reviewed data and interviewed officials from C3; the Task Force; DFAS, which is responsible for collecting overpayments and tracking interest payments; and the Army’s Criminal Investigations Division, which is responsible for investigating instances of fraudulent activity found in contracts. To assess the extent to which DOD captured and implemented lessons learned from closing contracts in contingency operations, we interviewed contracting officials at each of the organizations we visited to identify any lessons learned and reviewed documentation when available. We also interviewed senior contracting officials in Iraq and Afghanistan to identify any changes made in response to the lessons learned from closing the C3 contracts. We reviewed DOD’s current contingency contracting doctrine and guidance, and interviewed officials from the Joint Chiefs of Staff who are responsible for revising the doctrine and guidance. We also interviewed officials from the Office of Under Secretary of Defense for Acquisition, Technology, and Logistics’ Office of Defense Procurement and Acquisition Policy and the Office of the Deputy Assistant Secretary for the Army (Procurement) to identify any policy changes that may result from the lessons learned in Iraq. We obtained and reviewed C3 data on the total number of its Afghanistan contracts eligible and over age for closeout to assess its ability to close these contracts. We conducted this performance audit from July 2010 through September 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 key contributors to this report were Timothy DiNapoli, Assistant Director; Johana Ayers; Noah Bleicher; Seth Carlson; Morgan Delaney-Ramaker; Justin Jaynes; Julia Kennon; John Krump; Claire Li; Anne McDonough-Hughes; and Roxanna Sun. | Since 2002, DOD obligated at least $166.6 billion on contracts supporting reconstruction and stabilization efforts in Iraq and Afghanistan. Many of these contingency contracts, in particular those awarded in Iraq, need to be closed. Contract closeout is a key step to ensure the government receives the goods and services it purchased at the agreed upon price and, if done timely, provides opportunities to use unspent funds for other needs and reduces exposure to other financial risks. To assess DOD's efforts to close its Iraq contracts, GAO examined the (1) number of contracts that are eligible for closeout and the extent to which they will be closed within required time frames, (2) factors contributing to contracts not being closed within required time frames, (3) steps DOD took to manage the financial risks associated with not closing contracts within required time frames, and (4) extent to which DOD captured and implemented lessons learned from closing its Iraq contracts. GAO reviewed contingency contracting guidance, analyzed contract and closeout data for contracts awarded between fiscal years 2003 and 2010, and interviewed DOD officials from six organizations responsible for awarding or closing out these contracts. DOD does not have visibility into the number of its Iraq contracts eligible for closeout, but available data indicate that DOD must still review and potentially close at least 58,000 contracts awarded between fiscal years 2003 and 2010. GAO's analysis indicates that relatively few of its contracts will be closed within required time frames. For example, about 90 percent of the limited number of contracts for which DOD could provide closeout data are already over age for closeout. The U.S. Central Command's Contracting Command (C3) and its predecessors, which awarded many of DOD's Iraq contracts, did not have sufficient internal controls to ensure that contracting data were accurate and complete. C3's management visibility was further affected by limitations of its information systems, staff turnover, and poor contract administration. DOD's ability to close its contracts has been hindered by the lack of advance planning, workforce shortfalls, and contractor accounting challenges. For example, DOD's contingency contracting doctrine and guidance do not specifically require advanced planning for contract closeouts. DOD took steps in 2008 to address its backlog of contracts needing to be closed but such actions came too late to make significant difference in closing contracts within required time frames. DOD is now transitioning responsibility for closing out C3's contracts to the Army Contracting Command. Staffing challenges, however, during this transition have hindered efforts to close these contracts. Efforts to close large, cost-type contracts have been further hindered by Defense Contract Audit Agency staffing shortages and unresolved issues with contractors' accounting practices, which have delayed audits of the contractors' incurred costs. DOD's efforts to identify unspent contract funds and improper payments--two examples of financial risks that timely closeout of contracts may help identify--are hindered by limited visibility into its Iraq contracts. DOD identified at least $135 million in unspent funds that could potentially not be available to meet other DOD needs. If not used, these funds will be returned to the U.S. Treasury at the end of fiscal year 2011. Should DOD identify a need to pay for an unanticipated cost on these contracts, it will need to use other funds that are currently available. Additionally, instances of improper payments and potential fraud were sometimes found years after final contract deliveries were made, making it harder for DOD to recover funds owed to it and increasing the risk that it may need to pay contractors interest fees on late payments. DOD has identified and addressed some of the problems related to the closeout of Iraq contracts, but the growing backlog of over 42,000 Afghanistan contracts that need to be closed suggests the underlying causes have not been resolved. DOD officials noted that the lessons learned in Iraq highlight the need to improve contract data, increase the emphasis on contract administration and closeout, and improve contingency contracting doctrine and guidance. DOD officials reported that actions are underway to correct these deficiencies in future contingencies, but fully implementing these initiatives may take several years. GAO is making three recommendations to ensure DOD has sufficient resources to close its Iraq and Afghanistan contracts and to better plan for and improve visibility of closeout efforts in future contingencies. DOD concurred with each of the recommendations. |
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When implementing contracting reform, CMS initially planned to establish 15 A/B MAC jurisdictions and 4 DME MAC jurisdictions. At that time, CMS also planned to award four additional MAC contracts for processing Medicare claims for home health and hospice care, but the agency later decided to divide this workload among four of the A/B MAC contracts instead of establishing separate contracts for home health and hospice care. Since the initial implementation of contracting reform, CMS has consolidated some of the A/B MAC jurisdictions so that, as of February 2015, there were 12 A/B MAC jurisdictions. (See apps. I, II, and III for maps of the A/B, DME, and Home Health and Hospice MAC jurisdictions that were operational as of February 2015.) Under the FAR, CMS could choose from two broad types of contract structures for the MAC contracts—fixed-price contracts and cost- reimbursement contracts. Because of uncertainty about the amount of costs MACs would likely incur during the initial implementation of the MAC contracts, CMS opted to structure the MAC contracts as a cost-plus- award-fee contract, which is a type of cost-reimbursement contract that allows an agency to provide financial incentives to contractors if they achieve specific performance goals. In its 2007 MAC acquisition strategy, CMS stated that fixed-price contracts for MACs would be difficult to administer because little was known about the expected costs of these contracts in light of the concurrent implementation of several other new Medicare initiatives, such as the Part D prescription drug benefit and Medicare Advantage plans, among other things. Agency officials also said that they believed a cost-plus-award-fee contract structure would allow CMS to stress the importance of quality performance over the course of the contracts and would accommodate frequent changes in MACs’ workloads or responsibilities that CMS anticipated handling over the course of the contracts. CMS decided to structure each MAC contract with a 1-year base performance period and four optional 1-year performance periods. Under the cost-plus-award-fee contract, MACs receive a base fee, which is fixed at the inception of the contract, plus reimbursement for allowable costs. The MACs also may earn an incentive, known as an award fee, based on their performance on standards that are defined by CMS in advance of each 1-year performance period. During the procurement process, MAC offerors propose to CMS the amounts of the base fees and award fees they would like to be eligible to earn over the course of their contracts, which are subject to negotiation to arrive at the final base and award fee amounts with successful offerors. For the MACs that were in operation as of January 2014, base fees represented about 1 to 3 percent of the MACs’ total contract values, while the award fees that the MACs were eligible to earn represented about 1 to 5 percent of the total contract values. Over the course of MAC contracts, prior to the start date for each 1-year performance period, CMS can revise the metrics included in MACs’ award fee plans and adjust the distribution of award fees across the metrics to promote performance in high-priority areas and to emphasize areas where MACs may be able to influence a positive programmatic outcome. For the 12 A/B MACs that were in operation as of January 2014, the total estimated value for the 5-year contract period—if all option years are exercised—is over $5.2 billion, with the total estimated contract values ranging from about $326 million to $609 million per A/B MAC. For the four DME MACs that were in operation as of January 2014, the estimated 5-year contract value—if all option years are exercised—is about $624 million. Estimated 5-year contract values for the DME MACs ranged from about $92 million to $257 million per MAC. See table 1 for details about the ranges of base fees and available award fee pools that CMS estimated the MACs in operation as of January 2014 were eligible to earn over the course of their 5-year contracts. For each MAC, CMS develops a statement of work that outlines the functional requirements—or responsibilities—that the MACs are to fulfill over the course of their contracts. CMS oversees MACs’ performance in carrying out the responsibilities outlined in their statements of work in a variety of ways, including but not limited to the following: Reviewing MACs’ quality control plans. Under their statements of work, each MAC is responsible for developing a quality control plan, which must be submitted to CMS within 45 days after the contract is awarded and updated annually thereafter, when the contract is renewed for additional option years. CMS reviews the MACs’ quality control plans and approves them after ensuring that they include all required elements. Among other things, the quality control plan specifies procedures—such as an audit and inspection system and a formal system for implementing corrective actions—to which the MAC will adhere, in order to ensure that the MAC meets its contract performance requirements. Assessing MACs’ performance on the quality assurance surveillance plan. Consistent with the FAR, CMS develops a quality assurance surveillance plan to outline performance standards that all MACs are expected to meet, in accordance with their statements of work. At the end of each contract year, CMS assesses each MAC’s performance on the set of surveillance plan standards that CMS has established for each of 11 different business function areas. For example, one business function area is provider customer service, and two of the quality assurance surveillance plan standards for that area relate to the timeliness of the MAC’s responses to telephone and written inquiries from providers. After CMS completes its annual surveillance plan review for each MAC, the MACs have an opportunity to dispute CMS’s assessment or provide more information that may result in a change to the MAC’s performance score. In some cases, CMS may require that the MAC complete an action plan to address deficiencies cited in the quality assurance surveillance plan review. Assessing MACs’ performance through Contractor Performance Assessment Reporting System reviews. At the end of each contract year, CMS is required to prepare a Contractor Performance Assessment Reporting System report for each MAC, which provides an overall rating of each MAC’s performance during the contract year. MACs’ performance that they gather through various sources, such as the MACs’ cost reports, the results of quality control plan and quality assurance surveillance plan reviews, and award fee evaluations. Using information aggregated from all of these sources, CMS rates the MACs in areas such as quality, schedule, cost control, business relations, and personnel management. The Contractor Performance Assessment Reporting System stores these reports electronically and makes them available for other federal agencies to review in the event that an entity holding a MAC contract later competes for other federal contracts. The base year of each MAC contract is comprised of an implementation period and an operational period of performance, each of which requires a separate Contractor Performance Assessment Reporting System report, but these two reports are completed only after the end of the base year of the contract. Assessing MACs’ performance on metrics included in their award fee plans. Award fees are the key performance incentive included in the type of cost-reimbursement contract CMS selected for the MACs under the FAR. Award fee plans include fewer performance standards than the quality assurance surveillance plan and are intended to (among other things) reward MACs for being innovative, cost-effective, and collaborative for the overall benefit of the Medicare program. CMS develops the award fee plan and, at the end of each contract year, reviews MACs’ performance on the standards included in the plan, to determine whether each MAC is eligible to earn some, all, or none of its available award fee pool. CMS assigns a certain percentage of the award fee to each of the performance standards included in the plan. To be eligible to earn any percentage of the award fee, the MAC must achieve at least a “satisfactory” rating in each performance element under its most recent Contractor Performance Assessment Reporting System evaluation, signifying that it has substantially met all cost, schedule, and technical performance requirements of its contract. Further, the MAC must meet all or almost all of the significant criteria included in its award fee plan. MACs that perform at this level are eligible to earn up to 50 percent of their award fees. Only MACs that exceed all or almost all of the significant award fee criteria while also substantially meeting all cost, schedule, and technical performance requirements of their contracts are eligible to earn up to 100 percent of their award fees and an “excellent” rating for the award fee. MACs generally have not earned all of the award fees for which they have been eligible. For example, in its January 2014 report, the HHS Office of Inspector General analyzed data from two performance periods and found that MACs had earned between 35 and 86 percent of their overall award fee pools. MACs have a number of key responsibilities related to the Medicare program, as outlined in their statements of work, and these responsibilities have generally remained the same since contracting reform began in 2006. Among the responsibilities, MACs are charged with processing Medicare claims submitted by providers—which involves processing the claim to the point of payment, denial, or other action—in a timely and accurate manner. In addition, MACs are responsible for conducting medical reviews of claims to determine whether the claims are for services covered by the Medicare program and whether the services were medically necessary. MACs also handle first-level appeals, or requests for redeterminations for any claims that were initially denied. Further, the MACs are responsible for maintaining a Medicare provider customer service program, which has three main components: a provider outreach and education program, a contact center to handle provider inquiries, and self-service technology for providers to access Medicare information at any time. For descriptions of MACs’ key responsibilities, see appendix IV. According to CMS officials, with limited exceptions, MACs’ responsibilities are functionally similar across all of the MAC contracts. One exception is that there are slight differences between the responsibilities of the A/B MACs and those of the DME MACs. For example, DME MACs are not responsible for enrolling medical equipment suppliers in the Medicare program, whereas the A/B MACs have the responsibility of enrolling providers and suppliers. Enrollment of medical equipment suppliers is handled centrally by the National Supplier Clearinghouse contractor. Another exception is that the MACs can have different jurisdiction-specific responsibilities. For instance, some MACs serve jurisdictions in which Medicare Strike Force teams are located. The Medicare Strike Force teams investigate and prosecute potential fraud in specific locations with a high historic level of program fraud. The MACs provide additional support, perform special analyses, and carry out follow-up actions for certain providers as requested by the Strike Force teams. Additionally, certain MACs have had jurisdiction-specific responsibilities related to Medicare demonstration projects regarding specific types of providers, such as rural community hospitals, or for specific activities or services, including enrollment of providers that offer home health services. Although MACs’ responsibilities are generally similar across each of the contracts, CMS officials told us that the MACs often have different workloads for certain responsibilities, based on factors such as the provider mixes in their jurisdictions. For example, some MAC jurisdictions have a large number of long-term care hospitals. Since these types of hospitals may receive higher payments for the services they provide than other types of hospital providers, the MACs must review information about the long-term care hospitals they serve to ensure that hospitals qualify for the higher payments. As a result, these MACs may spend more time and resources than MACs with fewer long-term care hospitals would spend fulfilling contract requirements associated with processing claims from long-term care hospitals. CMS officials also told us that the responsibilities of the MACs have generally remained the same since the implementation of contracting reform, although legislative changes have affected some of the MACs’ workloads for certain responsibilities. One such change was the creation of the nationwide Recovery Auditor Program by the Tax Relief and Health Care Act of 2006, which changed how Medicare claims are reviewed after they have been paid to identify any improper payments. Prior to the implementation of the nationwide recovery auditor program in 2010, the MACs were responsible for conducting post-payment reviews to recover improper payments, but the Recovery Auditors now conduct the bulk of these reviews. If the Recovery Auditor finds overpayments of certain claims, the MACs recover those overpayments from the providers. Although the MACs are conducting fewer postpayment reviews than they originally did, CMS officials told us that the MACs’ workload for recovering overpayments identified by the Recovery Auditors’ reviews has increased.(PPACA) required the revalidation of providers’ and suppliers’ eligibility to participate in the Medicare program. Although the A/B MACs and the National Supplier Clearinghouse have always had responsibility for provider enrollment, the PPACA requirement to revalidate providers was added to the A/B MACs’ and the National Supplier Clearinghouse’s responsibilities. As of November 2014, the MACs and the National Supplier Clearinghouse had sent revalidation notices to more than 1.04 million Medicare providers and suppliers. Although there were some differences between A/B MACs’ and DME MACs’ reported costs, most of the reported costs for both the A/B MACs and the DME MACs were for a few key responsibilities. On average, both the A/B MACs and the DME MACs reported a large portion of their costs were incurred for similar activities, including claims processing and the Provider Customer Service Program. However, the A/B MACs reported a higher average percentage of their costs for financial management than did the DME MACs. Additionally, on average, the DME MACs reported a higher portion for appeals than did the A/B MACs. For the nine A/B MACs included in our review, the total costs reported by all nine MACs were $732.1 million. These MACs’ reported total costs for their respective full contract years ranged from $41.4 million to $132.9 million, with an average of $81.3 million per MAC. Four responsibility areas—claims processing, financial management, Provider Customer Service Program, and provider enrollment—accounted for about 60 percent of the nine A/B MACs’ reported costs during the most recent full contract year for which cost data were available. Four other key responsibilities accounted for about 26 percent of the A/B MACs’ reported costs: appeals (about 7 percent), medical review (about 7 percent), administrative requirements (about 7 percent), and infrastructure requirements (about 6 percent). The nine A/B MACs in our review incurred the remainder of their reported costs—about 14 percent— for other responsibilities, such as reopening of initial claims determinations, the Medicare secondary payer program, and jurisdiction- specific requirements.percentages of A/B MACs’ total reported costs, by key responsibility area, for the most recent full contract year for which data were available for MACs that were in operation at the time of our review. Officials from CMS and the MACs we interviewed agreed that they have learned many lessons since the initial implementation of the MAC contracts, and together, they have implemented improvements to increase the MACs’ operational efficiency and effectiveness. The MACs’ statements of work outline CMS’s expectation that the MACs will continuously refine their business processes to foster efficiencies to promote the best value for the government and use innovative solutions to improve program operations. CMS officials we interviewed explained that they routinely encourage, solicit, and review ideas from MACs about how to improve their operational efficiency and effectiveness. These officials explained that they have gathered ideas about increasing efficiency and effectiveness from the MACs in the following ways: In contract solicitations, CMS instructs MAC offerors to propose programmatic or operational innovations they would implement if awarded a MAC contract and to describe the expected benefits of the proposed innovations. When MACs are transitioning into each new contract, CMS requires them to formally submit lessons learned documents, which detail challenges or other insights identified by MACs while transferring operations from previous contractors. These lessons learned may be beneficial to other MACs during future contract implementation periods. In the fall of 2013, CMS created an innovations submissions mailbox for the MACs to send in improvement or innovation requests. The MACs are to use this system when they want to implement a new process, service, technology, or other improvement, but there are funding needs or other contract requirements that CMS must approve in order for the MAC to implement the planned improvement. CMS convenes meetings annually with MAC executives, and they often discuss process improvement ideas at these meetings. CMS also acknowledges MACs’ ideas for significant process improvement through the Contractor Performance Assessment Reporting System, a web-based application it uses to record MAC performance evaluations. CMS and the MACs have convened workgroups related to various key responsibilities, in which the MACs collaborate and share ideas. According to CMS officials, when a particular MAC’s innovations have merit across the MAC community, CMS will incorporate the practices into subsequent MAC statements of work, to spread the operational improvement to other MACs. Officials from CMS and the four A/B MACs and one DME MAC we interviewed listed the following examples of lessons learned and innovations that some of the MACs have implemented since the implementation of contracting reform: Provider self-service portals. Three of the four A/B MACs and the one DME MAC we interviewed said that they had developed Internet- based provider self-service portals, which allow providers to validate their eligibility, submit claims electronically, request claim reconsiderations, and check the status of claims and reconsiderations, among other things. MAC officials said that this has reduced their expenditures on resources devoted to telephone-based provider customer service. Data analytics. Officials from one A/B MAC described how they have begun using data analytics to more effectively identify provider- specific patterns of billing errors so that they can conduct targeted outreach and education to providers and try to prevent future billing errors. Clinical editing software. CMS officials described the software that one MAC has deployed to improve the effectiveness of its prepayment edits. The software enables the MAC to electronically flag errors in Medicare claims that are not likely to meet the criteria for Medicare payment when the provider submits the claim for payment, rather than after the MAC begins processing the claim. The MAC explained that the provider is then offered an opportunity to correct errors before transmitting the claim to the MAC for payment. This reduces the resources this MAC must devote to the appeals process, the CMS officials said. Representation at administrative law judge hearings. Another MAC described an innovation it had piloted in its DME MAC jurisdiction, which CMS has since required of all A/B and DME MACs. The innovation addresses the rate at which the MACs’ decisions to deny coverage for Medicare services or DME were being overturned at administrative law judge hearings, which are convened when the MAC and a Medicare qualified independent contractor have both determined that a claim should be denied and the beneficiary or provider disagrees with that determination. In the past, the MACs did not send representatives to these hearings, and many of the disputed claims were ultimately paid. The MACs now send physicians to administrative law judge hearings to represent the MAC and explain why it denied payment for claims that are the subject of the hearings. More of the MACs’ initial determinations are being upheld, which results in savings of Medicare dollars, the MAC said. CMS officials said that the agency includes in its MAC performance reviews an assessment of whether the MAC has generated ideas or process improvements that add value to the government. These ideas and innovations are documented in the Contractor Performance Assessment Reporting System, which may contribute to a favorable past performance evaluation for the MAC when its contract is recompeted. While they have made various changes since the implementation of contracting reform, officials we interviewed from both CMS and the MACs described some challenges created by the structure of the MAC contracts that may constrain continued improvements in MAC efficiency and effectiveness. One challenge CMS officials identified was the 5-year limit on MAC contract terms, which they said constrained their ability to respond to issues with MACs’ performance. These officials stated that they were reluctant to decide not to exercise an option year for a MAC based on performance issues. According to the officials, it was impractical to award a new contract within the 5-year contract terms permitted by the MMA because it takes approximately 18 to 24 months to solicit, award, and implement a new MAC contract. The officials said they would be more likely to consider replacing MACs midcontract if the contracts lasted longer than 5 years. To illustrate this, CMS officials told us that they had issued only one written notification to a MAC, advising that the agency might not exercise a contract option year—unless the contractor improved its performance—since the implementation of contracting reform. According to the CMS officials, the MAC ultimately improved its performance after receiving the notice, but CMS’s decision to continue the contract was also partially influenced by the agency’s conclusion that the potential benefit of replacing the MAC before the end of its contract term was outweighed by the risks and costs that would be associated with recompeting the contract sooner than planned. In addition, the CMS officials we interviewed stated that a potential benefit of increasing the time between MAC contract competitions could be that CMS and the MACs would have more time to develop innovations and that the MACs would have more time to implement them to yield performance improvements. The MAC officials we interviewed echoed these sentiments. The officials we interviewed from CMS and the MACs said they would support a legislative change to increase the maximum time between MAC contract competitions from 5 years to 10 years. In its January 2014 report, the HHS Office of Inspector General recommended that CMS seek legislation increasing the limit on MAC contract duration. The Medicare Access and CHIP Reauthorization Act of 2015, enacted in April 2015, increased the maximum time between MAC contract competitions to 10 years. According to the MAC officials we interviewed, the competitive nature of the MAC contracting environment has made MACs reluctant to share certain innovations or operational improvements with other MACs. The MAC officials said that they must balance CMS’s desire for them to share innovations with other MACs with trying to protect any competitive advantages they have in the contracting environment. From the perspective of officials from two of these MACs, collaboration and sharing of ideas was more widespread among the legacy contractors, which were not selected through competitive processes. After the initial transition from the legacy contractors to MACs, officials from one MAC said that there was a period of time when MACs may have overvalued a particular improvement or innovation as being proprietary or a competitive advantage and been reluctant to share ideas with other MACs. In the view of this contractor, MACs have since become more willing to share ideas that are retrospective and aimed at fixing past problems. However, they still want to protect true innovations, which are ideas that address problems more prospectively and aim to find better ways of fulfilling their contract requirements. CMS officials also described their recent decision to delay for 5 years the planned consolidation of two pairs of A/B MAC jurisdictions, based on their experiences with the recent consolidation of three other pairs of A/B MAC jurisdictions. In 2010, CMS announced that it planned to consolidate the 15 original A/B MAC jurisdictions to 10 jurisdictions before 2017. Consolidations had been implemented in three pairs of A/B MAC jurisdictions by February 2014, but CMS decided in March 2014 that it would delay for 5 years the consolidation of the two remaining pairs of MAC jurisdictions. The agency gave several reasons for this decision. First, CMS officials found that operational cost reductions associated with the first three consolidations were smaller than expected, and they were concerned that merging the remaining two pairs of A/B MAC jurisdictions could affect contractor performance negatively in key areas, including provider customer service. CMS was also concerned about the heightened complexity of the final two MAC jurisdiction consolidations because some of the affected jurisdictions were responsible for home health and hospice workloads. Finally, CMS was concerned about the business landscape that has evolved since the implementation of contracting reform. According to the CMS officials we interviewed, MACs conduct highly specialized work and, in the view of the officials, few other potential contractors would be capable of performing such specialized work successfully. The agency has already limited the share of the A/B MAC workload that can be serviced by a single contractor or affiliated contractors.almost the maximum workload CMS has specified that a single contractor can hold, CMS was concerned that further A/B MAC workload consolidations and reductions in the number of MAC marketplace participants could constrain CMS’s ability to respond to other challenges that might arise. While CMS has made modifications to its cost-plus-award-fee structure for MAC contracts—such as revising the metrics included in MACs’ award fee plans and adjusting the distribution of award fees across the metrics to promote performance in high-priority areas and areas where MACs have performed poorly in the past—the agency has not formally revisited its MAC contracting approach since the implementation of contracting reform. According to the FAR, changing circumstances may make certain contracting approaches more appropriate later in the course of a series of contracts or a long-term contract than they were at the outset. Moreover, CMS indicated in its 2007 acquisition strategy that once a baseline cost and level of effort had been established, the agency would reassess whether the cost-plus-award-fee contract structure was still appropriate for the MACs. However, CMS’s assessment of alternative contracting approaches since the implementation of contracting reform has been limited. In recent contract justification documents, CMS has indicated why a firm fixed-price contract structure remains an unsuitable approach for MAC contracts and included a limited discussion of why the use of incentive fees—a type of fee available under the cost-reimbursement contract structure—would not be appropriate for MACs.justification documents fulfill CMS’s responsibility under the FAR to document the circumstances, facts, and reasoning behind taking individual contract actions (such as entering into a contract in a given These contract MAC jurisdiction). In addition, the FAR also requires agencies to perform acquisition planning and, where a written evaluation plan is required, to review their acquisition plans and revise them as appropriate at key dates specified in the plan or whenever significant changes occur, but at least annually. While CMS’s decision to continue using the cost-reimbursement contract structure for the MAC contracts may be appropriate, there are a number of other contracting approaches that could be introduced within or in addition to the cost-reimbursement structure. CMS officials have discussed some of them internally but not documented any formal assessments of the alternatives by revising CMS’s 2007 MAC acquisition strategy. A comparative evaluation of the possible costs and benefits of alternative contracting approaches would provide a more evidence-based rationale for CMS’s chosen approach for the MAC contracts. Without formally assessing the potential benefits and risks of alternative contracting approaches, CMS lacks assurance that the current contract structure is the optimal method for incentivizing MACs’ performance, and CMS may be missing opportunities to enhance MACs’ efficiency and effectiveness. Following are four examples of potential alternative contracting approaches which may be permissible under the FAR, if properly documented and approved, along with some of the potential risks and benefits that CMS could consider. While some of these approaches are not explicitly mentioned in the FAR, they are also not prohibited. The FAR allows agencies to develop and test new acquisition methods, provided they are not explicitly precluded by federal law, executive order, or regulation. Using award terms. One type of incentive available to CMS is the award term. Unlike the contract option years that exist under CMS’s current MAC contracting approach, which CMS can exercise at its discretion once it has complied with the FAR requirements for exercising an option, award terms would incentivize MACs’ performance by automatically extending their contracts, as long as they met preestablished performance requirements. CMS officials told us that, while they had not documented an assessment of this alternative, they had discussed it internally and concluded that the statutory 5-year limit on MAC contract terms limited the potential of the award-term approach to serve as a greater motivator to MACs’ performance than the option years that are available under the existing cost-plus-award-term contract structure. We agreed that award terms may be a greater performance motivator if MAC contracts lasted longer than 5 years; however, there was nothing that would have precluded CMS from adopting the award- term approach within the 5-year terms for MAC contracts. For example, CMS could have restructured MAC contracts so that years two and three would be option years, and years four and five would be award-term years. CMS had not formally analyzed the potential risks and benefits of the award-term approach in the context of the 5-year contract term or compared these to the current option year approach. Given the recent legislative change that will permit MAC contracts to last up to 10 years, the award term approach may have more potential than CMS previously thought. Among the factors that CMS could consider would be whether this incentive could increase or decrease CMS’s administrative costs associated with monitoring MACs’ performance over the course of their contracts and the extent to which the agency may need to revise its performance metrics or thresholds, if at all, in order to accommodate the implementation of award terms. Implementing negative performance incentives. Under the FAR, agencies can also establish cost-reimbursement contracts with negative performance incentives. For example, under this type of contract, CMS theoretically could deduct from MACs’ base fees if they failed to meet certain performance thresholds. Alternatively, CMS could include nonmonetary negative incentives in MAC contracts, such as reducing the length of the contract if the MAC failed to meet established performance thresholds. For example, the contract could provide that, if a MAC’s performance fell below a certain level, CMS could reduce the length of the last option year of the contract by 3 months. For even lower levels of performance, CMS could impose reductions of 6 months, 9 months, or 1 year. The CMS officials we interviewed had not documented an assessment of whether monetary or nonmonetary negative incentives for poor performance would be appropriate for MAC contracts. However, they said that they had discussed it internally and concluded that the targets for existing MAC performance metrics are too high to accommodate negative performance incentives. For example, the CMS officials said that, while other federal contracts may require contractors to meet a certain requirement 80 percent of the time, MACs are required to meet many of their requirements 95 to 100 percent of the time. Transitioning certain elements within the MAC contracts to a fixed-price structure. In 2007, CMS documented its rationale for using a cost-reimbursement contract structure for the MAC contracts. However, while maintaining the overall cost-reimbursement contract structure, CMS could use a fixed-price contract structure for separate contract components; that is, CMS could set a firm price separately for certain contract responsibilities. In that case, the MACs would only be paid according to the fixed price for each contract component that was set at the beginning of the contract. In its 2007 acquisition strategy and more recent contract justification documents, CMS concluded that it would be too difficult to predict at the outset of each contract the workloads and specific costs that could be incurred for each of the MACs’ responsibilities. That is, CMS has stated that the fixed-price contract structure is not appropriate because legislative changes in Medicare coverage and payment policy, as well as other factors outside CMS’s and the MACs’ control, could cause the agency to make near-constant technical changes to MACs’ contracts over the course of each contract term. CMS officials we interviewed said they had engaged in some internal discussions about whether there were any elements within MACs’ contracts that could be transitioned from a cost-reimbursement to a fixed-price contract structure, but they had not formally analyzed the feasibility of doing so or which contract responsibilities have the potential to be appropriate for a fixed-price contract structure. Given that CMS has been collecting MAC cost reports for more than 8 years, the agency has the data it would need to analyze the potential benefits or risks of transitioning certain MAC responsibilities to a fixed- price structure. For example, while it may not be appropriate to transition the responsibilities of provider enrollment or medical review to a fixed-price structure—because of the unpredictability of future workloads MACs could incur for these particular responsibilities— CMS could evaluate whether it would be appropriate to transition certain other MAC requirements—such as certain claims processing production activities—to a fixed-price approach. Transitioning certain elements of the MAC contracts to an incentive fee structure. Another contracting approach available to CMS is the incentive fee. Under this arrangement, CMS would establish target costs that it would expect each MAC to incur for each contract responsibility. Using an agreed-upon formula that CMS would negotiate with each MAC, if the total costs reported by the contractor were less than the target costs, the contractor would earn a total fee that is greater than the target fee. If the total costs were greater than the target costs, the MAC would earn a total fee that is less than the target fee. For example, each MAC is required to have a Provider Customer Service Program to educate providers on Medicare requirements and respond to their inquiries. Using historical cost data, CMS could establish a target cost for these programs and incentivize the MACs to reduce costs in this area through techniques such as encouraging providers to use self-service information portals rather than seeking information through written inquiries. CMS officials told us that they initially decided against using the cost- plus-incentive-fee contract structure for MACs because they believed that changing Medicare requirements precluded the establishment of specific cost, schedule, or performance targets from the outset of contracting reform, and CMS’s recent contract justification documents continue to reflect that belief. There is no indication, however, that CMS has engaged in an analysis that might help identify whether there are certain MAC responsibilities for which the cost-plus- incentive-fee approach might be feasible, without transitioning to this approach for all MAC contract responsibilities. Now that CMS has more experience with MAC contracts and has more data on past costs and performance for MACs’ key responsibilities, CMS may be able to identify selected responsibilities that could be transitioned to an incentive fee structure. CMS has accumulated a considerable amount of data on MACs’ reported costs and performance under the cost-plus-award-fee contract structure the agency established when the first MACs became operational 8 years ago. The FAR states that certain contracting approaches may be more appropriate later in the course of a series of contracts or a long-term contract than they were at the outset, and CMS indicated in its 2007 acquisition strategy that it would revisit its contracting approach once it had collected baseline information. However, CMS has not engaged in a formal analysis of whether several other contracting approaches have the potential to increase MACs’ efficiency and effectiveness. Instead, recent contract justification documents have included a limited assessment of potential alternatives. Without using the wealth of data it has collected since the implementation of contracting reform to analyze other available contracting approaches, CMS may be missing opportunities to increase MACs’ efficiency and effectiveness. We recommend that CMS conduct a formal analysis, using its experience and data it has collected since the implementation of the first MAC contracts, to determine whether alternative contracting approaches could be used—even if only for selected MAC contract responsibilities—to help promote improved contractor performance. We provided a draft of this report to HHS and received written comments, which are reprinted in appendix V. In its comments, HHS concurred with this recommendation and said it plans to analyze alternative contracting approaches for MACs. Finally, HHS provided technical comments, which we addressed 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 its issuance date. At that time, we will send copies to the Secretary of Health and Human Services, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. Appendix IV: Key Responsibilities of Medicare Administrative Contractors (MAC) Description MACs are to process Medicare claims to the point of payment, denial, or other adjudicative action in a timely and accurate manner. Additionally, MACs are responsible for adhering to all claims processing rules outlined in CMS’s Internet-only manuals. MACs are to process provider applications for enrollment in the Medicare program, including prescreening of applications, verifying and validating the information in the enrollment application, and ensuring that the applying providers are not excluded from participation in the Medicare program. MACs are responsible for establishing a Provider Customer Service Program to assist providers in understanding and complying with Medicare’s operational policies, billing procedures, and processes. The Program is to enable providers to understand, manage, and bill Medicare correctly, with the goal being to reduce the Medicare paid claims error rate and improper payments. Each MAC’s program should consist of three major components: Provider outreach and education for educating providers and their staff, Provider contact center for handling provider inquiries, and Provider self-service technology, including technology that allows access to Medicare information at any time of the day. MACs are to decrease the paid claims errors in coverage, coding, and billing through the Medical Review program. The Medical Review program is designed to promote a structured approach to how Medicare policy is interpreted and implemented, which often requires the review of medical records to determine whether the services were medically necessary. MACs are responsible for implementing a comprehensive Medicare Secondary Payer program, which is intended to ensure that plans with primary insurer liability pay before Medicare pays for a particular service. A local coverage determination is a decision made by a MAC to cover a particular item or service on a MAC-wide basis, in accordance with the Social Security Act (i.e., a determination as to whether the item or service is reasonable and necessary). MACs are to publish local coverage determinations to provide guidance to the public and medical community within their jurisdictions. MACs are to develop local coverage determinations by considering medical literature, advice of local medical societies and consultants, public comments, and comments from providers. Additionally, MACs are to ensure that all local coverage determinations are consistent with statutes, rulings, regulations, and national policies related to coverage, payment, and coding. A reopening of a Medicare claim is a remedial action taken to change the final determination that resulted in an overpayment or an underpayment, even though the determination was correct based on the evidence of record. Reopenings are separate from the appeals process and are a discretionary action on the part of the MAC. The MAC’s decision to reopen a claim determination is not an initial determination and is not appealable. Description A party dissatisfied with the MAC’s initial determination about Medicare coverage for items or services has the right to request within 120 days that the MAC review its initial determination. Within 60 days of receiving the request for redetermination, a MAC employee who did not take part in the initial determination must review the claim and supporting documentation and issue a redetermination either affirming, partially reversing, or fully reversing the MAC’s initial determination. Parties permitted to appeal initial determinations include beneficiaries and their representatives, states, providers, physicians, and other suppliers. MACs are responsible for deterring and detecting fraud and abuse. The MACs may receive information about fraud or abuse from several sources, including provider inquiries or medical review, and are required to refer all suspected cases to the Program Safeguard Contractors (PSC) or Zone Program Integrity Contractors (ZPIC) for investigation. Additionally, MACs should communicate with the PSCs and ZPICs to coordinate efforts and prevent duplication of review activities. MACs are responsible for maintaining accounting records in accordance with specific government accounting principles and applicable government laws and regulations. MACs are expected to report financial activity to CMS in accordance with the financial reporting requirements set forth in CMS’s Internet-only manuals and the MACs’ statements of work. Additionally, the MACs are responsible for receiving, reviewing, and auditing (as necessary) institutional provider cost reports. MACs are responsible for establishing and maintaining a Program Management Office, which has defined management processes and organization in order to successfully carry out the responsibilities of the contract. One part of the Program Management office requires the MACs to communicate with CMS officials about a variety of issues. MACs are required to establish or use infrastructure to carry out the requirements of the contract. This includes telecommunication activities and management of electronic data. MACs are to comply with various administrative requirements that outline specific needs for carrying out the contract, such as key personnel, security, quality assurance, public relations, responding to congressional inquiries, participation in meetings and workgroups, continuity planning and disaster preparedness, internal controls, and compliance program. In addition to the contact named above, William T. Woods, Director; Martin T. Gahart, Assistant Director; Christie Enders; John Krump; Victoria Klepacz; Alexis C. MacDonald; Elizabeth T. Morrison; Mary Quinlan; and Jennifer Whitworth were major contributors to this report. Medicare Program Integrity: Increased Oversight and Guidance Could Improve Effectiveness and Efficiency of Postpayment Claims Reviews. GAO-14-474. Washington, D.C.: July 18, 2014. Medicare Program Integrity: Increasing Consistency of Contractor Requirements May Improve Administrative Efficiency. GAO-13-522. Washington, D.C.: July 23, 2013. Medicare Program Integrity: Few Payments in 2011 Exceeded Limits under One Kind of Prepayment Control, but Reassessing Limits Could Be Helpful. GAO-13-430. Washington, D.C.: May 9, 2013. Medicare Program Integrity: Greater Prepayment Control Efforts Could Increase Savings and Better Ensure Proper Payment. GAO-13-102. Washington, D.C.: November 13, 2012. Medicare Contracting Reform: Agency Has Made Progress with Implementation, but Contractors Have Not Met All Performance Standards. GAO-10-71. Washington, D.C.: March 25, 2010. | The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) required CMS to select claims administrative contractors through a competitive process and to do so in accordance with the FAR. In fiscal year 2013, MACs processed almost 1.2 billion claims totaling more than $363 billion in Medicare payments. GAO was asked to assess CMS's implementation of contracting reform and examine whether CMS could do more to increase MACs' effectiveness. This report evaluates (1) differences in responsibilities among MACs and the costs associated with these responsibilities, including any changes since the implementation of contracting reform; (2) lessons learned, if any, since CMS implemented contracting reform that could be used to increase MAC efficiency and effectiveness; and (3) alternative contracting approaches that CMS could use to enhance contractor performance. To do this work, GAO reviewed the FAR and CMS documents—including contracting documentation and MAC cost reports—and interviewed officials from CMS and selected MACs. GAO also reviewed the FAR to identify alternative contracting approaches. As of February 2015, 16 Medicare Administrative Contractors (MAC) administered claims submitted by Medicare providers and suppliers. Twelve were A/B MACs that administered Medicare Part A and Part B claims for inpatient hospital care, outpatient physician and hospital services, and home health and hospice care, among other services, in specific jurisdictions. Four other MACs administered claims for durable medical equipment (DME). GAO found that the A/B and DME MACs are typically expected to carry out similar key responsibilities, a few of which—including claims processing and customer service—have accounted for most of their reported costs. Since the implementation of contracting reform, beginning in 2006, the key responsibilities included in MACs' statements of work have generally remained consistent, with limited exceptions. Further, while similar key responsibilities accounted for the majority of A/B MACs' and DME MACs' costs, there were some differences between A/B MACs and DME MACs in the shares of total costs that were accounted for by certain responsibilities. For example, the DME MACs spent a higher portion on appeals, on average, than did the A/B MACs. Officials from the Centers for Medicare & Medicaid Services (CMS) and the MACs that GAO interviewed have identified lessons learned since the implementation of contracting reform, and they have made improvements to increase operational efficiency and effectiveness. For example, MACs have developed Internet-based provider portals to reduce expenditures on telephone-based provider customer service. However, both CMS and MAC officials identified challenges for continued improvements in MAC efficiency and effectiveness, such as MACs' desire to protect their competitive advantage by not sharing certain innovations or operational improvements with other MACs. CMS selected a cost-plus-award-fee contract structure for the MACs when it initially implemented contracting reform. This is a type of cost-reimbursement contract that allows the agency to provide financial incentives for achieving specific performance goals. While CMS has made modifications to its cost-plus-award-fee structure for MAC contracts—such as revising the performance metrics included in MACs' award fee plans and adjusting the distribution of award fees across the metrics to promote performance in areas where MACs have performed poorly in the past—the agency has not formally revisited its MAC contracting approach since the implementation of contracting reform. Moreover, its assessment of alternative contracting approaches has been limited. The Federal Acquisition Regulation (FAR) states that changing circumstances may make different contracting approaches more appropriate later in the course of a series of contracts or a long-term contract than they were at the outset. Further, CMS indicated in its 2007 MAC acquisition strategy that once a baseline cost and level of effort had been established, the agency would reassess whether the cost-plus-award-fee contract structure was still appropriate for the MACs. There are a number of other contracting approaches that could be introduced within or in addition to the cost-reimbursement structure. Without formally assessing the potential benefits and risks of alternative contracting approaches, CMS may be missing opportunities to enhance MACs' efficiency and effectiveness. GAO recommends that CMS conduct an analysis to determine whether alternative contracting approaches could be used to help promote improved contractor performance. In its comments, the Department of Health and Human Services concurred with this recommendation and said it plans to analyze alternative contracting approaches for MACs. |
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For over 50 years, antibiotics have been widely prescribed to treat bacterial infections in humans. Many antibiotics commonly used in humans have also been used in animals for therapeutic and other purposes, including growth promotion. Resistance to penicillin, which was the first broadly used antibiotic, started to emerge soon after its widespread introduction. Since that time, resistance to other antibiotics has emerged, and antibiotic resistance has become an increasing public health problem worldwide. Antibiotics kill most, if not all, of the susceptible bacteria that are causing an infection, but leave behind—or select, in biologic terms—the bacteria that have developed resistance, which can then multiply and thrive. Infection-causing bacteria that were formerly susceptible to an antibiotic can develop resistance through changes in their genetic material, or deoxyribonucleic acid (DNA). These changes can include the transfer of DNA from resistant bacteria, as well as spontaneous changes, or mutations, in a bacterium’s own DNA. The DNA coding for antibiotic resistance is located on the chromosome or plasmid of a bacterium. Plasmid-based resistance is transferred more readily than chromosomal-based resistance. Once acquired, the genetically determined antibiotic resistance is passed on to future generations and sometimes to other bacterial species. The dose of antibiotic and length of time bacteria are exposed to the antibiotic are major factors affecting whether the resistant bacteria population will dominate. Low doses of antibiotics administered over long periods of time to large groups of animals, such as doses used for growth promotion in animals, favor the emergence of resistant bacteria. To investigate the impact on human health of antibiotic use in animals, researchers have used both epidemiologic studies alone and epidemiologic studies combined with molecular subtyping of bacterial isolates. Epidemiologic studies examine patterns of health or disease in a population and the factors that influence these patterns. These studies help to identify the cause of a disease and the factors that influence a person’s risk of infection. Many studies investigating antibiotic-resistant bacteria and their impact on human health combine epidemiologic studies with molecular subtyping—also called “DNA fingerprinting”—a technique that translates bacteria’s genetic material into a “bar code” that can be used to identify specific pathogens and link them with disease outbreaks. For example, following an outbreak of a diarrheal disease among people in a community, an epidemiologic study would determine all the common exposures among the people with the disease, and molecular subtyping of bacterial isolates could determine what pathogens were responsible for the disease. While the use of antibiotics in animals poses potential human health risk, it is also an integral part of intensive animal production in which large numbers of poultry, swine, and cattle are raised in confinement facilities. (See fig. 1.) Antibiotics are used in animals to treat disease; to control the spread of a disease in a group of animals when disease is present in some of the animals; to prevent diseases that are known to occur during high-risk periods, such as after transport, when the animals are stressed; and to promote growth—that is, to allow animals to grow at a faster rate while requiring less feed per pound of weight gain. This use of antibiotics is commonly referred to as growth promotion and generally entails using low doses of antibiotics over long periods of time in large groups of animals. Many animal producers believe the use of antibiotics for growth promotion also prevents disease. Antibiotics are generally administered by injection to individual animals and in feed or water to groups of animals. Figure 2 shows how antibiotic-resistant bacteria that develop in animals can possibly be transferred to humans, who may then develop a foodborne illness, such as a salmonella infection, that is resistant to antibiotic treatment. Once the resistant bacteria develop in animals, they may be passed to humans through the consumption or handling of contaminated meat. An animal or human may carry antibiotic-resistant bacteria but show no signs or symptoms of an illness. Resistant bacteria may also be spread to fruits, vegetables, and fish products through soil, well water, and water runoff contaminated by waste material from animals harboring these bacteria, although such routes are beyond the focus of this report. Researchers in human medicine have debated the public health impact of antibiotic use in agriculture for many years. In the United States the debate intensified before FDA approved the first fluoroquinolone antibiotic for use in animals in 1995. At that time, drugs from the fluoroquinolone class had already been used for humans for nearly a decade. Debate focused on whether development of resistance to the drug approved for use in animals could, through cross-resistance, compromise the effectiveness of other drugs in the fluoroquinolone class that were valuable in treating human diseases. Efforts have been made to address the spread of antibiotic resistance by providing education to change behaviors of physicians and the public, but researchers differ on whether changes in agricultural practices are also needed. CDC has undertaken educational efforts aimed at physicians and the public. CDC is encouraging physicians to reduce prescribing antibiotics for infections commonly caused by viruses, such as ear and sinus infections. Patients are being taught that antibiotics are only for bacterial infections, not viral infections. Many researchers contend that efforts to reduce the use of antibiotics in animals are also needed to preserve the effectiveness of antibiotics necessary for treatment of bacterial diseases in humans and animals and to decrease the pool of resistant bacteria in the environment. However, agricultural industry officials argue that antibiotic use in animals is essential to maintaining the health of animals and therefore the safety of food. Professional organizations and associations differ on the use of antibiotics in animals. Many professional organizations that have studied the human health implications of antibiotic use in animals—including WHO and, in the United States, the Institute of Medicine of the National Academy of Sciences and the Alliance for the Prudent Use of Antibiotics—have recommended either limiting or discontinuing the use of antibiotic growth promoters. Many of the professional associations for human medicine— such as the American Medical Association, the American College of Preventive Medicine, the American Public Health Association, and the Council of State and Territorial Epidemiologists—have position statements for limiting antibiotic use in animals for nontherapeutic purposes, such as growth promotion, for antibiotics that are important for both human and animal health. Many of the professional associations for veterinary medicine—such as the American Veterinary Medical Association and the American Association of Swine Practitioners—agree on the goal of reducing the use of antibiotics in animals but differ on the means to achieve this goal. These associations are calling for veterinarians to work with owners of animals to implement judicious use guidelines. While limiting the use of antibiotics in animals for growth promotion may reduce the human health risk associated with antibiotic-resistant bacteria, such restrictions also may increase the cost of producing animals and the prices consumers pay for animal products. For example, a 1999 economic study estimated that a hypothetical ban on all antibiotic use in feed in swine production would increase U.S. consumers’ costs by more than $700 million per year. However, the increase in consumer costs would be much smaller if—as the Institute of Medicine proposed in 2003—producers were allowed to continue to use some antibiotics for growth promotion and only antibiotics that are used in humans were banned for growth promotion. Moreover, in other animal species, such as beef cattle or chickens, the economic impacts of growth promotion restrictions would likely be smaller than in swine because antibiotic use for growth promotion is less prevalent in the production of these other species. Appendix II summarizes studies of the economic effects of banning antibiotic use for growth promotion and other proposed restrictions on antibiotic uses in animals. The three federal agencies responsible for protecting Americans from health risk associated with drug use in animals are FDA, CDC, and USDA. These agencies have a variety of responsibilities related to surveillance, research, and regulation. All three agencies collaborate on surveillance activities, such as the National Antimicrobial Resistance Monitoring System—Enteric Bacteria (NARMS), which was initiated in 1996 because of public health concerns associated with the use of antibiotics in animals. In addition, FDA’s primary responsibilities as a regulatory body focus on human health and animal drug safety. CDC primarily conducts research and education that focus on human health. USDA oversees the retail meat trade, including related farm and slaughter operations. USDA activities may include studies of healthy farm animals, evaluations of diagnostic data involving sick animals, and biological sampling from slaughter and meat processing plants. USDA also conducts research and education related to antibiotic resistance. In addition, FDA approves for sale and regulates the manufacture and distribution of drugs used in veterinary medicine, including drugs given to animals from which human foods are derived. Prior to approving a new animal drug application, FDA must determine that the drug is safe and effective for its intended use in the animal. It must also determine that the new drug intended for animals is safe with regard to human health. FDA considers a new animal antibiotic to be safe if it concludes that there is reasonable certainty of no harm to human health from the proposed use of the drug in animals. FDA may also take action to withdraw an animal drug from the market when the drug is no longer shown to be safe. These three agencies also participate in the federal Interagency Task Force on Antimicrobial Resistance. Task force activities focus on antibiotic resistance from use of antibiotics in animals, as well as the human use of antibiotics. In January 2001, the task force developed an action plan based on advice from consultants from state and local health agencies, universities, professional societies, pharmaceutical companies, health care delivery organizations, agricultural producers, consumer groups, and other members of the public. The action plan includes 84 action items, 13 of which have been designated as top-priority items and cover issues of surveillance, prevention and control, research, and product development. A federal agency (or agencies) is designated as the lead for each action item. The United States is one of the world’s leading exporters of meat. In 2002, U.S. meat exports accounted for about $7 billion. The World Trade Organization (WTO), of which the United States is a member, provides the institutional framework for conducting international trade, including trade in meat products. WTO member countries agree to a series of rights and obligations that are designed to facilitate global trade. When a country regulates imports, including imported meat, WTO guidelines stipulate that member countries have the right to determine their own “appropriate levels of protection” in their regulations to protect, among other things, human and animal health. Member countries must have a scientific basis to have levels of protection that are higher than international guidelines. To encourage member countries to apply science-based measures in their regulations, WTO relies on the international standards, guidelines, and recommendations that its member countries develop within international organizations, such as the Codex Alimentarius Commission for food safety and the OIE for animal health and the safety of animal products for human consumption. While ensuring that food products are safe and of high quality usually promotes trade, one country’s food safety regulations could be interpreted by another country as a barrier to trade. It is difficult, however, to distinguish between a legitimate regulation that protects consumers but incidentally restricts trade from a regulation that is intended to restrict trade and protect local producers, unless that regulation is scientifically documented. Research has shown that antibiotic-resistant bacteria have been transferred from animals to humans, but the extent of potential harm to human health is uncertain. Evidence from epidemiologic studies suggests associations between patterns of antibiotic resistance in humans and changes in antibiotic use in animals. Further, evidence from epidemiologic studies that include molecular subtyping to identify specific pathogens has established that antibiotic-resistant campylobacter and salmonella bacteria are transferred from animals to humans. Many of the studies we reviewed found that this transference poses significant risks for human health. Researchers disagree, however, about the extent of potential harm to human health from the transference of antibiotic-resistant bacteria. Antibiotic-resistant bacteria have been transferred from animals to humans. Evidence that suggests that this transference has taken place is found in epidemiologic studies showing that antibiotic-resistant E. coli and campylobacter bacteria in humans increase as use of the antibiotics increases in animals. Evidence that establishes transference of antibiotic- resistant bacteria is found in epidemiologic studies that include molecular subtyping. These studies have demonstrated that antibiotic-resistant campylobacter and salmonella bacteria have been transferred from animals to humans through the consumption or handling of contaminated meat. That is, strains of antibiotic-resistant bacteria infecting humans were indistinguishable from those found in animals, and the researchers concluded that the animals were the source of infection. Evidence from epidemiologic studies that do not include molecular subtyping indicates that patterns of antibiotic resistance in humans are associated with changes in the use of particular antibiotics in animals. For example, work conducted in the United States in the 1970s showed an association between the use of antibiotic-supplemented animal feed in a farm environment and the development of antibiotic-resistant E. coli in the intestinal tracts of humans and animals. In the study, isolates from chickens on the farm and from people who lived on or near the farm were tested and found to have low initial levels of tetracycline-resistant E. coli bacteria. The chickens were then fed tetracycline-supplemented feed, and within 2 weeks 90 percent of them were excreting essentially all tetracycline-resistant E. coli bacteria. Within 6 months, 7 of the 11 people who lived on or near the farm were excreting high numbers of resistant E. coli bacteria. Six months after the tetracycline-supplemented feed was removed, no detectable tetracycline-resistant organisms were found in 8 of the 10 people who lived on or near the farm when they were retested. Another study, based on human isolates of Campylobacter jejuni submitted to the Minnesota Department of Health, reported that the percentage of Campylobacter jejuni in the isolates that were resistant to quinolone increased from approximately 0.8 percent in 1996 to approximately 3 percent in 1998. There is also evidence to suggest that antibiotic-resistant enterococcus has developed from the use of antibiotics in animals. Vancomycin resistance is common in intestinal enterococci of both exposed animals and nonhospitalized humans only in countries that use or have previously used avoparcin (an antibiotic similar to vancomycin) as an antibiotic growth promoter in animal agriculture. Since the EU banned the use of avoparcin as a growth promoter, several European countries have observed a significant decrease in the prevalence of vancomycin-resistant enterococci in meat and fecal samples of animals and humans. Epidemiologic studies that include molecular subtyping have demonstrated that antibiotic-resistant campylobacter and salmonella bacteria have been transferred from animals to humans through the consumption or handling of contaminated meat. That is, strains of antibiotic-resistant bacteria infecting humans were indistinguishable from those found in animals, and the authors of the studies concluded that the animals were the source of infection. The strongest evidence for the transfer of antibiotic-resistant bacteria from animals to humans is found in the case of fluoroquinolone-resistant campylobacter bacteria. Campylobacter is one of the most commonly identified bacterial causes of diarrheal illness in humans. The strength of the evidence is derived in part from the fact that the particular way fluoroquinolone resistance develops for campylobacter bacteria makes it easier to identify the potential source of the resistance. Most chickens are colonized with campylobacter bacteria, which they harbor in their intestines, but which do not make them sick. Fluoroquinolones are given to flocks of chickens when some birds are found to have certain infections caused by E. coli. In addition to targeting the bacteria causing the infection, treatment of these infections with fluoroquinolones almost always replaces susceptible campylobacter bacteria with fluoroquinolone-resistant campylobacter bacteria. Because fluoroquinolone resistance is located on the chromosome of campylobacter, the resistance is generally not transferred to other species of bacteria. Therefore when fluoroquinolone- resistant campylobacter bacteria are detected in human isolates, the source is likely to be other reservoirs of campylobacter bacteria, including animals. In some cases, molecular subtyping techniques have shown that fluoroquinolone-resistant isolates of campylobacter from food, humans, and animals are similar. Fluoroquinolone-resistant Campylobacter jejuni in humans has increased in the United States and has been linked with fluoroquinolone use in animals. CDC reported that in the United States the percentage of Campylobacter jejuni in human isolates that were resistant to fluoroquinolones increased from 13 percent in 1997 to 19 percent in 2001. A study in Minnesota found that fluoroquinolone-resistant Campylobacter jejuni was isolated from 14 percent of 91 chicken products obtained from retail markets in 1997. Through molecular subtyping, the strains isolated from the chicken products were shown to be the same as those isolated from nearby residents, thereby bolstering the case that the chickens were the source of the antibiotic resistance. During the 1980s, the resistance of campylobacter bacteria to fluoroquinolones increased in Europe. European investigators hypothesized that there was a causal relationship between the use of fluoroquinolones in animals and the increase in fluoroquinolone-resistant campylobacter infections in humans. For example, an epidemologic study that included molecular subtyping in the Netherlands found that among different strains of campylobacter bacteria, the percentage of fluoroquinolone-resistant strains in isolates tested had risen from 0 percent in both human and animal isolates in 1982 to 11 percent in human isolates and 14 percent in poultry isolates by 1989. The authors concluded that the use of two new fluoroquinolones, one in humans in 1985 and one in animals in 1987, was responsible for the quinolone-resistant strains. The authors asserted that the extensive use of fluoroquinolones in poultry and the common route of campylobacter infection from chickens to humans suggest that the resistance was mainly due to the use of fluoroquinolones in poultry. Several epidemiologic studies using molecular subtyping have linked antibiotic-resistant salmonella infections in humans, another common foodborne illness, to animals. For example, in 1998 bacteria resistant to ceftriaxone were isolated from a 12-year-old boy who lived on a cattle farm in Nebraska. Molecular subtyping revealed that an isolate from the boy was indistinguishable from one of the isolates from the cattle on the farm. No additional ceftriaxone-resistant salmonella infections were reported in that state or adjoining states that could have been the cause of the infection. Similarly, an epidemiologic study in Poland from 1995 to 1997 using molecular subtyping found identical profiles for ceftriaxone-resistant salmonella bacteria in isolates from poultry, feed, and humans. The researchers concluded that the salmonella infections were introduced in the poultry through the feed and reached humans through consumption of the poultry. Researchers in Taiwan also found that Salmonella enterica serotype choleraesuis bacteria that were resistant to ciprofloxacin in isolates collected from humans and swine were closely related and, following epidemiologic studies, concluded that the bacteria were transferred from swine to humans. Researchers have also documented human infections caused by multidrug- resistant strains of salmonella linked to animals. In 1982, researchers used molecular subtyping to show that human isolates of multidrug-resistant salmonella bacteria were often identical or nearly identical to isolates from animals. In the mid-1990s, NARMS data showed a rapid growth of multidrug resistance in Salmonella enterica serotype Typhimurium definitive type (DT) 104 among humans. Molecular subtyping found that human isolates with this strain of multidrug resistance in Salmonella enterica serotype Typhimurium DT104 in 1995 were indistinguishable from human isolates with this strain tested in 1985 and 1990. These results indicated that the widespread emergence of multidrug resistance in Salmonella enterica serotype Typhimurium DT104 may have been due to dissemination of a strain already present in the United States. Because food animals are the reservoir for most domestically acquired salmonella infections and transmission from animals to humans occurs through the food supply, the researchers concluded that the human infections were likely from the animals. Recently, there has been an emergence of multidrug-resistant Salmonella enterica serotype Newport infections that include resistance to cephalosporins, such as cefoxitin. Based on molecular subtyping, multidrug-resistant salmonella isolates from cattle on dairy farms were found to be indistinguishable from human isolates. An epidemiologic study found that the infections in humans were associated with direct exposure to a dairy farm, and the authors hypothesized that the infections were associated with handling or consuming the contaminated foods. The extent of harm to human health from the transference of antibiotic- resistant bacteria from animals is uncertain. Many studies have found that the use of antibiotics in animals poses significant risks for human health, and some researchers contend that the potential risk of the transference is great for vulnerable populations. However, a small number of studies contend that the health risks of the transference are minimal. Some studies have sought to determine the human health impacts of the transference of antibiotic resistance from animals to humans. For example, the Food and Agriculture Organization of the United Nations (FAO), OIE, and WHO recently released a joint report based on the scientific assessment of antibiotic use in animals and agriculture and the current and potential public health consequences. The report states that use of antibiotics in humans and animals alters the composition of microorganism populations in the intestinal tract, thereby placing individuals at increased risk for infections that would otherwise not have occurred. The report also states that use of antibiotics in humans and animals can also lead to increases in treatment failures and in the severity of infection. Similarly, a recent review of studies regarding increased illnesses due to antibiotic-resistant bacteria found significant differences in treatment outcomes of patients with antibiotic-resistant bacterial infections and patients with antibiotic-susceptible bacterial infections. For example, one study found that hospitalization rates of patients with nontyphoidal salmonella infections were 35 percent for antibiotic-resistant infections and 27 percent for antibiotic-susceptible infections. That study also found that the length of illness was 10 days for antibiotic-resistant infections versus 8 days for antibiotic-susceptible infections. Another study found diarrhea from Campylobacter jejuni infections lasted 12 days for antibiotic-resistant infections versus 6 days for susceptible infections. Also, based on this review, the authors estimated that fluoroquinolone resistance likely acquired through animals leads to at least 400,000 more days of diarrhea in the United States per year than would occur if all infections were antibiotic-susceptible. The authors estimated that antibiotic resistance from nontyphoidal salmonella infections mainly arising from animals could account for about 8,700 additional days of hospitalization per year. Experts are especially concerned about safeguarding the effectiveness of antibiotics such as vancomycin that are considered the “drugs of last resort” for many infections in humans. Evidence suggests that use of the antibiotic avoparcin in animals as a growth promoter may increase numbers of enterococci that are resistant to the similar antibiotic vancomycin. A particular concern is the possibility that vancomycin- resistant enterococci could transfer resistance to other bacteria. Some Staphylococcus aureus infections found in hospitals are resistant to all antibiotics except vancomycin, and human health can be adversely affected, as treatment could be difficult, if not impossible, if these strains develop resistance to vancomycin, too. Recently, two human isolates of Staphylococcus aureus were found to be resistant to vancomycin. With the increase in infections that are resistant to vancomycin, the streptogramin antibiotic quinupristin/dalfopristin (Q/D, also known as Synercid) has become an important therapeutic for life-threatening vancomycin-resistant enterococcus infections. Virginiamycin, which is similar to Q/D, has been used in animals since 1974, and Q/D was approved for human use in 1999. NARMS data from 1998 to 2000 indicate that Q/D- resistant Enterococcus faecium has been found in chicken and ground pork purchased in grocery stores, as well as in human stools. Experts hypothesize that use of virginiamycin in poultry production has led to Q/D- resistant bacteria in humans because the antibiotics are very similar, but the human health consequences of this have not been quantified. Experts are also concerned about risks to vulnerable populations such as individuals with compromised immune systems or chronic diseases, who are more susceptible to infections, including antibiotic-resistant infections. For example, salmonella infections are more likely to be severe, recurrent, or persistent in persons with human immunodeficiency virus (HIV). Another concern is that people with resistant bacteria could inadvertently spread those bacteria to hospitalized patients, including those with weakened immune systems. Although it is generally agreed that transference is possible, some researchers contend that the health risks of the transference are minimal. Proponents of this view note that not all studies have shown an increase in antibiotic-resistant bacteria. For example, one study conducted between 1997 and 2001 found no clear trend toward greater antibiotic resistance in salmonella bacteria. Proponents of this view also assert that restricting the use of antibiotics in animal agriculture could lead to greater levels of salmonella and campylobacter bacteria reaching humans through meat, thus increasing the risk of human infections. Conversely, some of these researchers also argue that the risk to humans of acquiring these infections from animals can be eliminated if meat is properly handled and cooked. They also cite a few studies that have concluded that the documented human health consequences are small. For example, they noted that one study estimated that banning the use of virginiamycin in animals in the U.S. would lower the number of human deaths by less than one over 5 years. FDA, CDC, and USDA have increased their surveillance activities related to antibiotic resistance in animals, humans, and retail meat since beginning these activities in 1996. New programs have been added, the number of bacteria being studied has increased, and the geographic coverage of the sampling has been expanded. In addition, all three agencies have sponsored research on the human health risk from antibiotic resistance in animals. FDA has taken several recent actions to minimize the human health risk of antibiotic resistance from animals, but the effectiveness of its actions is not yet known. These activities include administrative action to prohibit the use of the fluoroquinolone enrofloxacin (Baytril) for poultry and the development of a recommended framework for conducting qualitative risk assessments of all new and currently approved animal drug applications with respect to antibiotic resistance and human health risk. FDA, CDC, and USDA have six surveillance activities ongoing to identify and assess the prevalence of resistant bacteria in humans, animals, or retail meat. (See table 1.) Since 1996, these activities have expanded to include additional bacteria, greater geographic coverage, and new activities. Two of these activities—NARMS and Collaboration in Animal Health, Food Safety and Epidemiology (CAHFSE)—focus on antibiotic resistance from animals. The other four activities—Foodborne Diseases Active Surveillance Network (FoodNet), PulseNet, PulseVet, and National Animal Health Monitoring System (NAHMS)—focus on foodborne disease or animal health in general, not antibiotic resistance, but are nevertheless relevant to issues of antibiotic resistance. Figure 3 shows how these different surveillance activities provide data about various aspects of antibiotic resistance. NARMS monitors changes in susceptibilities of bacteria in humans and animals to antibiotics. To assess the extent of changes in levels of resistance, NARMS collects animal and human isolates of six different bacteria, specifically non-Typhi Salmonella, Campylobacter, E. coli, Enterococcus, Salmonella Typhi, and Shigella. These activities are conducted under three independent, yet coordinated, programs, with FDA serving as the funding and coordinating agency. The human program gathers isolates from humans and is led by CDC. The animal program, led by USDA, gathers isolates from animals on farms, from slaughter and processing plants, and from diagnostic laboratories. The retail meat program gathers samples of meat purchased at grocery stores and is run by FDA. The agencies work together to standardize results through ongoing quality control efforts. NARMS has expanded in three major ways—range of bacteria tested, geographic coverage, and number of programs—since it was established in 1996. For example, human NARMS started by looking at two bacteria and now studies six bacteria. Further, NARMS also assessed the potential of other bacteria to become sources of resistance by collecting and assessing listeria and vibrio isolates in pilot studies. With regard to geographic coverage, the number of participating health departments has increased from 14 state and local health departments in 1996 to all 50 states and Washington, D.C., in 2003. Finally, the retail meat program was added in 2002. Initially, 5 states participated in the retail meat program, but by 2004, 10 states were participating. Despite this recent expansion, all of NARMS experienced budget cuts in fiscal year 2004, calling into question future expansion efforts. For example, the USDA budget for the animal program was cut 17.6 percent for 2004. NARMS has also produced collaborative research efforts among FDA, CDC, and USDA and helped further scientific understanding of antibiotic resistance. For example, data from NARMS led CDC to conclude that the proportion of campylobacter isolates resistant to ciprofloxacin in 2001 was 2.4 times higher than in 1997. Similarly, FDA and CDC officials reported that NARMS data were used to evaluate antibiotic resistance to fluoroquinolones, and CDC officials told us that after NARMS data showed an increased number of cases of Salmonella Newport infections in humans, researchers at CDC and USDA shared human and animal isolates to determine whether the same pattern existed in animals. CAHFSE, established by USDA in 2003, collects samples from animals on farms to identify changes in antimicrobial resistance over time. The first animals that are being tested in the program are swine. USDA conducts quarterly sampling of 40 fecal and 60 blood samples from animals from farms in four states. As of March 2004, 40 farms were participating in CAHFSE. In addition to the laboratory analyses, there are plans for risk analyses, epidemiologic studies, and field investigations, as well as analysis of samples collected at slaughter, and the addition of more species, funding permitted. FoodNet, PulseNet, PulseVet, and NAHMS focus on foodborne disease or animal health rather than antibiotic resistance. FoodNet, the principal foodborne disease component of CDC’s Emerging Infections Program, is a collaborative project with 10 states (referred to as FoodNet sites), USDA, and FDA. The goals of FoodNet are to determine the incidence of foodborne diseases, monitor foodborne disease trends, and determine the proportion of foodborne diseases attributable to specific foods and settings. FoodNet data are derived from specimens collected from patients. Isolates from these specimens are sent to NARMS for susceptibility testing. CDC officials reported that one of every 20 patients with a specimen in FoodNet also has an isolate in NARMS. A recent development has been the linking of the NARMS and FoodNet data systems. For example, FoodNet data can be used to determine whether an individual was hospitalized, and NARMS data can reveal whether the bacteria that infected the person were resistant to antibiotics. CDC officials reported that because of the linked databases, they were able to determine whether, for example, someone with an antibiotic-resistant salmonella infection was more likely to be hospitalized than someone with an antibiotic-susceptible salmonella infection. FoodNet also has a role in the retail meat program of NARMS. The FoodNet sites purchase the meat samples from grocery stores, examine the samples for the prevalence or frequency of bacterial contamination, and forward isolates of the bacteria to FDA for susceptibility testing for antibiotic resistance. PulseNet is CDC’s early warning system for outbreaks of foodborne disease. USDA recently established a similar animal program, called PulseVet. PulseNet studies isolates from humans and suspected food, and PulseVet studies isolates from animals. Both PulseNet and PulseVet conduct DNA fingerprinting of bacteria and compare those patterns to other samples in order to identify related strains. The PulseNet and PulseVet isolates are tested for antibiotic resistance at CDC and USDA, respectively. FDA also performs DNA fingerprinting on salmonella and campylobacter isolates obtained from the retail meat program of NARMS and submits these data to PulseNet. NAHMS, which focuses on healthy animals, was initiated by USDA in 1983 to collect, analyze, and disseminate data on animal health, management, and productivity across the United States. Since 1990, USDA has annually conducted studies on animal health, including information about antibiotic use, through NAHMS. Each study focuses on different animals, including swine, cattle (both dairy and beef), and sheep. NAHMS provides only a snapshot of a particular species or commodity; it does not track changes over time. While NAHMS contributes information about healthy animals, a USDA official told us that it also includes information about antibiotics used and may include information on the route of administration and the reason for treatment, which can be useful in further understanding NARMS findings. In addition, researchers and veterinarians are able to access the NAHMS database for studies of disease incidence, risk assessment, and preventive treatment techniques. Further, bacteria samples obtained from NAHMS have been added to the NARMS database. Under the federal Interagency Task Force on Antimicrobial Resistance action plan, FDA, CDC, and USDA have initiated a number of research efforts that are relevant to antibiotic use in animals and human health. These ongoing research efforts focus on defining the effects of using various animal drugs on the emergence of antibiotic-resistant bacteria and identifying risk factors and preventive measures. Through CDC, FDA currently has cooperative agreements with four veterinary schools to study ways to reduce antibiotic-resistant bacteria in animals and is assessing the prevalence of antibiotic-resistant DNA in feed ingredients. In addition, FDA annually issues a 3-year research plan that describes research focusing on, among other things, antibiotic resistance in animals and its consequences for human health. Current studies include efforts to examine the consequences of antibiotic use in animals, the transmission of antibiotic resistance, and the processes underlying the spread of antibiotic resistance. In total, CDC has funded three projects under its Antimicrobial Resistance Applied Research extramural grant program. One of these grants, for example, is to study the prevalence of antibiotic-resistant E. coli in chicken and ground beef products, examine the risk factors for human colonization with a resistant strain of E. coli, and compare characteristics of antibiotic-susceptible and antibiotic-resistant isolates from meat with those of antibiotic-susceptible and antibiotic-resistant isolates from humans. Similarly, USDA has funded studies of antibiotic resistance in chicken, turkey, pork, and dairy products. These studies have provided additional sources of isolates to FDA for risk assessment purposes. Also, USDA’s Cooperative State Research, Education, and Extension Service has funded over 30 studies related to antibiotic resistance since 2000 and awarded an additional $8 million in grants in 1999 and 2000. Funded research includes studies on the prevalence, development, and possible transmission of antibiotic resistance; the epidemiology of antibiotic resistance; and the evaluation of management practices and potential prevention/intervention strategies for antibiotic resistance. FDA has taken a variety of actions to minimize the risk to the public health of antibiotic resistance in humans resulting from the use of antibiotics in animals, although it is still too early to determine the effectiveness of these actions. First, FDA has taken action to prohibit the use of an already approved animal drug for poultry because of concerns about human health risk. Second, the agency developed a recommended framework for reviewing all new animal antibiotic applications with respect to antibiotic resistance and human health risk. Third, FDA has begun reviewing antibiotics currently approved for use in animals according to its new framework to determine whether FDA needs to act to ensure that the drugs are safe. It is too early to determine the effectiveness of FDA’s review of currently marketed drugs. FDA has not made drugs used in animals that are critically important for human health its top priority for review, and any remedial actions pursued by the agency may take years to complete. On October 31, 2000, FDA proposed withdrawing the approval of enrofloxacin (Baytril), a fluoroquinolone drug used in poultry, after human health risks associated with the use of the drug in chickens and turkeys were documented by, among others, NARMS. Enrofloxacin is administered to flocks of poultry in their water supply to control mortality associated with E. coli and Pasteurella multocida organisms. FDA had found that new evidence, when evaluated with information available when the application was approved, demonstrated that enrofloxacin used with poultry flocks has not been shown to be safe for humans. Specifically, FDA determined that the use of enrofloxacin in poultry causes the development of a fluoroquinolone-resistant strain of campylobacter in poultry, which, when transferred to humans, is a significant cause of fluoroquinolone- resistant campylobacter infections in humans. Before proceeding with formal efforts to withdraw approval for use of enrofloxacin with poultry flocks, FDA considered a number of alternative actions. For example, the agency determined that changing the label to limit use to the treatment of individual birds and limiting use to one time or one treatment per individual bird were impractical. The agency also considered and rejected the establishment of a registry that would require veterinarians to demonstrate the need for the drug. FDA proceeded with its efforts to withdraw approval of enrofloxacin for use in poultry because FDA knew that there were alternative effective drugs for treating these illnesses in poultry. In February 2002, FDA announced that a hearing would be held on the proposal to withdraw approval of enrofloxacin. Since FDA’s proposed action to ban the use of enrofloxacin in poultry, representatives of both FDA and Bayer, the manufacturer of Baytril, as well as numerous experts, have provided testimony on the question of its safety. Submission of written testimony was due in December 2002, and cross-examination of witnesses took place from late April 2003 through early May 2003. The final posthearing briefs and responses were delivered in July and August 2003. On March 16, 2004, an FDA administrative law judge issued an initial decision withdrawing the approval of the new animal drug application for Baytril. This decision will become final unless it is appealed to the FDA Commissioner by Bayer or another participant in the case or the Commissioner chooses to review it on his own initiative. If the Commissioner reviews and upholds the initial decision, Bayer or another participant may choose to appeal in court. FDA has determined that the human health risk from antibiotic use in animals is not acceptable, and the agency may initiate risk management strategies to contain such risk. In October 2003, as part of its efforts to approve and regulate animal drugs, FDA issued Guidance for Industry #152. The guidance outlines a framework for determining the likelihood that an antibiotic used to treat an animal would cause an antibiotic resistance problem in humans who consume meat or other food products from animals. The guidance’s risk assessment framework is based on three factors—the probability that resistant bacteria are present in the target animal, the probability that humans would ingest the bacteria in question from the relevant food commodity, and the probability that human exposure to resistant bacteria would result in an adverse health consequence. The resulting overall risk estimate is ranked as high, medium, or low. Because the guidance is new, it is not yet known how the results of a risk assessment conducted according to the guidance will influence FDA’s decisions to approve new drug applications. Agency officials told us that FDA has never denied a new or supplemental animal drug application because of evidence that the drug caused antibiotic resistance in humans. In addition, the risk assessment guidance states that drugs with high risk may still be approved, though with specific use restrictions, if there is a reasonable certainty of no harm to human health when the drug is approved. These restrictions might include availability only by prescription, restrictions on uses not specified on the label (known as extralabel use), limitations for use in individual animals (versus groups of animals) for fewer than 21 days, and requirements for postapproval monitoring. FDA has previously used these kinds of restrictions with some drugs. While agency officials told us that the extralabel use prohibitions for animal drugs have generally reduced unauthorized use, such use restrictions may not prevent human health risk. For example, while FDA had earlier limited fluoroquinolones to use by or under the order of a veterinarian and prohibited the extralabel use of fluoroquinolones, the agency has now concluded that a human health risk exists despite these restrictive measures. FDA officials reported that the agency has reviewed about seven new drug applications using the risk assessment framework in Guidance for Industry #152. Some of those drugs have been approved. Other drugs have been approved but with label claims different from those requested in the application. FDA officials have not denied approval to any of these new drug applications. To determine whether future regulatory actions may be necessary, FDA is conducting risk assessments for drugs currently used in animal agriculture that are also important for human medicine. FDA began with two quantitative risk assessments for drugs ranked as critically important for human health at the time the assessments were initiated. FDA completed the assessment for fluoroquinolones in October 2000 and expects to complete the assessment for virginiamycin, a streptogramin drug related to Synercid, its counterpart for humans, in 2004. The quantitative risk assessments calculate estimates of the number of cases of infection. Agency officials told us that they had hoped that the quantitative risk assessment approach would provide a template for future risk assessments. However, FDA decided that it did not. FDA officials told us that as a result, the agency plans to review other currently marketed antibiotics using the qualitative risk assessment framework outlined in Guidance for Industry #152, which uses broad categories to assess risk. An FDA official reported that if the information necessary to complete any section of the qualitative risk assessment were unavailable, the agency would assign a higher score to the product, to err on the side of caution. After outlining possible risk management steps, if any, the agency would allow a drug’s sponsor (generally pharmaceutical firms) to provide additional information to help FDA reconsider its risk estimate. Generally, these qualitative risk assessments are considered to be a starting point for examining human health risk for some drugs. FDA has not made drugs that are critically important for human health its top priority for review. (See app. III for more detail on evaluating the importance of an animal drug for human health.) Instead, the agency focused its first qualitative risk assessments on subtherapeutic penicillin and tetracycline drugs. These assessments are expected to be completed by April 2004. FDA officials told us that the agency will then conduct qualitative risk assessments for therapeutic penicillin and tetracycline drugs, followed by assessments for those drugs that are defined in Guidance for Industry #152 as critically important for human health. As of March 2004, there were four such categories of drugs. For a number of reasons, it is not known whether FDA’s new framework for reviewing currently approved and marketed animal drugs will be able to effectively identify and reduce any human health risk. First, under this plan, it may take years for FDA to identify and reduce any human risk of acquiring antibiotic resistance from meat. FDA has not developed a schedule for conducting the qualitative risk assessments on the currently approved drugs, and the assessments may take a significant amount of time to complete. For example, based on the current schedule, FDA officials told us they expect the qualitative risk assessment of subtherapeutic penicillins and tetracyclines, which were begun in 2002, to take nearly 2 years to complete. Second, FDA officials told us that the risk estimation from the qualitative risk assessments will only use data already available in the original new drug application and any supplemental drug applications, rather than actively seeking new evidence. However, FDA told us that new evidence was an important factor in its risk assessment of fluoroquinolones. Finally, while FDA can pursue a number of enforcement options if its reviews uncover a human health risk, it is not known if they will be effective or how long it will take for such changes to take effect. As the enrofloxacin case demonstrates, risk management strategies may not mitigate human health risk, and administrative proceedings can extend for several years after FDA decides to take enforcement action. An FDA official also told us that if the drug sponsor voluntarily cooperates in implementing risk management strategies, lengthy administrative proceedings may be avoided. Although they have made some progress in monitoring antibiotic resistance associated with antibiotic use in animals, federal agencies do not collect data on antibiotic use in animals that are critical to supporting research on the human health risk. Data on antibiotic use would allow agencies to link use to the emergence of antibiotic-resistant bacteria, help assess the risk to human health, and develop strategies to mitigate resistance. FDA and USDA do not collect these data because of costs to the industry and other factors. Countries that collect antibiotic use data, depending on the amount and type of data collected, have been able to conduct more extensive research than U.S. agencies. According to FDA, CDC, and USDA, more data are needed on antibiotic use in animals in order to conduct further research on antibiotic resistance associated with this use. In particular, FDA has stated that it needs information on the total quantity of antibiotics used in animals, by class; the species they are used in; the purpose of the use, such as disease treatment or growth promotion; and the method used to administer the antibiotic. WHO and OIE have also recommended that countries collect such data. This information could be used for the following: To link antibiotic use to emerging strains of antibiotic-resistant bacteria. Antibiotic use information would clarify the relationship between resistance trends in NARMS and the actual use of antibiotics. For example, detailed on-farm data on antibiotic use and other production practices that are linked to bacteria samples from animals could help identify the conditions under which resistant bacteria develop. To help assess risk to human health. Information on antibiotic use would help assess the likelihood that humans could be exposed to antibiotic-resistant bacteria from animals. This potential exposure is important in determining the risk that antibiotic use in animals may pose to human health. To develop and evaluate strategies to mitigate resistance. Data on antibiotic use would help researchers develop strategies for mitigating increased levels of resistant bacteria in animals, according to CDC officials. Strategies could be developed based on such factors as the way the drug is administered, dosage levels, or use in a particular species. In addition, unless data are available for monitoring the effects of these interventions, researchers cannot assess the strategies’ effectiveness. FDA recognizes that additional data on antibiotic use in animal production would facilitate research on the linkages to human resistance. To that end, FDA had considered a plan that would have required pharmaceutical companies to provide more detailed information on antibiotics distributed for use in animals. This information would have been reported as a part of FDA’s ongoing monitoring of these antibiotics after their approval. However, according to FDA officials, this more detailed reporting would have resulted in significant costs to the pharmaceutical industry. Consequently, FDA is analyzing other options to minimize the burden to the industry. In addition, the information that USDA collects through NAHMS is of limited use for supporting research on the relationship between antibiotic use in animals and emerging antibiotic-resistant bacteria. NAHMS was not designed to collect antibiotic use data; instead, as previously discussed, its main goal is to provide information on U.S. animal health, management, and productivity. Through NAHMS, USDA does collect some data on antibiotic use, but only periodically and only for certain species. For example, it has studied the swine industry every 5 years since 1990 but has not yet studied broiler chickens—the most common type of poultry Americans consume. USDA’s Collaboration in Animal Health, Food Safety and Epidemiology (CAHFSE) is a new program designed to enhance understanding of bacteria that pose a food safety risk. USDA plans to monitor, over time, the prevalence of foodborne and other bacteria, as well as their resistance to antibiotics on farms and in processing plants. These data are expected to facilitate research on the link between agricultural practices, such as the use of antibiotics, and emerging resistant bacteria. Currently, however, CAHFSE does not provide information on the impact of antibiotic use for species such as poultry and cattle and for a significant portion of the swine industry. According to USDA, CAHFSE funding comes primarily from a limited amount of funding that is redirected from other USDA programs, and the program would need additional funding before it could expand to cover processing plants, more swine operations, or other species. USDA officials told us they plan to coordinate data collection and analysis efforts for CAHFSE with NARMS activities at FDA and CDC. According to the officials we spoke with at market research firms, private companies also collect some data on antibiotic use, but this information is developed for commercial purposes and is not always available for public research. These companies collect information on animal production practices, including antibiotic use, and sell this information to producers, who use it to compare their production costs and practices with those of other producers. They also sell these data to pharmaceutical companies, which use the information to estimate the future demand for their products. In any case, the market research firms do not design their data collection efforts to assist research on antibiotic resistance. Unlike the United States, other countries, such as Denmark, New Zealand, and the United Kingdom, collect more extensive data on antibiotic use in animals. Among the countries we examined, Denmark collects the most comprehensive and detailed data, including information on the quantities of antibiotics used in different animal species by age group and method of administration. According to Danish researchers, these data have allowed them to take the following actions: Link antibiotic use in animals to emerging strains of antibiotic- resistant bacteria. Danish researchers have been able to determine how changes in the consumption of antibiotics in animals affect the occurrence of antibiotic-resistant bacteria. In addition, researchers began collecting additional data on antibiotic-resistant bacteria in humans in 2002, allowing them to explore the relationship between levels of antibiotic-resistant bacteria in animals, food, and humans. Develop strategies to mitigate resistance. By monitoring trends in antibiotic use and levels of antibiotic-resistant bacteria, Denmark has been able to adjust national veterinary use guidelines and revised regulations to minimize potential risk to human health. Other countries, such as New Zealand and the United Kingdom, have data collection systems that are not as comprehensive as Denmark’s. Nevertheless, these nations collect data on total sales for antibiotics used in animals by class of antibiotic. The United Kingdom is also working to more accurately track the sales of antibiotics for use in different species. These data show trends in use over time and identify the importance of different antibiotic classes for the production of livestock and poultry. According to the official responsible for the United Kingdom’s data collection system, collecting these data requires few resources. In addition, Canadian officials told us Canada is collecting some data on antibiotic use on farms and expects to collect data on sales of antibiotics used in animals. Canada also plans to develop comprehensive methods to collect use data and integrate these data into its antibiotic resistance surveillance system. According to Canada’s first annual report on antibiotic resistance, issued in March 2004, its next annual report will include some information on antibiotic use in animals. See appendix IV for information on other countries’ data collection systems. The United States and several of its key trading partners, such as Canada and South Korea, and its competitors, such as the EU, differ in their use of antibiotics in animals in two important areas: the specific antibiotics that can be used for growth promotion and the availability of antibiotics to producers (by prescription or over the counter). With respect to growth promotion in animals, the United States, as well as Australia, Canada, Japan, and South Korea, allow the use of some antibiotics from classes important in human medicine. However, the United States and Australia are currently conducting risk assessments to determine whether to continue to allow the use of some of these antibiotics for growth promotion. Canada plans to conduct similar risk assessments, and Japan is reviewing the use of antibiotics for growth promotion if those antibiotics are from classes used in humans. In contrast, New Zealand has completed its risk assessments of antibiotics used for growth promotion and no longer allows the use of any antibiotics for growth promotion that are also related to antibiotics used in human medicine. Similarly, the EU has prohibited its member countries from using antibiotics in feed for growth promotion if those antibiotics are from antibiotic classes used in human medicine. In addition, the EU has issued a regulation that will prohibit the use of all other antibiotics in feed for growth promotion by 2006. We found differences among the United States’ and other countries’ use of antibiotics for growth promotion in the following four antibiotic classes that FDA has ranked as critically or highly important in human medicine: Macrolides. The United States, Canada, and South Korea allow antibiotics from the macrolide class for growth promotion, but the EU and New Zealand do not. In the United States, tylosin, a member of this class, is among the most commonly used antibiotics for growth promotion in swine. As of March 2003, Australia allowed antibiotics from the macrolide class for growth promotion, but it had a review under way on some antibiotics in this class, including tylosin, to determine if growth promotion use should continue. Penicillins and tetracyclines. The United States, Canada, and South Korea allow certain antibiotics from these two classes to be used for growth promotion, but Australia, the EU, Japan, and New Zealand do not. Furthermore, as mentioned earlier, the United States is currently conducting risk assessments on these two classes to determine whether to continue allowing their use for growth promotion. Streptogramins. The United States, Canada, and South Korea allow the use of virginiamycin, an antibiotic from this class, for growth promotion, but the EU and New Zealand do not. The United States is conducting a risk assessment on the use of virginiamycin for growth promotion and disease prevention. As of April 2003, Australia permitted virginiamycin for growth promotion, but the Australian agency that regulates antibiotic use in animals has recommended that approval of this use be withdrawn. Appendix V lists antibiotics—including antibiotics from the above classes—that are frequently used in U.S. animal production. With regard to the availability of antibiotics to livestock and poultry producers, public health experts advocate requiring a veterinarian’s prescription for the sale of antibiotics. They believe that this requirement may help reduce inappropriate antibiotic use that could contribute to the emergence of antibiotic-resistant bacteria in animals and the human health risk associated with these resistant bacteria. The United States and Canada permit many antibiotics to be sold over the counter, without a veterinarian’s prescription, while the EU countries and New Zealand are more restrictive regarding over-the-counter sales. The United States and Canada generally allow older antibiotics, such as sulfamethazine, to be sold over the counter, but they require a prescription for newer antibiotics, such as fluoroquinolones. In addition, with regard to the availability of antibiotics from antibiotic classes that are important in human medicine, the United States and Canada allow livestock and poultry producers to purchase several antibiotics over the counter, including penicillins, tetracyclines, tylosin, and virginiamycin. However, Canada is considering changing its rules to require prescriptions for antibiotics used in animals for all antibiotic uses except growth promotion. In contrast, the EU countries and New Zealand are more restrictive regarding over-the-counter sales of antibiotics for use in animals. Unlike the United States and Canada, the EU does not allow penicillins, tetracyclines, tylosin, and virginiamycin to be sold over the counter and will end all over-the-counter sales by 2006. Denmark, an EU member, already prohibits all over-the-counter sales. Similarly, New Zealand requires producers to have a veterinarian’s prescription for antibiotics that it has determined are associated with the development of resistant bacteria in humans. Appendix IV contains additional information on the key U.S. trading partners and competitors discussed in this section, including, as previously mentioned, their systems for collecting data on antibiotic use. To date, antibiotic resistance associated with use in animals has not been a significant factor affecting U.S. trade in meat products, according to officials of USDA’s Foreign Agricultural Service, the Office of the U.S. Trade Representative, the U.S. Meat Export Federation, and the U.S. Poultry and Egg Export Council. However, the presence of antibiotic residues in meat has had some impact on trade. In particular, Russia has previously banned U.S. poultry because of the presence of tetracycline residues. Furthermore, these officials indicated that other issues have been more prevalent in trade discussions, including the use of hormones in beef cattle and animal diseases such as bovine spongiform encephalopathy (commonly referred to as mad cow disease) and avian influenza. For example, the EU currently bans U.S. beef produced with hormones. Many other nations ban the import of U.S. beef because of the recent discovery of an animal in the United States with mad cow disease. Although federal government and industry officials stated that antibiotic use in animals has not significantly affected U.S. trade to date, we found some indication that this issue might become a factor in the future. As USDA reported in 2003, antibiotic use in animals could become a trade issue if certain countries apply their regulations on antibiotic use in animals to their imports. For example, according to some government and industry officials, the United States’ use of antibiotics could become a trade issue with the EU as it phases out its use of all antibiotics for growth promotion by 2006. However, the EU is not currently a significant market for U.S. meat because of trade restrictions, such as its hormone ban that effectively disallows U.S. beef. Similarly, a Canadian task force reported in June 2002 that the issue of antibiotic resistance and differences in antibiotic use policies could become a basis for countries to place trade restrictions on exports of meat from countries that have less stringent use policies. The issue of antibiotic use in animals and of the potential human health risk associated with antibiotic-resistant bacteria have also received international attention. For example, in 2003, the Codex Alimentarius Commission, an international organization within which countries develop food safety standards, guidelines, and recommendations, issued draft guidance for addressing the risk of antibiotic resistance in animals. Codex also requested that a group of experts assess the risk associated with antibiotic use in animals and recommend future risk management options. In December 2003, these experts concluded that the risk associated with antibiotic-resistant bacteria in food represents a significantly more important human health risk than antibiotic residues—an issue that countries have already raised as a trade concern. Antibiotics have been widely prescribed to treat bacterial infections in humans, as well as for therapeutic and other purposes in animals. Resistance to antibiotics is an increasing public health problem in the United States and worldwide. Published research results have shown that antibiotic-resistant bacteria have been transferred from animals to humans. In evaluating the safety of animal drugs, FDA considers their effect on human health. Such drugs are safe in this regard if there is reasonable certainty of no harm to humans when the drug is used as approved. Using this critieria, FDA has determined that the potential health risk from transference of antibiotic resistance from animals to humans is unacceptable and must be a part of FDA’s regulation of animal antibiotics. FDA, CDC, and USDA have made progress in their efforts to assess the extent of antibiotic resistance from the use of antibiotics in animals through both individual and collaborative efforts, including work through the Interagency Task Force. However, the effectiveness of these efforts remains unknown. FDA has developed guidance to evaluate antibiotics used in animals and intends to review all new drug applications and antibiotics currently approved for use with animals for this risk to determine if it needs to act to ensure that the drugs are safe. Although FDA has recently begun the reviews using this approach, its initial reviews have been for drugs other than those that are critically important for human health. FDA officials do not know how long each review will require. In addition, it is not yet known what actions FDA would take if concerns became evident. Although the agency has the authority to deny or withdraw approval of new or approved animal antibiotics that pose such a risk, FDA also has a variety of other options available. However, FDA action to prohibit the use of fluoroquinolone antibiotics in poultry has continued for more than 3 years. Finally, researchers and federal agencies still do not have critical data on antibiotic use in animals that would help them more definitively determine any linkage between use in animals and emerging resistant bacteria, assess the relative contribution of this use to antibiotic resistance in humans, and develop strategies to mitigate antibiotic resistance. The experience of countries such as Denmark indicates that data collection efforts are helpful when making risk-based decisions about antibiotic use in animals. While we recognize that there are costs associated with collecting additional data on antibiotic use in animals, options exist for collecting these data that are not cost-prohibitive. For example, the United Kingdom’s efforts to collect national sales data on antibiotic use in animals use relatively few resources. In addition, existing federal programs, such as FDA’s ongoing monitoring of approved antibiotics and USDA’s CAHFSE, can provide a data collection framework that can be expanded to begin collecting the needed data. FDA, CDC, and USDA recognize the importance of such information and have taken some steps to collect data, although they have not yet developed an overall collection strategy. Until the agencies have implemented a plan to collect critical data on antibiotic use in animals, researchers will be hampered in their efforts to better understand how this use affects the emergence of antibiotic-resistant bacteria in humans, and agencies will be hampered in their efforts to mitigate any adverse effects. Because of the emerging public health problems associated with antibiotic resistance in humans and the scientific evidence indicating that antibiotic- resistant bacteria are passed from animals to humans, we recommend that the Commissioner of FDA expedite FDA’s risk assessments of the antibiotics used in animals that the agency has identified as critically important to human health to determine if action is necessary to restrict or prohibit animal uses in order to safeguard human health. Additionally, because more data on antibiotic use in animals—such as the total quantity used, by class; the species in which they are used; the purpose of the use, such as disease treatment or growth promotion; and the method used to administer—are needed to further address the risk of antibiotic resistance, we also recommend that the Secretaries of Agriculture and of Health and Human Services jointly develop and implement a plan for collecting data on antibiotic use in animals that will adequately (1) support research on the relationship between this use and emerging antibiotic-resistant bacteria, (2) help assess the human health risk related to antibiotic use in animals, and (3) help the agencies develop strategies to mitigate antibiotic resistance. We provided USDA and HHS with a draft of this report for review and comment. We also provided segments of the draft related to trade matters to the Department of State and the Office of the U.S. Trade Representative. In their written comments, USDA and HHS generally agreed with the report and provided comments on certain aspects of our findings. USDA stated that our report recognized the many issues and complexities of efforts to address the risk to humans from antibiotic use in animals. The department also provided information on the extent of research related to antibiotic resistance that it has funded since 1998. We added this information to the report. Regarding our conclusion that antibiotic- resistant salmonella and campylobacter bacteria have been transferred from animals to humans, USDA agreed that it is likely that a transfer has occurred. However, USDA suggested that some of the studies we cited to support that conclusion were, by themselves, inadequate to support a causal link. We believe that our conclusion is firmly supported by a body of scientific evidence, but we have clarified our description of some studies in response to USDA’s comments. On the issue of human health risks, USDA commented that we cited few sources of scientific evidence to support the view that the human health risks from the transference of antibiotic- resistant bacteria are minimal. We found that only a few studies have concluded that the risk is minimal, while many studies have concluded that there is a significant human health risk from the transference. With respect to our recommendation that USDA and HHS jointly develop and implement a plan for collecting data on antibiotic use in animals, USDA stated that our report highlights the importance of the data that the CAHFSE program could provide on the impact of antibiotic use in various animal species. However, USDA pointed out that additional funding resources would be needed to expand CAHFSE and other data collection and research efforts. We revised the report to better reflect USDA’s concern about funding. HHS agreed with our finding that antibiotic-resistant salmonella and campylobacter bacteria have been transferred from food animals to humans. HHS provided references to additional research studies that support our conclusion. We were aware of all of the studies cited by HHS, but we did not include them in the report because we believe that our conclusion was already amply supported. Regarding our conclusion that researchers disagree about the extent of human health risk caused by the transference of antibiotic resistance, HHS provided information from an unpublished study that found that the course of illness was significantly longer for persons with antibiotic-resistant campylobacter cases than for those with antibiotic-susceptible infections. Most of the studies we identified found modest but significant human health consequences, similar to those in the unpublished study described in HHS’s comments. Regarding our recommendation that the agencies jointly develop and implement a plan for collecting data on antibiotic use in animals, HHS stated that the most useful and reliable antibiotic use data are those maintained by pharmaceutical companies. HHS said current regulations would have to be revised to put the data that pharmaceutical companies are required to report to FDA in a more relevant format for research on antibiotic resistance. As the two agencies develop and implement their plan to collect the relevant data, if they agree that pharmaceutical companies are an important source, they should take whatever regulatory actions might be necessary if the sources they identify will not provide the data voluntarily. HHS also proposed that discussions between HHS and USDA for improving antibiotic use data collection be conducted through the Interagency Task Force on Antimicrobial Resistance. We note that while USDA’s comments on antibiotic use data emphasized collecting on-farm data through its new CAHFSE program, HHS’s comments focused on obtaining data on antibiotic use in animals from pharmaceutical companies. We believe these differing approaches illustrate the need for USDA and HHS to jointly develop and implement a plan to collect data. We agree with HHS that the Interagency Task Force could serve as a forum for discussions between USDA and HHS on this matter. USDA’s written comments and our more detailed responses to them are in appendix VI. HHS’s written comments are in appendix VII. In addition, HHS, USDA, the Department of State, and the Office of the U.S. Trade Representative provided technical comments, which we incorporated into the report 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 date of this letter. At that time, we will send copies of this report to the Secretaries of Agriculture and of Health and Human Services and of State; the U.S. Trade Representative; and other interested officials. We will also provide copies to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report, please call Marcia Crosse at (202) 512-7119 or Anu Mittal at (202) 512-3841. Other contacts and key contributors are listed in appendix VIII. This report examines the (1) scientific evidence regarding the transference of antibiotic resistance from animals to humans through the consumption or handling of contaminated meat, and the extent of potential harm to human health, (2) progress federal agencies have made in assessing and addressing the human health risk of antibiotic use in animals, (3) types of data that federal agencies need to support research on the human health risk of antibiotic use in animals and the extent to which these data are collected, (4) use of antibiotics in animals in the United States compared with antibiotic use by its key agricultural trading partners and competitors, and (5) information that is available on the degree to which antibiotic use in animals has affected U.S. trade. We used the term “animal” to refer to animals raised for human consumption, such as cattle, sheep, swine, chickens, and turkeys; the term “meat” to refer to beef, lamb, pork, chicken, and turkey; and the term “contaminated meat” to refer to meat that contains antibiotic-resistant bacteria. We limited the scope of our work to the transference of antibiotic- resistant bacteria from animals to humans through the consumption or handling of contaminated meat. Specifically, we looked at the evidence for transference of antibiotic-resistant foodborne intestinal pathogens from animals to humans. We did not examine issues related to antibiotics used on plants and seafood, antibiotic residues in animals, or the effects of antibiotics present in the environment because of the application of animal waste to agricultural lands. To examine the scientific evidence regarding the transference of antibiotic resistance from animals to humans through the consumption or handling of contaminated meat, and the extent of harm to human health, we searched medical, social science, and agricultural databases, which included the Department of Health and Human Services’ (HHS) National Library of Medicine, for studies published in professional journals. We identified articles published since the 1970s on antibiotic use and resistance in animals and humans, as well as articles on antibiotic-resistant foodborne illnesses. We interviewed officials from HHS’s Food and Drug Administration (FDA) and Centers for Disease Control and Prevention (CDC) and the U.S. Department of Agriculture (USDA) to determine how these agencies are assessing the human health risk of antibiotic use in animals. We also reviewed reports related to the human health risk of antibiotic use in animals. Finally, we interviewed officials from relevant professional organizations (e.g., the American Medical Association) and public health advocacy groups (e.g., the Center for Science in the Public Interest) to identify other data or studies on the issue of human health risk from antibiotic use in animals. To determine federal agencies’ progress in assessing and addressing the human health risk of antibiotic use in animals, we examined documents from FDA, CDC, and USDA. These documents include reports on results from the federal government’s antibiotic resistance surveillance program and on the progress of the federal Interagency Task Force on Antimicrobial Resistance, documents presented in an FDA administrative court concerning the agency’s proposal to withdraw the approval of the use of a certain antibiotic used in poultry that is also an important antibiotic in human medicine, and FDA’s framework to assess the human health risk of antibiotic use in animals. To examine the types of data that federal agencies need concerning antibiotic use in animals in order to support research on the human health risk and the extent to which these data are collected, we reviewed federal agency documents and reports and interviewed FDA, CDC, and USDA officials. In particular, we discussed the status of FDA’s efforts to collect data on U.S. antibiotic use in animals, the status of USDA’s programs that collect data on antibiotic use, and CDC’s initiatives that would benefit from use data. We reviewed foreign government reports to determine how other countries use antibiotic use data for research; we also reviewed international reports from the World Health Organization (WHO) and the Office International des Epizooties (OIE), which provide guidelines on the types of use data that countries should collect. We also interviewed officials from Denmark, which collects extensive data on antibiotic use in animals, and from Canada, which plans to implement a data collection system. We discussed the availability of data on U.S. antibiotic use in animals with officials from pharmaceutical companies, industry associations, state veterinary offices, firms that collect data on antibiotic use in animals, and public health advocacy groups. To examine how the use of antibiotics in animals in the United States compares with antibiotic use by its key agricultural trading partners and competitors, we obtained and reviewed information on antibiotic use in animals for the United States and its key partners and competitors in international meat trade. Using international trade data, we identified the European Union (EU) and 11 countries—Australia, Brazil, Canada, China, Denmark, Hong Kong, Japan, Mexico, New Zealand, Russia, and South Korea—as key U.S. trading partners or competitors. We obtained information on countries’ antibiotic use in animals through discussions with officials of USDA’s Animal and Plant Health Inspection Service and Foreign Agricultural Service (FAS) and literature searches to identify relevant documents. In addition, we discussed antibiotic use in animals with government officials from Canada, a leading U.S. trading partner and competitor, and Denmark, a leading U.S. trading partner and competitor that took significant actions to curtail antibiotic use in animals during the late 1990s. We also e-mailed a questionnaire to FAS agricultural attachés in the EU and the key trading partner or competitor countries, except Canada and Denmark. For Canada and Denmark, we obtained responses to this questionnaire from Canadian and Danish government officials as part of our visits to these countries. We did not send this questionnaire to government officials of the EU and the other nine countries because of Department of State and FAS officials’ concerns that antibiotic use in animals may be a sensitive issue for some foreign governments and that some governments may be suspicious about the questionnaire’s underlying purposes; for the same reasons, in completing this questionnaire, the FAS agricultural attachés were instructed to not contact foreign government officials. As a result, the amount of information we obtained varies by country, and we were able to obtain only very limited information on antibiotic use in Brazil, China, Hong Kong, Japan, Mexico, Russia, and South Korea. We did not independently verify the information reported in responses to this questionnaire or other documents, including laws and regulations, from the foreign countries. To obtain information on antibiotic use in U.S. animal production, we reviewed FDA regulations; USDA’s National Animal Health Monitoring System reports on management practices, including antibiotic use practices in beef cattle and swine production; a University of Arkansas study of antibiotic use in broiler chickens; the Animal Health Institute’s annual reports on antibiotic use in animals; and a Union of Concerned Scientists report. We did not independently verify the information contained in these reports. In addition, we spoke with officials from state veterinarians’ offices and from agricultural industry organizations, including the American Veterinary Medicine Association, the National Pork Producers Council, the American Meat Institute, the National Cattlemen’s Beef Association, the U.S. Poultry and Egg Export Council, the National Chicken Council, and pharmaceutical and poultry companies. We also visited livestock and poultry farms in Georgia, Maryland, and Pennsylvania. We compared the United States’ policies regulating antibiotic use in animals with the policies of those key trading partners and competitors for which this information was available. In addition, we summarized available information on countries’ activities to address antibiotic resistance associated with antibiotic use in animals, and, for the United States, we developed a list of the antibiotics most commonly used in beef cattle, swine, and broiler chickens. To examine information that is available on the degree to which antibiotic use in animals has affected international trade, we reviewed reports on trade and food safety issues from USDA’s Economic Research Service and FAS, foreign governments, and international organizations. We also examined records of USDA’s Food Safety and Inspection Service to identify countries that have requirements concerning antibiotic use for the meat they import. In addition, we reviewed the reports and standards of international trade organizations, such as the World Trade Organization, the Codex Alimentarius Commission, and OIE. We discussed antibiotic use and other potential trade issues with officials from the Office of the U.S. Trade Representative, FAS, and meat industry trade associations. We also identified several studies on estimates of the potential economic impacts of restrictions on antibiotics used in meat production. These are described in detail in appendix II. We conducted our work from May 2003 through April 2004 in accordance with generally accepted government auditing standards. In this appendix we identify and summarize eight recent studies that provide estimates of the potential economic impacts of restrictions on antibiotics used in livestock production. Specifically, these studies estimate the economic effects of a partial and/or total ban of antibiotics used in animals. For several decades, antibiotics have been used for a variety of production management reasons, from therapeutic uses to increased productivity, such as feed efficiency or weight gain. In economic terms, higher productivity results in more final product supplied to the market, at a lower cost to consumers. Despite the use of a variety of economic models, assumptions about model parameters, and data sets, the economic impacts on consumers and producers of the studies that we identified were generally comparable. Overall, the studies conclude that a ban or partial ban on antibiotics in animal production would increase costs to producers, decrease production, and increase retail prices to consumers. For example, the studies indicate that the elimination of antibiotic use in pork production could increase costs to producers ranging from $2.76 to $6.05 per animal, which translates into increased consumer costs for pork ranging from $180 million per year to over $700 million per year. Table 2 summarizes the eight studies. While these market effects are important to both producers and consumers of livestock products, they must be balanced against the health care costs of antibiotic resistance due to agricultural uses of antibiotics. Potential health costs imposed by increased antibiotic resistance include more hospitalizations, higher mortality rates, and higher research costs to find new and more powerful drugs. From the point of view of proposals to reduce antibiotic use, these potential costs represent the benefits from reduced antibiotic use. These costs to society, however, are difficult to measure because of limited data on antibiotic use and resistance as well as the problematic nature of measuring the value of a human life. Moreover, while there are some estimates of the costs of antibiotic resistance from both medical and agricultural sources, no estimates exist that directly link the human health costs of antibiotic resistance with antibiotics used in animal production. Nevertheless, studies that have examined the costs of antibiotic resistance from all sources have found a wide range of estimates running into the millions and billions of dollars annually. For example, one recent study (2003) estimated that the health cost to society associated with resistance from only one antibiotic, amoxicillin, was $225 million per year. We discuss the eight studies we reviewed in reverse chronological order, from 2003 to 1999. Most examine restrictions on antibiotics in the swine industry, but a few look at the beef and poultry industries as well. All of the studies measure the economic impacts of antibiotic restrictions on domestic U.S. markets, except the WHO study of the antibiotic restrictions recently imposed by Denmark. Also, most studies estimate only domestic economic impacts, not impacts on international trade. In 2002, WHO convened an international expert panel to review, among other issues, the economic impact resulting from the Danish ban of antibiotics for growth promotion, particularly in swine and poultry production. As part of this effort, Denmark’s National Committee for Pigs estimated that the cost of removing antibiotic growth promoters in Denmark totaled about $1.04 per pig, or a 1 percent increase in total production costs. In the case of poultry, however, there was no net cost because the savings associated with not purchasing these antibiotics offset the cost associated with the reduction in feed efficiency. Components of these costs included excess mortality, excess feeding days, increased medication, and increased workload. A subsequent study by Jacobsen and Jensen (2003) used these costs as part of the agriculture sector of a general equilibrium model to estimate the impact on the Danish economy of the termination of antibiotic growth promoters. The model used these cost assumptions in a baseline scenario that projects the likely development of the Danish economy to 2010. The results of the model indicated a small reduction in pig production of about 1.4 percent per year and an increase in poultry production of about 0.4 percent. The authors explain that the increase in poultry production occurred because of the substitutability of these meats in consumption. In addition, this research included estimates of the consequences of removing antibiotic growth promoters on the export market. The model showed that exports of pork were forecast to be 1.7 percent lower than they would be in the absence of these growth promoters, while poultry exports would increase by about 0.5 percent. The authors explained that some costs associated with modifications to production systems were difficult to measure and were not included in the analysis, although they may have been substantial for some producers. They also stated that the analysis does not take into account the possible positive effect that the removal of antibiotic growth promoters may have had on consumer demand, both in the domestic and in the export markets. Moreover, they added that any costs must be set against the likely human health benefits to society. In 2003, using a 1999 study by Hayes et al. of the potential economic impacts of a U.S. ban based on the ban in Sweden, as described below, and a recent ban on feed-grade antibiotics in Denmark, Hayes and Jensen estimated the economic impacts of a similar ban in the United States. In 1998, the Danish government instituted a voluntary ban on the use of antibiotics in pork production at the finishing stage, and in 2000 it banned antibiotics for growth promotion at both the weaning and the finishing stages. The results of the ban in Denmark, however, may be more applicable than the Swedish experience because, like the United States, Denmark is one of the largest exporters of pork and has somewhat similar production practices. The authors compared the econometric results of a U.S. baseline without a ban with projected results based on assumptions taken from the ban in Denmark. Many of the same technical and economic assumptions that were used in the Swedish study were also used for the impacts based on the Danish ban. For instance, the authors included a sort- loss cost of $0.64 per animal, a similar assumption for loss of feed efficiency, and decreases in piglets per sow. Other key assumptions and features unique to the study include the following: the use of only one case or scenario—a “most-likely” scenario—unlike the study based on the Swedish ban; increased costs of $1.05 per animal at the finishing stage and $1.25 per animal at the weaning stage; a vaccine cost of $0.75 per animal; and a capital cost of about $0.55 per animal; According to the study, a major economic impact in the U.S. pork market of a ban similar to the Danish ban would be a cost increase of about $4.50 per animal in the first year. Across a 10-year period, the total cost to the U.S. pork industry was estimated to be more than $700 million. With a lower level of pork production, retail prices would increase by approximately 2 percent. The authors conclude that a ban at the finishing stage would create very few animal health concerns, while a ban at the weaning stage would create some serious animal health concerns and lead to a significant increase in mortality. They also note that, as happened immediately following the ban at the weaning stage in Denmark, the total use of antibiotics in the United States at this production stage may rise. Miller et al. (2003) used 1990 and 1995 National Animal Health Monitoring System (NAHMS) swine survey data to estimate the net benefit of antibiotics used for growth promotion to swine producers. The NAHMS database provides statistically valid estimates of key parameters related to the health, management, and productivity of swine operations in the United States. The authors used econometric methods to estimate the relationships between growth-promoting antibiotics and productivity measures, such as average daily weight gain (ADG) and feed conversion ratio (FCR), for grower/finisher pigs. Using these productivity measures, predictions on performance were then generated for an independent, medium-sized, midwestern farrow-to-finish pork producer in 1995. The performance figures were expressed in economic terms, such as profitability, using a swine enterprise budgeting model. The study includes the following key features and assumptions: The productivity measures estimated were ADG, FCR, and mortality rate (MR) during the grower/finisher stage of swine production. Explanatory variables included in the model were regional identifiers, size of operation, market structure variables, number of rations, mortality rate, number of days antibiotics were administered, number of antibiotics fed, number of diseases diagnosed in last 12 months, among others. The ADG and FCR equations were estimated jointly using the seemingly unrelated regression procedure. Because the theory as to an exact specification was unknown, the MR equation was estimated using a backward-stepwise linear regression. The authors estimated that increases in annual returns above costs from antibiotics for a 1,020-head finishing barn was $1,612, or $0.59 per swine marketed. This represents an improved profitability of approximately 9 percent of net returns in 2000 for Illinois swine finishing operations. The authors also found that there is substitutability between antibiotics as growth promoters and other production inputs (such as number of rations) that could reduce the negative influence of removing antibiotics. In an updated study, Miller et al. (2003) estimated the combined effects of antibiotics used for growth promotion (AGP) and antibiotics used for disease prevention (ADP) in pork production using the NAHMS 2000 swine survey. Specifically, the authors measured the productivity and the economic impacts of these antibiotics on grower/finisher pigs for individual swine producers. The authors evaluated four scenarios, using varying degrees of bans of both AGP and ADP: (1) a ban on AGP, (2) a ban on ADP, (3) a ban on both AGP and ADP, and (4) a limitation on AGP and ADP to levels that maximize production. These scenarios were chosen because antibiotics that are used for different purposes have different impacts on productivity, improving it on one dimension while possibly diminishing it on another. First, the authors estimated four pork productivity dimensions related to the use of antibiotics using an econometric model. Second, using the estimated productivity measures from the econometric model, they estimated economic impacts to pork producers for each antibiotic ban scenario using a spreadsheet farm budget model. The study includes the following key features and assumptions: Pork productivity was measured using four measures of productivity, including average daily weight gain, feed conversion ratio, mortality rate, and lightweight rate. These productivity measures were estimated using seemingly unrelated regression analysis and are modeled from the perspective of possible structural relationships among the measures. The study used the NAHMS 2000 study, which provides the most recent data available to investigate productivity impacts and impacts on farm costs and profitability. Overall, the authors confirmed their earlier findings that a ban would likely cause substantial short-term losses to producers. However, decreasing the use of certain antibiotics to a more desirable level may be implemented without major losses. For scenario 1, a total ban on AGP would cost producers $3,813 in profits annually. For scenario 2, a ban on ADP would slightly improve profits by a gain of $2703 annually. For scenario 3, a ban on both AGP and ADP would lower producer profits by $1128 annually. For scenario 4, where AGP and ADP are applied at levels where swine productivity is maximized, producers would gain $12,438 annually compared with no antibiotic use. The authors conclude that restrictions on classes of AGP, the amount of time antibiotics are fed, and restrictions on ADP many be implemented by producers without major losses. However, they also note that some time dimensions ignored in their study may be important and that their use of nonexperimental data requires careful interpretation. Brorsen et al. (2002) used a model similar to one developed by Wohlgenant (1993) to estimate the economic impacts on producers and consumers of a ban on antibiotics used for growth promotion in swine production. The authors used a model that allowed for feedback between beef and pork markets and measured changes in producer and consumer surplus resulting from shifts in both supply and demand. Moreover, the authors extended their two-commodity beef and pork model to include poultry. In their model, changes in production costs due to banning the use of antibiotics for growth promotion are measured indirectly by the net benefits from their use. The study includes the following key features and assumptions: The ban considered in this model is a complete ban on all antibiotics in feed. The effects of using antibiotics for growth promotion were assumed to be from improvements in (1) feed efficiency over drug cost, (2) reduced mortality rate, and (3) reduced sort-loss at marketing. The authors assumed a $45.00 per hundredweight market price for hogs. All parameters (i.e., demand and supply elasticities) used to solve the model were based on other economic studies, except the parameter that represented the change in production costs. Once these were obtained, retail quantity, retail price, farm quantity, and farm price were determined simultaneously. An econometric model was used to obtain the economic benefit from the improvement in feed-to-gain conversions in swine production. The mortality benefit in swine was assumed to range from 0 percent, to 0.75 percent (most likely), to 1.5 percent. Net benefits of the use of antibiotics for growth promotion were estimated by summing the results of a simulation exercise based on the probability distributions of the three sources of economic benefits at the industry level. The authors estimated that economic costs to swine producers from a ban on antibiotics used for growth promotion would range from $2.37 per hog to $3.11 per hog, with an average cost of $2.76 per hog. For swine producers, the estimated annual costs would be approximately $153.5 million in the short run to $62.4 million in the long run. Estimated annual costs to pork consumers would increase by about $89 million in the short run to $180 million in the long run. Mathews, Jr. (2002) examined the economic effects of a ban on antibiotic use in U.S. beef production using two policy alternatives—a partial ban and a full ban. To estimate these effects, the author developed a series of economic models, including a firm-level, cost-minimization model that minimizes the cost of feeding cattle to final output weights for a base case, a full ban, and a partial ban (banning only selected antibiotics) scenario. Imbedded in this model is a growth function that incorporates the interaction between the growth rate of cattle and feed efficiency. The firm- level effects were then aggregated across firms in a partial equilibrium framework to estimate national cattle supply, price, and value of production for the three scenarios. The study includes the following key features and assumptions: Variables included in the growth function were lagged average daily weight gain, feed efficiency, seasonal variables, and an interaction variable of average weight gain and feed efficiency. The growth model forms a “dynamic” link to the cost-minimization model by accounting for the impacts of recent feeding experiences. In the cost-minimization model, feed costs were minimized, subject to protein levels and other feed constraints. The model finds the minimum cost for feeding a steer to a final weight estimated from the embedded growth function. The resulting model allowed final cattle weights, feeding costs, and the number of cattle fed per year to vary, resulting in livestock supplies that are endogenous to the model. In the partial-ban scenario, substitute antibiotics were assumed to be functionally equivalent to and twice as costly as in the base scenario. Data for the aggregate analysis included annual average all-cattle prices and commercial beef production for the period 1975 through 1990. A base scenario was estimated using parameter and final steer weight estimates from the growth model for each quarter over an 11-year period, from January 1990 through January 2001. Results of the partial-ban scenario indicated that aggregate annual income would decrease by nearly $15 million for producers, while annual consumer costs would increase by $54.7 million. For the full ban, a 4.2 percent decline in beef production would yield a 3.32-percent increase in the price of cattle, from $42.60 to $47.12 per hundredweight. Also, the full ban translates into an annual consumer cost increase of $361 million. The author noted that the study did not take into account any effects of a ban or partial ban on trade in beef products. A study issued in 1999 by Hayes et al. at Iowa State University estimated the potential economic impacts of a ban on the use of antibiotics in U.S. pork production based on assumptions from a Swedish ban in 1986. To estimate baseline results, the authors used a simultaneous econometric framework of the U.S. pork industry that included several production and marketing segments: live inventory and production, meat supply, meat consumption, meat demand, and retail price transmission. The baseline results, or results with no change in antibiotic use, were compared to a range of estimates of a ban on antibiotics in pork production in the United States based on a set of technical and economic assumptions taken from the Swedish experience. These simulations included three different scenarios: a “most likely,” a “best-case,” and a “worst-case” scenario if the ban were to be implemented in the United States. The key features and assumptions of the model for the “most likely” case included the following: a 10-year projection period from 2000 to 2009 from a 1999 baseline, with deviations from the baseline in the projection period reflecting the technical and economic assumptions taken from the Swedish ban; the pork, beef, and poultry markets, although the model assumed no change in the regulation of antibiotics on beef and poultry; technical assumptions: feed efficiency for pigs from 50 to 250 pounds declines by 1.5 percent, piglet mortality increases by 1.5 percent, and mortality for finishing pigs increases by 0.04 percent. Also, the “most likely” case extends weaning age by 1 week and piglet per sow per year decrease by 4.82 percent. veterinary and therapeutic costs would increase by $0.25 per pig, net of the cost for feed additives; additional capital costs would be required because of additional space needed for longer weaning times and restricted feeding, including $115 per head for nursery space and $165 per head for finishing space; an estimated penalty of $0.64 per head for sort-loss costs; and input markets, such as the cost of antibiotics, are exogenous or not a part of the modeling system. The authors in their “most likely” scenario estimated that the effects of a ban on the use of antibiotics would increase production costs by $6.05 initially and $5.24 at the end of the 10-year period modeled. Because the supply of pork declines, however, net profit to farmers would decline by only $0.79 per head. Over a 10-year period, the net present value of forgone profits would be about $1.039 billion. For consumers, the retail price of pork increases by $0.05 per pound, which sums to a yearly cost of about $748 million for all consumers. The authors also cited four important limitations to their study: (1) the estimated impacts represent an “average” farm and may mask wide differences across farms; (2) technical evidence from the Swedish experience must be regarded with caution as an indicator of what might happen in the United States; (3) consumers only respond to changes in the price of pork; however, the model does not take into account how such a ban would affect the prices of beef and poultry; and (4) there was no attempt to factor in the positive effects of such a ban on consumer willingness to pay for pork produced without the use of feed-grade antibiotics. The National Research Council (NRC) examined the economic costs to consumers of the elimination of all subtherapeutic use of antibiotics in a chapter of a 1999 report entitled The Use of Drugs in Food Animals: Benefits and Risks. Instead of measuring the consequences of eliminating antibiotics on farm costs and profits, NRC decided that a more viable alternative would be to measure costs to consumers in terms of the higher prices that would be passed on to consumers. According to NRC, this measurement strategy was followed for several reasons: changes in production costs do not necessarily translate into lower profits; depending on management practices, not all producers rely on these antibiotics to the same extent and would not all be equally affected by a ban; and some producers, for example those who produce for special niche markets, may actually benefit from such a ban. The study includes the following key features and assumptions: All cost increases are passed on to consumers in terms of percentage price changes. The model measures how much consumers would need to spend in order to maintain a similar level of consumption as before the ban. No change in consumption because of a ban on antibiotics would occur. Per capita costs are estimated as the product of three items: (1) percentage increase in annual production costs, (2) retail prices, and (3) per capita annual retail quantity sold. Annual costs of a ban were estimated for four domestic retail markets— chicken, turkey, beef, and pork—as well as a total cost for all meat. NRC estimated that the average annual cost per capita to consumers of a ban on all antibiotic use was $4.84 to $9.72. On a commodity retail price basis, the change in price for poultry was lowest, from $0.013 per pound to $0.026 per pound; for pork and beef, prices ranged from $0.03 per pound to $0.06 per pound. Retail pork price increases ranged from $0.03 per pound to $0.06 per pound. Total national additional costs per year for pork consumption ranged from $382 million to $764 million, depending on assumptions about meat substitutes. As for all meat products combined, total consumer cost increases ranged from $1.2 billion to $2.5 billion per year. Finally, NRC noted that the reduction in profits and industry confidence that would result from such a ban may cause a reduction in research, and that society would lose the research benefits. Also, to determine whether this cost increase would be justified, the amount should be compared with the estimated health benefits. As part of the risk estimation outlined in Guidance for Industry #152, FDA developed a framework for evaluating the importance of an antibiotic to human medicine. FDA has ranked antibiotics as either critically important, highly important, or important. These rankings are based on five criteria, which are ranked from most (criterion 1) to least important (criterion 5): 1. The antibiotic is used to treat enteric pathogens that cause foodborne disease. 2. The antibiotic is the sole therapy or one of the few alternatives to treat serious human diseases or is an essential component among many antibiotics in the treatment of human disease. 3. The antibiotic is used to treat enteric pathogens in nonfoodborne disease. 4. The antibiotic has no cross-resistance within the drug class and an absence of linked resistance with other drug classes.5. There is difficulty in transmitting resistance elements within or across genera and species of organisms. Antibiotics that meet both of the first two criteria are considered by FDA to be critically important to human medicine. Drugs that meet either of the first two criteria are considered highly important to human medicine. Drugs that do not meet either of the first two criteria but do meet one or all of the final three criteria are considered important to human medicine. Of the 27 classes of animal drugs relevant to human health, 4 were ranked critically important, 18 highly important, and 5 important. The status of a particular antibiotic may change over time. For example, a drug may be considered to be critically important to human health because it is the sole therapy. Later, if new antibiotics become available to treat the same disease or diseases, the drug may be downgraded in its importance to human health. This appendix provides information on efforts to address antibiotic resistance associated with antibiotic use in animals for the United States and some of its key trading partners and competitors. For the United States, more detailed information on these activities is in the letter portion of this report. For the United States’ key trading partners and competitors, to the extent that information was available, we summarized the countries’ activities and described antibiotic resistance surveillance systems and antibiotic use data collection systems. In addition, table 3 presents information on the total amount of antibiotics sold or prescribed for use in animals for the United States and three trading partners and competitors for which this information was available. Specifically, it shows 2002 antibiotic sales data for the countries that we identified as having government data collection systems on antibiotic use with the available data. Although the United States does not have a government system, we included information collected by the Animal Health Institute for comparison. Total meat production is also shown to represent the size of the animal production industries in these countries. Overview of activities. In 1999, federal agencies formed the Interagency Task Force on Antimicrobial Resistance to address antibiotic resistance issues. In October 2003, FDA issued guidelines for assessing the safety of animal drugs (Guidance for Industry #152). FDA is conducting risk assessments of some antibiotics important in human medicine. Antibiotic-resistance surveillance systems. FDA, CDC, and USDA collect information on antibiotic-resistant bacteria in humans, retail meat, and animals through the National Antimicrobial Resistance Monitoring System (NARMS). Antibiotic use data collection systems. The Animal Health Institute, a trade association representing veterinary pharmaceutical companies, publishes the only publicly available data on the amount of antibiotics sold annually for use in animals. The Animal Health Institute collects these data from its member companies, which represent about 85 percent of the animal drug sales in the United States. The data show the amount of antibiotics sold by antibiotic class, but certain classes are reported together to abide by company disclosure agreements. See table 3 for information on the amount of antibiotics sold in the United States during 2002. In addition, the United States collects some on-farm data through USDA’s National Animal Health Monitoring System (NAHMS) and Collaboration in Animal Health, Food Safety, and Epidemiology (CAHFSE) programs. Overview of activities. In 1998, Australia established the Joint Expert Technical Advisory Committee on Antibiotic Resistance to provide independent expert scientific advice on the threat to human health of antibiotic-resistant bacteria caused by use in both animals and humans. Australia has begun to review the approved uses of antibiotics important in human medicine to determine if changes are needed. Australia’s review process includes performing a public health and an efficacy assessment. Like the United States’ risk assessment approach, Australia’s public health assessment considers the hazard, exposure, and potential impact of the continued use of the antibiotic on public health. The efficacy assessment considers whether the antibiotic is effective in animals for the purpose claimed and whether the label contains adequate instructions. As of April 2003, Australia had completed its assessment of virginiamycin, a member of the streptogramin class, and was considering a recommendation to ban its use for growth promotion. In addition, as of March 2003, Australia was assessing the risk of the macrolide antibiotic class, including tylosin. Antibiotic resistance surveillance systems. The committee’s 1999 report recommended establishing a comprehensive surveillance system to monitor antibiotic-resistant bacteria in animals. As of March 2003, a strategy for developing an antimicrobial resistance surveillance system was being completed. Antibiotic use data collection systems. Australia uses import data to monitor the annual quantity of antibiotics used in animals because all of the antibiotics used in the nation are imported. The data, which include information on the quantity of antibiotics imported by antibiotic class and end use, are not usually released publicly. A potential problem with this data collection method is that importers are not always able to anticipate how producers will use the antibiotic. Overview of activities. Like the United States, Canada plans to do risk assessments of antibiotics important in human medicine and to make changes in approved antibiotic uses as appropriate based on these risk assessments. Canadian officials expect to initially focus on growth promotion uses of several antibiotic classes and antibiotics, including penicillins, tetracyclines, tylosin, and virginiamycin. Canada plans to use risk assessment methods similar to those used in the United States; however, Canada may also consider other factors, such as the benefits associated with antibiotic use. In addition, Canada is considering the adoption of a prescription requirement for all antibiotic uses in animals except growth promotion. Antibiotic resistance surveillance systems. The Canadian Integrated Program for Antimicrobial Resistance Surveillance, started in 2002 and designed to use resistance surveillance methods consistent with the United States’ NARMS, collects information on antibiotic resistance from the farm to the retail levels. Canada issued the first annual report from this surveillance system in March 2004. Antibiotic use data collection systems. Canada is integrating the collection of data on antibiotic use in humans and animals into its surveillance system and plans to use this information to support risk analysis and policy development. Collection of on-farm data on antibiotic use in animals through pilot projects is ongoing, and collection of data from pharmaceutical companies, importers, and distributors, such as feed mills and veterinarians, is planned. Overview of activities. In 1999, an EU scientific committee on antibiotic resistance recommended that the growth promotion use of antibiotics from classes that are or may be used in human medicine be banned. Later that year, the EU completed action on this recommendation and banned the use of these antibiotics in feed for growth promotion. The scientific committee also recommended that the four remaining antibiotics used for growth promotion be replaced with other alternatives. In 2003, the EU issued a regulation adopting this recommendation, which banned the use of these antibiotics as of January 1, 2006. In addition, Denmark, an EU member, ended the use of all antibiotics for growth promotion in 2000. Antibiotic resistance surveillance systems. Most EU members have a program to monitor antibiotic resistance, but the EU as a whole does not have a harmonized system that allows comparison of data across nations. A November 2003 directive from the European Parliament and the Council of the European Union set forth general and specific requirements for monitoring antibiotic resistance. Among other things, member countries must ensure that the monitoring system includes a representative number of isolates of Salmonella spp., Campylobacter jejuni, and Campylobacter coli from cattle, swine, and poultry. In particular, Denmark’s surveillance system, the Danish Integrated Antimicrobial Resistance Monitoring and Research Programme, monitors resistance in these and other bacteria in animals, meat, and humans. Antibiotic use data collection systems. The EU has proposed that its members collect data on antibiotic use in animals. EU countries’ efforts to collect this information are at varying stages of development. For example, while some EU countries are just developing programs to collect antibiotic use data, the United Kingdom and Denmark currently collect this information. The United Kingdom’s Veterinary Medicines Directorate collects data from veterinary pharmaceutical companies on the amounts of different antibiotics and other animal drugs sold in the United Kingdom. The directorate then separates these data into chemical groups, administration methods, and target species. For certain antibiotics that are sold for use in more than one species, it is not possible to determine the species in which they were used. However, the directorate is working to more accurately assign sales quantities to each species. See table 3 for information on the amount of antibiotics sold in the United Kingdom during 2002. Denmark collects extensive data on the use of antibiotics in animals. In particular, through its VetStat program, Danish officials can obtain data on all medicines prescribed by veterinarians for use in animals. This program provides detailed information on antibiotic use, such as the quantity used, class of antibiotic used, species, age of animal, and the purpose of use, as well as the disease the antibiotic was used to treat. In addition, VetStat allows researchers to calculate the average daily doses that animals receive of various antibiotics. See table 3 for information on the amount of antibiotics used in Denmark during 2002. Antibiotic resistance surveillance systems. Hong Kong has an antibiotic resistance surveillance system. We did not obtain additional information on this system. Antibiotic use data collection systems. Hong Kong has an antibiotic use data collection system. We did not obtain additional information on this system. Overview of activities. Japan is currently reviewing the use of antibiotics for growth promotion if those antibiotics are from classes used in humans. According to an April 2004 report from the Office of the U.S. Trade Representative, the Japanese government has stated that these reviews will be based on science. Antibiotic resistance surveillance systems. Japan has an antibiotic resistance surveillance system. We did not obtain additional information on this system. Antibiotic use data collection systems. Japan has an antibiotic use data collection system. We did not obtain additional information on this system. Antibiotic resistance surveillance systems. In 2000 and 2001, FDA undertook a pilot study with Mexico to monitor the antimicrobial resistance of salmonella and E. coli isolates obtained from human samples. In September 2001, the pilot study was expanded into a 3-year cooperative agreement to include both human and animal monitoring. The primary objective of the agreement was to establish an antimicrobial resistance monitoring system for foodborne pathogens in Mexico comparable to the United States’ NARMS program. Overview of activities. New Zealand established an Antibiotic Resistance Steering Group primarily to coordinate a program to gather and analyze information on the use of antibiotics in feed (including antibiotics for growth promotion), assist in developing a policy concerning this use, and assess the potential transfer of resistant bacteria from animals to humans. New Zealand has completed its risk assessments of antibiotics for growth promotion and no longer allows the growth promotion use of any antibiotics that are also related to antibiotics used in human medicine. New Zealand did not carry out a comprehensive risk analysis for any of the antibiotics being used for growth promotion because the available information was not sufficient. Instead, New Zealand used consistent rationale, including the mechanisms and potential for antibiotic resistance and the potential for that resistance to be transferred from animals to humans, in assessing each antibiotic (or class, such as the macrolide class). Antibiotic resistance surveillance systems. New Zealand is working to implement a comprehensive antibiotic resistance surveillance program. According to a January 2003 antibiotic resistance progress report, New Zealand has programs to monitor specific pathogens in animals, but the programs do not gather information specific to antibiotic resistance. While the government informally monitors the antibiotic resistance of E. coli and Staphylococcus aureus, the program provides very limited data. Antibiotic use data collection systems. Since 2001, New Zealand has collected antibiotic sales data from a formal survey of pharmaceutical companies. The companies report the data voluntarily. Annual reports provide antibiotics sales statistics by antibiotic class, method of administration, type of use (including growth promotion), and animal species. The data are only indicative of use because antibiotics are used for multiple purposes, and it is impossible to know the exact use of all the antibiotics. New Zealand has considered changes to its data collection system to provide additional information. See table 3 for information on the amount of antibiotics sold in New Zealand during 2002. Antibiotic use data collection systems. The Korea Animal Health Products Association, an industry group, monitors the quantity of antibiotics produced and sold by its members. The data are available on a monthly basis and, at a minimum, provide total antibiotic use quantities by species, specific antibiotic, and antibiotic class. This appendix provides information available on the antibiotics that are frequently used on farms that produce feedlot cattle, swine, and broiler chickens in the United States. In 1999, USDA’s National Animal Health Monitoring System (NAHMS) collected data on antibiotic use in beef cattle raised in feedlots. Table 4 lists the antibiotics identified as having at least 10 percent of feedlots using them in feed or water, or by injection, and the most frequent purpose of use, when this information is available. NAHMS provided only limited information on how the antibiotics were administered, so this information is not included in the table. The table also presents information on FDA’s rankings of the importance of the antibiotic class in human medicine. (See app. III for further information on FDA’s ranking system.) For those antibiotics not found in these rankings, we listed them as not important. In particular, over half of the feedlots surveyed used chlortetracycline in feed or water, about one-third used tilmicosin to prevent disease, and over half used tilmicosin, florfenicol, and tetracyclines to treat disease. In addition, about one-third used cephalosporins, fluoroquinolones, and penicillins/amoxicillin to treat disease. However, the feedlots using these antibiotics do not administer them to all cattle. For example, although 42 percent of feedlots use antibiotics to prevent respiratory disease, only 10 percent of feedlot cattle receive antibiotics for this purpose. In 2000, NAHMS collected data on antibiotic use in swine. Table 5 lists the antibiotics identified as those that at least 10 percent of producers use in feed or water or by injection for either nursery-age or older swine, the most frequent method of administration for these antibiotics, and the most frequent purpose of use. The table also presents information on FDA’s ranking of the importance of the antibiotic class in human medicine. For those antibiotics not found in these rankings, we listed them as not important. In particular, about half of the producers surveyed used tylosin and chlortetracycline in feed. In addition, about one-third of the producers surveyed used a penicillin to treat disease and bacitracin to promote growth. However, the producers using these antibiotics do not administer them to all of their swine. USDA has not collected any data on antibiotic use in broiler chickens through NAHMS. However, a University of Arkansas study used data from a corporate database to track patterns of antibiotic use in broiler chickens from 1995 through 2000. This study focused on the use of antibiotics in feed to promote growth and to prevent disease. Over the period of the study, the percentage of production units using antibiotics in feed decreased, in part because antibiotics did not prove to be as cost-effective as other feed additives that promote growth. The study did not analyze data on antibiotics used in chickens for disease treatment. According to industry officials, producers seldom treat chickens for diseases. Table 6 lists the antibiotics identified by the study as being used by at least 10 percent of broiler production units and their purpose of use. Table 6 also presents information on FDA’s ranking of the importance of the antibiotic class in human medicine. For those antibiotics not found in these rankings, we listed them as not important. The following are our comments on the USDA letter, dated April 5, 2004. 1. We revised the report to include USDA’s concerns that additional funding would be needed to expand CAHFSE. 2. We clarified our discussion of some studies. References are cited in footnotes for studies discussed in the report. 3. We agree that the collection of both aggregate and detailed data on antibiotic use in animals is useful and that researchers need to know specifically how antibiotics are used in order to determine which of the uses is responsible for trends in antibiotic resistance. The report discusses both aggregate and detailed data. As USDA states, the report highlights the CAHFSE program, through which USDA is collecting specific, on-farm data on swine. In addition, the report discusses Denmark’s system, which collects detailed data on how antibiotics are used in animals. 4. We found that only a few studies have concluded that the risk is minimal, while many studies have concluded that there is a significant human health risk from the transference. 5. We revised the report to include information on research funded by USDA’s Cooperative State Research, Education, and Extension Service. 6. We clarified the report to reflect comments on specific studies. In addition, we clarified the report to indicate which results were from epidemiologic studies alone, and which results were from epidemiologic studies that included molecular subtyping techniques. In addition to those named above, Gary Brown, Diane Berry Caves, Diana Cheng, Barbara El Osta, Ernie Jackson, Julian Klazkin, Carolyn Feis Korman, Deborah J. Miller, Sudip Mukherjee, Lynn Musser, Roseanne Price, and Carol Herrnstadt Shulman 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. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | Antibiotic resistance is a growing public health concern; antibiotics used in animals raised for human consumption contributes to this problem. Three federal agencies address this issue--the Department of Health and Human Services' (HHS) Food and Drug Administration (FDA) and Centers for Disease Control and Prevention (CDC), and the Department of Agriculture (USDA). GAO examined (1) scientific evidence on the transference of antibiotic resistance from animals to humans and extent of potential harm to human health, (2) agencies' efforts to assess and address these risks, (3) the types of data needed to support research on these risks and extent to which the agencies collect these data, (4) use of antibiotics in animals in the United States compared with its key agricultural trading partners and competitors, and (5) information on how use has affected trade. Scientific evidence has shown that certain bacteria that are resistant to antibiotics are transferred from animals to humans through the consumption or handling of meat that contains antibiotic-resistant bacteria. However, researchers disagree about the extent of harm to human health from this transference. Many studies have found that the use of antibiotics in animals poses significant risks for human health, but a small number of studies contend that the health risks of the transference are minimal. Federal agencies have expanded their efforts to assess the extent of antibiotic resistance, but the effectiveness of their efforts to reduce human health risk is not yet known. FDA, CDC, and USDA have increased their surveillance activities related to antibiotic resistance. In addition, FDA has taken administrative action to prohibit the use of a fluroquinolone in poultry. FDA has identified animal drugs that are critically important for human health and begun reviewing currently approved drugs using a risk assessment framework that it recently issued for determining the human health risks of animal antibiotics. However, because FDA's initial reviews of approved animal drugs using this framework have focused on other drugs and have taken at least 2 years, FDA's reviews of critically important drugs may not be completed for some time. Although federal agencies have made some progress in monitoring antibiotic resistance, they lack important data on antibiotic use in animals to support research on human health risks. These data, such as the type and quantity of antibiotics and purpose for their use by species, are needed to determine the linkages between antibiotic use in animals and emerging resistant bacteria. In addition, these data can help assess human health risks from this use and develop and evaluate strategies for mitigating resistance. The United States and several of its key agricultural trading partners and competitors differ in their use of antibiotics in animals in two important areas: the specific antibiotics allowed for growth promotion and availability of antibiotics to producers (by prescription or over the counter). For example, the United States and Canada allow some antibiotics important in human medicine to be used for growth promotion, but the European Union (EU) and New Zealand do not. Regarding over the counter sales of antibiotics, the United States is generally less restrictive than the EU. Antibiotic use in animals has not yet been a significant factor affecting U.S. international trade in meat and poultry, although the presence of antibiotic residues in meat has had some impact, according to government and industry officials. Instead, countries raise other food safety issues, such as hormone use and animal diseases. However, according to these officials, antibiotic use in animals may emerge as a factor in the future. They particularly noted that the EU could object to U.S. use of antibiotics for growth promotion as its member countries are phasing out that use. |
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The Federal Aviation Administration’s (FAA) mission is to promote the safe, efficient, and expeditious flow of air traffic in the U.S. airspace system, commonly referred to as the National Airspace System (NAS). To accomplish its mission, FAA provides services 24 hours a day, 365 days a year, through its air traffic control (ATC) system—the principal component of the NAS. Predicted growth in air traffic and aging equipment led FAA to initiate a multibillion-dollar modernization effort in 1981 to increase the safety, capacity, and efficiency of the system. However, over the past 17 years, FAA’s modernization program has experienced substantial cost overruns, lengthy schedule delays, and significant performance shortfalls. Consequently, many of the benefits anticipated from the modernization program—new facilities, equipment, and procedures—have not been realized, and the efficiency of air traffic control operations has been limited. In addition, the expected growth in air traffic will place added strains on the system’s capacity. To get the modernization effort back on track and thereby address the limitations of the present system and meet the growing demand for increasing its capacity, FAA—in consultation with the aviation community—is developing plans to implement a phased approach to modernization, including a new concept of air traffic management known as “free flight.” To enable free flight, FAA intends to introduce a host of new technologies and procedures that will allow the agency to gradually move from its present system of air traffic control, which relies heavily on rules, procedures, and tight control over aircraft operations, to a more collaborative system of air traffic management. Under such a system, users would have more flexibility to select optimal flight paths, whose use would lower costs, improve safety, and help accommodate future growth in air traffic through the more efficient use of airspace and airport resources. Implementing this new air traffic management system will require FAA to introduce new technologies and procedures. FAA plans to test other new technologies and procedures through an initiative called Flight 2000 (now the Free Flight Operational Enhancement Program). FAA’s air traffic controllers direct aircraft through the NAS. Automated information-processing and display, communication, navigation, surveillance, and weather equipment allow air traffic controllers to see the location of aircraft, aircraft flight plans, and prevailing weather conditions, as well as to communicate with pilots. FAA controllers are primarily located in three types of facilities: air traffic control towers, terminal area facilities, and en route centers. The functions of each type of facility are described below. • Airport towers control the flow of aircraft—before landing, on the ground, and after take-off—within 5 nautical miles of the airport and up to 3,000 feet above the airport. A combination of technological and visual surveillance is used by air traffic controllers to direct departures and approaches, as well as to communicate instructions and weather-related information to pilots. • Terminal area facilities—known as Terminal Radar Approach Control (TRACON) facilities—sequence and separate aircraft as they approach and leave busy airports, beginning about 5 nautical miles and extending to about 50 nautical miles from the airport and up to 10,000 feet above the ground. • Air Route Traffic Control Centers (ARTCC)—or en route centers—control planes in transit over the continental United States and during approaches to some airports. Planes are controlled through regions of airspace by en route centers responsible for the regions. Control is passed from one en route center to another as a plane moves across a region until it reaches TRACON airspace. Most of the en route centers’ controlled airspace extends above 18,000 feet for commercial aircraft. En route centers also handle lower altitudes when dealing directly with a tower or after agreeing with a terminal facility. Aircraft over the ocean are handled by en route centers in Oakland and New York. Beyond the radars’ sight, controllers must rely on periodic radio communications through a third party—Aeronautical Radio Incorporated (ARINC), a private organization funded by the airlines and FAA to operate radio stations—to determine aircraft locations. • Flight Service Stations provide weather and flight plan services, primarily for general aviation pilots. See figure 1.1 for a visual summary of air traffic control over the continental United States and oceans. FAA will continue to operate en route, terminal, and tower facilities under the new air traffic management system; controllers in these facilities will be able to manage flight operations more collaboratively through the use of new decision support tools. For example, two new traffic management tools will allow en route and terminal controllers to better sequence aircraft as they move into the terminal environment—potentially increasing the system’s safety and efficiency. Free flight is a new way of managing air traffic that is designed to enhance the safety, capacity, and efficiency of the NAS. Under this new management system, air traffic control is expected to move gradually from a highly structured system based on elaborate rules and procedures to a more flexible system that allows pilots, within limits, to change their route, speed, and altitude, notifying the air traffic controller of the new route. In contrast, under the present system, while flight plans are developed in conjunction with air traffic control personnel, aircraft are required to fly along specific routes with minimal deviation. When deviations from designated routes are allowed—to, for example, avoid severe weather—they must be pre-approved by an air traffic controller. Under free flight, despite the availability of flexibilities to pilots, the ultimate decision-making authority for air traffic operations will continue to reside with controllers. While FAA and the aviation community have recently increased their efforts to implement free flight, the concept of free flight—allowing pilots to fly more optimal routes—is not new. In fact, the idea has been around for decades. With the development of navigation technology in the 1970s that allowed aircraft to fly directly from origin to destination without following fixed air routes (highways in the sky), the possibility of providing pilots with flexibility in choosing routes became viable. However, until recently, movement to develop the procedures and decision support systems needed to fully use this type of point-to-point navigation has been slow. In the last several years, because of the need to meet demands for increasing the system’s capacity and efficiency, FAA and aviation system users and their major trade organizations, representatives of air traffic control personnel, equipment manufacturers, the Department of Defense (DOD), and others (collectively referred to as stakeholders) have been working on plans to accelerate the implementation of free flight. To enable this new system of air traffic management, FAA plans to introduce a range of new technologies and procedures that will give pilots and controllers more precise information about the location of aircraft. This information will eventually allow for the distances between aircraft to be safely reduced—in turn, allowing more aircraft to operate in the system. For example, a new tool planned for use primarily in the en route environment will give controllers better information about the location of aircraft so that they can detect and resolve potential conflicts sooner than they can using current technology. Similarly, pilots will have more precise information about the location of their aircraft in relation to other aircraft. The use of these technologies will help to improve the system’s safety and capacity. While free flight will provide pilots with more flexibility, different situations will dictate its use. For instance, in clear, uncrowded skies, pilots may be able to use free flight fully, but some restrictions may be necessary during bad weather or in highly congested areas. “a safe and efficient flight operating capability under instrument flight rules in which the operators have the freedom to select their path and speed in real time. Air traffic restrictions are only imposed to ensure separation, to preclude exceeding airport capacity, to prevent unauthorized flight through Special Use Airspace (SUA), and to ensure safety of flight. Restrictions are limited in extent and duration to correct the identified problem. Any activity which removes restrictions represents a move toward Free Flight.” Stakeholders generally agree with the above broad concept—especially the idea that any activity that removes restrictions represents a move toward free flight. However, because users have different priorities based on their use of the system, they have different ideas about how best to implement this concept. RTCA has found that the implementation of free flight will affect a wide range of users—from part-time pilots to major airlines—depending on the operating environment. For example, in the en route environment, users will be allowed to fly more optimal routes between airports, thus saving time and money. In addition, under certain conditions, these users may be allowed to safely reduce the distance between themselves and other aircraft. Similarly, in airspace between 5 and 50 miles from the airport, the improved sequencing of traffic for approaches and landings will provide the potential for users to operate more efficiently than under the present system. Improved sequencing is expected to increase the number of aircraft that can safely operate in this environment at a given time. In addition, improved information sharing between pilots and controllers on the location of aircraft on an airport’s surface, for example, is expected to allow for better use of the airport’s surface capacity (such as runways and gates). Efficient use of this limited capacity is key to allowing users to maximize the benefits of operations under free flight. In light of FAA’s current efforts to replace its aging infrastructure and keep pace with increasing demands for air traffic services through the new system of air traffic management known as free flight, the chairmen and ranking minority members of the Senate Committee on Commerce, Science, and Transportation and its Subcommittee on Aviation asked us to monitor the implementation of FAA’s efforts and provide them with a series of reports. This initial report provides (1) an overview of FAA’s progress to date in implementing free flight, including Flight 2000 (now the Free Flight Operational Enhancement Program), and (2) the views of the aviation community and FAA on the challenges that must be met to implement free flight cost-effectively. To address the first objective, we met with key FAA officials responsible for the programs involved in the agency’s free flight implementation efforts to gain a better understanding of how FAA is coordinating the agencywide and program-specific elements of free flight. The issues discussed with these officials included (1) the definition/philosophy of free flight; (2) details on key agencywide and program-specific initiatives, such as Flight 2000 (now the Free Flight Operational Enhancement Program); and (3) the status of the agency’s efforts to develop, deploy, and integrate new technologies; mitigate risk; develop metrics; collaborate with other FAA program offices and stakeholders; improve certification procedures; develop cost/benefit analyses; and gain buy-in to free flight implementation efforts among FAA staff and the aviation community. We discussed these same issues with a broad range of stakeholders to get their views on the agency’s progress to date in implementing free flight. These stakeholders, who have collaborated with FAA to implement free flight, included representatives of RTCA, trade organizations (such as the Air Transport Association, Airports Council International, Regional Airline Association, National Business Aircraft Association, and Aircraft Owners and Pilots Association), employee unions (including the National Air Traffic Controllers Association, Air Line Pilots Association, and Professional Airways Systems Specialists), DOD, academic institutions (Massachusetts Institute of Technology (MIT) and University of Illinois, Champaign) and research and contracting organizations (MIT Lincoln Laboratory, Department of Transportation/Volpe Center, National Aeronautics and Space Administration, and MITRE), major airlines, cargo carriers, and aircraft and avionics manufacturers. In addressing the second objective, we asked the same FAA officials and stakeholders to identify the key challenges that must be met for free flight to be implemented cost-effectively. As part of our review for both objectives, we researched the current literature and reviewed relevant FAA documents (such as the NAS architecture and operational concept, capital investment plan, and cost and schedule information for key projects). In addition, we obtained and reviewed documentation from stakeholders in support of their positions on outstanding issues related to implementing free flight. We provided copies of a draft of this report to FAA for its review and comment. We met with FAA officials, including the Director, Program Office, Free Flight Phase 1, and the Acting Program Directors for Flight 2000 and Architecture and Systems Engineering, who generally agreed with the contents of the report and provided clarifying comments, which we incorporated as appropriate. We conducted our audit work from November 1997 through August 1998 in accordance with generally accepted government auditing standards. Under its air traffic control modernization program, FAA is upgrading its facilities and equipment—including replacing aging infrastructure, such as controllers’ workstations and the Host computer—and ensuring that its systems comply with Year 2000 requirements. While these efforts are not part of free flight, they will provide the infrastructure that is critical for its implementation. To define free flight and develop recommendations, associated initiatives, and time frames for its implementation, FAA has worked with stakeholders under the leadership of RTCA—a nonprofit organization that serves as an advisor to FAA. As of July 1998, 1 of 44 recommendations had been completed, and substantial progress has been made in implementing many of the initiatives that fall under the remaining recommendations. While working to implement the 44 recommendations, FAA and stakeholders agreed on the need to focus their efforts on deploying technologies designed to provide early benefits to users. These efforts led to consensus on a phased approach to implementing free flight—beginning with Free Flight Phase 1—including the core technologies to be used and the locations where the technologies will be deployed under this first phase, scheduled to be implemented by 2002. FAA has been working with stakeholders to resolve differences among them and to better define its planned limited demonstration, known as Flight 2000 (now the Free Flight Operational Enhancement Program), which is designed to identify and mitigate the risks associated with using free-flight-related communication, navigation, and surveillance technologies and associated procedures. As a result of these collaborative efforts, FAA and stakeholders—through RTCA—have agreed to a general roadmap for a restructured demonstration to be conducted in fiscal years 1999-2004. However, unresolved issues remain, including the need to secure funding and develop additional plans. In its October 1995 report, RTCA discussed the benefits of free flight and included recommendations and time frames for users and FAA to consider for implementing free flight. These recommendations, many of which have several initiatives, emphasized, among other things, the (1) consideration of human factors during all phases of developing free flight, (2) use of streamlined methods/procedures for system certification, and (3) expansion of the National Route Program. The vast majority of these recommendations (35 of 44) were to be completed in the near term (1995 through 1997), 6 are focused on the midterm (1998 through 2000), and 3 are to be completed in the far term (2001 and beyond). See appendix I for a list of these recommendations. Since late 1995, FAA and stakeholders have been working on various free flight recommendations and many associated initiatives and, in August 1996, agreed on an action plan to guide their implementation. According to FAA, through July 1998, they have fully implemented only 1 of the 35 near-term recommendations—to incorporate airline schedule updates, such as delays and cancellations, into FAA’s Traffic Flow Management system to help it reduce unnecessary restrictions and delays imposed on airline operations. However, FAA and stakeholders have made substantial progress in implementing many of the initiatives under the near-term recommendations. For example, as outlined under a recommendation to extend the benefits of data exchange, FAA has deployed digital pre-departure clearances at 57 sites, which provide pilots with departure information via digital cockpit displays and reduce the need for voice messages. In addition, 49 of these sites have Digital Automatic Terminal Information Service, which provides information about current weather, airport, and facility conditions around the world. Digital communications provide an advantage over voice communications by helping to relieve congested voice frequencies and reduce the number of operational errors that are caused directly or indirectly by miscommunication. Under another recommendation, FAA is working with stakeholders through an RTCA task force to find ways to reduce the time and cost associated with the agency’s process for approving new technologies for flight operations. To address another recommendation, FAA has deployed a technology, on a limited basis, for controllers’ use that is expected to improve the sequencing of air traffic as aircraft enter, leave, and operate within terminal airspace. Work is under way on six midterm and three far-term recommendations and their associated initiatives. For the most part, these recommendations focus on incremental improvements to the core technologies that are being deployed under Free Flight Phase 1 and those planned for deployment under Flight 2000 (now the Free Flight Operational Enhancement Program). For example, in the midterm, FAA has begun to modify controllers’ workstations and supporting computer equipment to accept, process, and display data received from satellites. In addition, under a far-term recommendation, FAA is studying the feasibility of using satellite-based information to provide more precise information for landing during periods of limited visibility. FAA also noted that while it was in the early stages of planning for the implementation of free flight, it took steps to maximize the air traffic control system’s capacity and efficiency by extending flexibilities to users—to select and fly more efficient flight paths when operating in designated altitudes/areas—through programs such as the National Route Program (NRP). FAA has two early efforts under way to allow users (under certain conditions) to select routes and procedures that will save them time and money—NRP and the Future Air Navigation System (FANS). Established in 1990, NRP is intended to conserve fuel by allowing users to select preferred or direct routes. FAA estimates that NRP saves the aviation industry over $40 million annually. These savings are realized, in part, because pilots are allowed to take advantage of favorable winds or minimize the effects of unfavorable winds, thereby reducing fuel consumption. Initially allowed only at higher altitudes, the program has been expanded to include operations down to 29,000 feet. FAA is also working to decrease, where appropriate, the present restriction that flights must be 200 miles from their point of departure before they can participate and must end their participation 200 miles prior to landing. FANS uses new technologies and procedures that enhance communication between pilots and air traffic controllers and provide more precise information on the position of aircraft—allowing for improvements in air navigation safety and in the ability of air traffic controllers to monitor flights. Used primarily over the oceans and in remote areas normally out of the range of ground-based navigation aids, FANS uses digital communication more than voice communication to exchange information such as an aircraft’s location, speed, and altitude. Although FANS is gradually being implemented in many regions and countries, the aviation community believes that for its full operational benefits (such as time and fuel savings) to be realized, air traffic control procedures need to be modified to shorten the distance currently required between aircraft. They also contend that FAA needs to deploy the promised hardware and software (Automatic Dependent Surveillance or ADS) infrastructure for FANS in facilities that support airline operations primarily over the Pacific Ocean in order for these benefits to be realized. In November 1997, the FAA Administrator began an outreach effort with the aviation community to build consensus on and seek commitment to the future direction of the agency’s modernization program. As part of this effort, she formed a task force of senior transportation officials, union leaders, and executives and experts from the aviation community to assess the agency’s modernization program—including the NAS architecture—and develop a plan for moving forward. Much as we found in reviewing the system’s logical architecture in February 1997, the task force found that the architecture under development appropriately built on the concept of operations for the NAS and identified the programs necessary to meet users’ needs. However, the task force found that the architecture was insufficient because of issues associated with cost, risk, and lack of commitment from users. In response, the task force recommended a phased approach that would cost less, focus more on providing near-term benefits to users, and modernize the NAS incrementally. Many of the initiatives identified under the near- and midterm recommendations will be included under this phased approach because these initiatives are expected to provide early benefits for users. A central tenet of this approach is the “build a little, test a little” concept of technology development and deployment—intended to limit efforts to a manageable scope, identify and mitigate risks, and deploy technologies before the system is fully mature when they can immediately improve the system’s safety, efficiency, and/or capacity. Such a phased approach to implementing free flight was designed to help the agency avoid repeating past modernization problems associated with overly ambitious cost, schedule, and performance goals and to restore users’ faith in its ability to deliver on its promises. As a first step toward the phased implementation of free flight, FAA—in coordination with stakeholders—outlined a plan for Free Flight Phase 1 in early 1998. This plan is expected to be implemented by 2002. As currently envisioned, Free Flight Phase 1 calls for the expedited deployment of certain NAS technologies. The technologies—which are at various stages of development and will be further refined and tested are the (1) Controller Pilot Data Link Communications (CPDLC) Build 1, (2) User Request Evaluation Tool (URET), (3) Single Center Traffic Management Advisor (TMA), (4) Collaborative Decision Making (CDM), (5) Surface Movement Advisor (SMA), and (6) Passive Final Approach Spacing Tool (pFAST). In general, these technologies are expected to provide tools for controllers that will help to increase the safety and capacity of the air traffic control system and benefit users through savings on fuel and crew costs. For example, FAA and many stakeholders believe that TMA and pFAST should improve controllers’ ability to more efficiently sequence traffic to improve its flow in crowded terminal airspace. Similarly, they believe the URET conflict probe will improve controllers’ ability to detect and resolve potential conflicts sooner than present technology allows. However, in June 1998, the air traffic controllers’ union at one of the two en route centers where URET is being tested asked that its use be terminated until several concerns about its use in the current environment can be resolved. Termination did not occur at this facility, and the issue has been elevated to the regional level within FAA for resolution. See appendix II for a summary of the status of the recommendations related to Free Flight Phase 1. The aviation community generally agrees on the core technologies for Free Flight Phase 1 and on the locations proposed for deploying and testing these technologies. See figure 2.1 for these sites. In addition, FAA is currently developing a Free Flight Phase 1 plan that will provide more details on implementing the program and recently appointed a program manager to lead this effort. As a companion effort, FAA has charged RTCA with responsibility for building consensus within the aviation community on how best to revise the vision for modernization (operational concept) and to develop the blueprint (architecture/framework) for carrying out the modernization. It is critical that the vision for modernization and the blueprint for implementing this vision be tightly integrated to help ensure that free flight activities are coordinated and working toward common goals. In January 1997, Vice President Gore announced an initiative—Flight 2000—to demonstrate and validate the use of navigation capabilities to support free flight. FAA then expanded Flight 2000 to include communication and surveillance technologies. FAA viewed Flight 2000 as an exercise for testing free flight technologies and procedures in an environment where safety hazards could be minimized. FAA expected the Flight 2000 program to validate the benefits of free flight, evaluate transition issues, and streamline the agency’s procedures for ensuring that new equipment is safe for its intended use. Proposed primarily for Alaska and Hawaii, Flight 2000 would have tested communication, navigation, and surveillance technologies, such as the Global Positioning System (GPS) and its augmentations, the Wide Area Augmentation System (WAAS) and the Local Area Augmentation System (LAAS); Controller Pilot Data Link Communications (CPDLC); and ADS-B technology. FAA initially selected these locations because they offer a controlled environment with a limited fleet, which includes all classes of users, all categories of airspace, and wide ranges of weather conditions and terrain. However, many in the aviation community questioned whether the lessons learned in Alaska and Hawaii would apply to operations in the continental United States. At their urging, FAA agreed to add at least one site within the continental United States to the Flight 2000 demonstration. Collaborative efforts between FAA and stakeholders on Flight 2000—through RTCA—have led to broad consensus on a general roadmap for restructuring this demonstration program, including four criteria for selecting the candidate operational capabilities to be demonstrated. In general, under these criteria (1) industry and FAA must address all aspects of modernization to be successful in moving toward free flight; (2) expected benefits are the major reason for implementing a given capability; (3) the capability does not interfere with or slow down any near-term activities; and (4) the risks associated with operational capabilities that require integrating multiple communication, navigation, and surveillance technologies should be addressed. Using these criteria, FAA and stakeholders reviewed over 70 potential operational capabilities and selected 9 of them. They also recommended demonstration locations in the Ohio Valley and Alaska. (See app. III for a description of these capabilities and the expected operational benefits.) For example, under this proposal, FAA would provide more accurate weather information to pilots and controllers to improve safety and potentially reduce flight times. In addition, FAA would improve airport surface navigation capabilities by providing pilots (and operators of other surface vehicles) with moving maps that display traffic in low-visibility conditions. FAA and stakeholders also recommended that the program be renamed the “Free Flight Operational Enhancement Program.” Stakeholders and FAA recognize that more detailed planning is needed—to identify risk-mitigation activities, select the final site, and estimate costs, schedules, and the number of required aircraft—and that this planning will require close coordination between FAA and industry to ensure that plans are consistent with stated operational capabilities and are achievable by FAA and users. FAA is currently considering the proposed RTCA roadmap for the restructured Flight 2000 demonstration and expects to reach a decision in the fall of 1998. If approved as scheduled, a detailed plan is expected by the end of 1998. FAA’s plan to implement free flight through an evolutionary (phased) approach is generally consistent with past recommendations that we and others have made on the need for FAA to achieve a more gradual, integrated, and cost-effective approach to managing its modernization programs. However, FAA and stakeholders recognize that significant challenges must be addressed if the move to free flight—including Free Flight Phase 1 and Flight 2000 (now the Free Flight Operational Enhancement Program) is to succeed. While FAA must address many of the challenges, stakeholders recognize that, as partners, they must assist the agency. The challenges for FAA are to (1) provide effective leadership and management of modernization efforts—including cross-program communication and coordination; (2) develop plans—in collaboration with the aviation community—that are sufficiently detailed to move forward with the implementation of free flight—including the identification of clear goals and measures for tracking the progress of the modernization efforts; (3) address outstanding issues related to the development and deployment of technology—such as the need to improve the agency’s process for ensuring that new equipment is safe for its intended use and methods for considering human factors; and (4) address other issues, such as the need for FAA to coordinate its modernization and free flight efforts with those of the international community and integrate free flight technologies. FAA and stakeholders identified a number of managerial issues that will need to be addressed if free flight is to be implemented successfully. For example, (1) provide strong senior leadership to guide the implementation of free flight both within and outside the agency and (2) implement an evolutionary rather than a revolutionary approach to modernization. Successfully addressing these issues will help the agency effectively implement free flight. Some FAA officials and stakeholders said that the agency will need to provide strong leadership both inside the agency and within the aviation community for free flight to be implemented successfully. For example, some FAA officials and stakeholders said that the agency will need to improve the effectiveness of its internal operations by encouraging communication and cooperation between the various program offices responsible for its free flight efforts. Additionally, some FAA officials and stakeholders said that the agency will need to continue efforts to build consensus among the aviation community and gain its commitment to the direction of the agency’s plans for modernization. Some FAA officials and stakeholders told us that improvements in communication and coordination across FAA program offices are needed to implement free flight successfully. For example, one FAA official told us that the primary challenge facing the agency in its efforts to implement free flight is developing effective communication and coordination across program lines. Some stakeholders shared this concern, observing that the various program offices within FAA do not communicate well or effectively coordinate their activities. Thus, according to some within FAA and stakeholders, despite the agency’s move to using cross-functional, integrated product teams to improve accountability and coordination across FAA, these teams have become insular and some team members tend to be motivated primarily by the priorities and management of the offices that they represent rather than the goals of a given team. One stakeholder stressed that the effectiveness of these teams has also been limited by (1) inadequate training of members on how to operate a team and (2) the fact that these teams are given responsibility for projects without the commensurate authority they need to carry out their responsibilities. Some stakeholders also noted that the agency has not made a number of decisions about modernization because of ongoing disagreements among various program offices over how best to proceed with its various components, such as the selection of new free flight technologies for communicating information digitally rather than by voice. The concerns cited above are consistent with our prior work on FAA’s culture as it affects acquisition management. In particular, we found that the agency has previously had difficulty communicating and coordinating effectively across traditional program lines. In addition, we learned from some FAA staff and functional managers that FAA has encountered resistance to the integrated product team concept and these teams’ operations. As we reported, one major factor impeding coordination has been FAA’s organization into different divisions whose “stovepipes,” or upward lines of authority and communication, are separate and distinct. Because FAA’s operational divisions are based on a functional specialty, such as engineering, air traffic control, or equipment maintenance, getting the employees in these units to work together has been difficult. Internal and external studies have found that the operations and development sides of FAA have not forged effective partnerships. To its credit, FAA is currently attempting to improve cross-agency communication and coordination by developing incentives for staff to work toward the agency’s goals and priorities. Plans are also under way to develop contracts with each integrated product team to hold its members accountable for developing and deploying a given operational capability. According to FAA officials, these contracts are intended to improve accountability for delivering technologies; in the past, such accountability has not been clearly assigned. In addition, efforts are under way to work with the aviation community to resolve disagreements that have persisted among FAA program offices, such as how to proceed with the use of digital communication. While stakeholders generally applaud FAA’s efforts to build consensus among stakeholders, some believe that the agency must be prepared to exercise strong leadership by (1) making difficult decisions after weighing stakeholders’ competing priorities, (2) holding to these decisions even amidst new and conflicting opinions about the value of one course of action over another, and (3) delivering on its commitments. Some stakeholders said they were particularly frustrated when, after announcing a planned course of action, FAA later delayed its implementation or retracted it and moved in a different direction. Some stakeholders told us that such indecision makes it very difficult for them to make plans for the future—such as determining investments for avionics upgrades—and further erodes their confidence in the agency’s ability to manage modernization programs and provide leadership to the aviation community. For example, several stakeholders cited FAA’s failure to deliver the ground-based infrastructure, needed for users to accrue benefits from equipping with new technologies under the Future Air Navigation System program, as a warning signal to them to proceed cautiously, since the agency may not deliver on its promises. In particular, users are concerned that if they invest in new technologies, they will not realize benefits in a timely manner to offset these investments. Some stakeholders believe that for FAA to successfully implement free flight, it must demonstrate that it can effectively manage its air traffic control modernization programs and deliver promised capabilities. To do so, FAA will need to implement an evolutionary approach to technology development and deployment. According to FAA, under such an approach, it will limit the scope of project segments so that it can deploy, test, evaluate, and refine a given technology until it obtains the desired capabilities. One stakeholder familiar with this approach emphasized the importance for FAA, in implementing it, of (1) assessing risks, (2) developing metrics, (3) limiting the scope of each phase of development, (4) evaluating progress before moving forward with the next phase of development, and (5) retraining staff. These steps would be applied to each cycle of the development process to help ensure that each completed iteration results in enhanced capabilities and moves a given technology closer to its desired level of maturity. FAA agreed that each of these steps will be important for successfully implementing this approach. FAA has not yet developed detailed plans for implementing this approach; however, in concept, it is consistent with our past recommendations that the agency avoid taking on unrealistic cost, schedule, and performance goals. For example, the recently developed plans for revising the Flight 2000 demonstration recommend an incremental approach, under which operational capabilities will be introduced over time into planned field demonstration sites. FAA and users expect such an approach will allow them to achieve success by taking smaller, less risky, more manageable steps. Some stakeholders told us that although they are encouraged by FAA’s efforts to date, they are taking a wait-and-see attitude as to whether the agency can effectively implement this approach to technology development and deployment. FAA and stakeholders have identified a wide range of concerns that need to be addressed to help ensure that efforts to implement free flight are sufficiently well developed as the agency moves forward with related modernization activities. These concerns include, among others, the need for (1) FAA—in collaboration with stakeholders—to develop clear goals and objectives for what it intends to achieve, as well as a measurement system for tracking progress, and (2) FAA and stakeholders to develop detailed plans that will allow for the cost-effective implementation of free flight. Stakeholders believe that more detailed plans are needed to provide the aviation community with assurances that moving forward with free flight is warranted. They believe that these plans should include the results of cost/benefit analyses, new procedures, and schedules for equipment installation. Because they expect that equipping with free flight technologies will be expensive, many users believe that FAA needs to demonstrate the near-term benefits of the new equipment—especially given FAA’s poor record of delivering promised benefits. As part of its efforts to develop plans for implementing free flight, FAA has conducted cost/benefit analyses to provide justification for free flight investments. However, stakeholders have raised concerns that these analyses have focused almost exclusively on the benefits to FAA. As a result, they believe that these analyses are of little value to users that must make business decisions about investing in new technologies. As one airframe manufacturer noted, FAA should develop a convincing case for changing the functions of the present system before selecting new technologies. While users expressed a desire for studies that consider their business needs, one airline official told us that meaningful cost/benefit analyses are very difficult to establish for the airline industry because the costs and benefits of equipping will vary considerably both among and within airlines. For example, the cost of investments and associated benefits will vary with factors such as (1) the cost of installing new avionics—including the cost of retrofitting older aircraft, (2) the timing of requirements for completing the installation of equipment, and (3) the routes flown. Even though these factors vary from one airline to another, some airlines expect FAA to conduct analyses that demonstrate that technology investments will be cost-effective for them. Similarly, DOD and general aviation users are concerned about potential penalties for not equipping their aircraft with technologies that will be needed to conduct operations under free flight. For example, DOD officials told us that they need more detailed information about whether—or under what circumstances—they may be excluded from certain airspace if they fail to equip with free flight technologies. DOD is also concerned that the lack of specificity in FAA’s plans may negatively affect its ability to meet its mission readiness requirements—including the ability to fly cost-efficient and effective routes. Some stakeholders have expressed concern that the cost of equipping with avionics for participation in the free flight environment may be prohibitive for the recreational end of the general aviation community. FAA is aware of this concern and plans to use the Flight 2000 demonstration (now the Free Flight Operational Enhancement Program) as a means for streamlining its process for ensuring the safety of new equipment for flight operations and developing affordable avionics for general aviation. A number of stakeholders told us that in order for FAA and users to fully exploit new capabilities to maximize the air traffic control system’s safety, capacity, and efficiency, the agency will need to develop procedures that will be used in the free flight environment. Such procedures will affect a wide range of operations. For example, new procedures will be required to approve, integrate, and deploy new technologies. New procedures will also be needed to enable pilots and controllers to use the new technologies. Hence, some stakeholders noted that it will be important for FAA to make explicit any changes in pilots’ and controllers’ roles and responsibilities. For example, if pilots and controllers are to share responsibility for making decisions about altitudes, speeds, and routes, the procedures need to be well defined. Under Free Flight Phase 1, the agency plans to implement new procedures as needed to demonstrate the use of new air traffic management tools that controllers will use to improve conflict detection and air traffic sequencing, among other things. Similarly, under Flight 2000 (now the Free Flight Operational Enhancement Program), FAA plans to develop new procedures for the new communication, navigation, and surveillance technologies that will be used by pilots and controllers. FAA is aware of the need to develop procedural changes for operations under free flight and is currently working with the aviation community to develop these new procedures. However, some stakeholders are concerned that the development and implementation of new procedures will not occur in a timely fashion. One of these stakeholders further stressed that having new equipment and technology working together is not enough, without new procedures, to deliver the benefits promised under free flight. Commercial airlines and DOD require adequate lead time to plan for the cost-effective installation of new equipment. To facilitate an efficient equipment installation process, FAA will need to work with users to consider their unique needs as they develop plans for moving to free flight operations. For example, to minimize costs, airlines would prefer to install new avionics within an aircraft’s regularly scheduled maintenance cycle. In addition, airlines do not want to install new equipment too early because they want to be able to take advantage of opportunities to purchase the best technologies at the lowest cost; however, they do not want to equip too late and miss out on the benefits. Similarly, because DOD must request funding well before installing new equipment, it needs ample lead time to develop budget requests and installation schedules for many of its aircraft, which number more than 16,000. Therefore, it is important for FAA to make timely decisions about future technology requirements and stick with those decisions to give all aviation user groups the lead time needed to ensure that their purchases are cost-effective and their installation schedules are efficient. To provide for a smooth transition, FAA has been working with DOD and other users to move forward with the selection of new technologies for operations under free flight. FAA’s most recent draft NAS architecture (blueprint) represents the agency’s attempt to provide the level of detail requested by the aviation community. However, some stakeholders have expressed concern that the draft architecture is too general to use in planning for future technology upgrades. For example, an airline representative noted that when airlines place orders for new aircraft, they request systems that provide maximum flexibility for later modifications or upgrades. However, future free flight equipment upgrades will still be costly, and the sooner FAA decides which technologies will be required for operations under free flight, the more effectively airlines can plan for those upgrades. Collaboration between FAA and stakeholders is critical to developing plans that will have the level of buy-in needed to start implementing free flight. FAA’s recent experiences in developing modernization plans have pointed to the need to work collaboratively with the aviation community from the onset of a given program to help ensure the effective resolution of issues as plans are developed. In March 1998, FAA and the aviation community reached consensus to begin implementing Free Flight Phase 1—including consensus on which technologies will be deployed and where. In addition, under this first phase, steps will be taken to identify and mitigate the risks associated with inserting new technologies and procedures into an operating air traffic control system. In contrast, until recently FAA and stakeholders have been sharply divided over the agency’s plans for conducting Flight 2000—a limited demonstration of free-flight-related communication, navigation, and surveillance technologies—primarily in Alaska and Hawaii. Problems began when the proposal was announced without consulting users and have persisted, despite FAA’s efforts to work collaboratively with stakeholders to resolve them. While many stakeholders we interviewed agreed with the need for FAA to conduct an operational demonstration of free flight technologies and related procedures, they had strong reservations about the utility of conducting such a demonstration in Alaska and Hawaii. In their view, few of the lessons learned would be transferable to operations in the continental United States, where free flight implementation will ultimately focus. In addition, stakeholders expressed concern that FAA has not focused enough attention on developing the detailed plans that it needs for conducting the demonstration, as required by the agency’s acquisition management system. In fact, the Department of Transportation’s fiscal year 1998 appropriation act prohibited FAA from spending any fiscal year 1998 funds on the Flight 2000 program. In the accompanying Conference Report for the act, the conferees noted that additional financial and technical planning was needed before the Flight 2000 demonstration program could be implemented. The Congress has not yet decided whether to fund this demonstration program in fiscal year 1999. To address these concerns, FAA has been working collaboratively with stakeholders—through RTCA—to develop a roadmap (general plans) for restructuring Flight 2000. These efforts have resulted in the (1) development of selection criteria for the operational capabilities to be used, (2) selection of demonstration sites in Alaska and the Ohio Valley, (3) selection of nine operational capabilities (see app. III), (4) proposed change of the program’s name from Flight 2000 to the “Free Flight Operational Enhancement Program,” and (5) revision of the time frame (1999-2004) for conducting the demonstration program. FAA is currently considering this RTCA proposal. FAA and stakeholders realize that they will need to continue to work collaboratively to refine these plans. The latest collaborative efforts appear to be a positive step toward developing the type of detailed plans FAA needs to carry out the demonstration and secure the necessary funding. Stakeholders and FAA officials identified several concerns about technology development and deployment that need to be resolved. Key among these were (1) the pace and cost of the agency’s process for ensuring that new equipment is safe for its intended use, (2) issues related to human factors, (3) uncertainties surrounding the use of GPS as a sole means of navigation, and (4) issues associated with the use of digital communication technologies. Many stakeholders and FAA officials stated that FAA’s certification process—methods for ensuring that new equipment is safe for its intended use—is a key challenge to the implementation of free flight because it takes too long and costs too much; they urged that the process be streamlined. The certification process could be problematic for free flight because many new types of equipment, such as those that are required for the use of new digital communication technology, will need to be certified before they can be implemented. As one aviation community stakeholder noted, “If something is going to change the aviation system, it has to go through the certification knot hole.” Recognizing that the certification process poses a barrier to implementing free flight, FAA has taken a number of steps to address this problem. For example, FAA asked, and RTCA agreed, to convene a task force to examine ways to improve the agency’s existing certification practices. The first meeting took place in June 1998, and the task force expects to report to FAA within 6 months. Among other things, this task force will (1) develop baseline information on the current system—including a review of avionics, infrastructure, and satellite needs; (2) consider human factors in the certification process—including how best to integrate human factors into the system’s design and operations; (3) identify ways to improve the current certification process—including an attempt to determine an acceptable range of failure for technologies and metrics for technology design and performance; and (4) review FAA’s certification services—including what customers should expect from the agency and alternative methods of satisfying certification requirements, such as granting approval authority for specific types of technologies to Centers of Excellence or individuals. In addition, RTCA has a special committee that is reviewing the use of digital communication technologies for free flight, including the development of standards that FAA could use to develop certification requirements. Furthermore, the agency plans to use the Flight 2000 (now the Free Flight Operational Enhancement Program) demonstration of free flight communication, navigation, and surveillance technologies as an opportunity for streamlining the agency’s equipment certification process. Several stakeholders told us that while the certification process could be streamlined, both FAA and stakeholders need to take a careful approach. They noted that the present system may be cumbersome, but it is providing the desired level of safety. If standards are going to be relaxed, then redundancies need to be built into the system to ensure that modifications to the certification process either maintain or improve upon existing levels of safety. Many stakeholders told us they believe that the successful implementation of free flight hinges on issues related to human factors, such as the ability and willingness of pilots, controllers, and maintenance staff to shift to a new system of air traffic management. Among the concerns raised are the need to (1) define the type of training that will best prepare human operators for the transition; (2) provide a reasonably paced training schedule to help ensure that pilots, controllers, and maintenance staff, in particular, are not overburdened with too many changes at one time; and (3) identify the risks associated with changes in technologies and procedures and the potential effects of these changes on human operations in a free flight environment. For example, a recent report by the National Research Council on human factors and automation raised concerns that, among other things, the increased use of automation may lead to confusion among pilots, controllers, and airline operations personnel over where control lies, especially in a free flight environment.As a result, the report recommended that until these and other human factors issues are better understood, the introduction of automated tools should proceed gradually and decision-making authority should continue to reside on the ground with controllers. A related issue is the need to incorporate the consideration of human factors into the product development cycle to avoid costly and cumbersome changes at the end of the development process. An FAA human factors official told us that FAA has learned a lot from its experience with the Standard Terminal Automation Replacement System (STARS) about the need to involve users in considering human factors throughout the product development cycle—from the mission needs statement, forward. This official stressed that the agency can pay to consider human factors throughout the acquisition cycle or pay more later, as it is doing with STARS, to fix the problems that arise when these factors are not considered. Furthermore, when human factors are not considered along the way, problems cannot always be fixed. Fewer options are available at the end of a development cycle for modifying a given technology. Stakeholders agreed with this assessment. While FAA has developed guidelines for considering human factors during the technology development process, it has not established a formal requirement for using these guidelines. In June 1996, we reported that FAA’s work on human factors was not centralized, and we recommended that the Secretary of Transportation direct FAA to ensure that all units coordinate their research through the agency’s Human Factors Division.According to some FAA officials and one stakeholder, such coordination is still lacking and the agency’s programs would benefit from assigning responsibility for human factors to a higher level within FAA so that these issues can receive sufficient attention from the agency’s senior management. In addition, several stakeholders stressed the importance of retaining the same members on teams that address concerns about human factors through the entire development process. One of these stakeholders believes that such continuity will help ensure that the team’s efforts are not derailed late in the process by the inclusion of new members and the introduction of a range of new issues and methods of resolving them. Human factors must also be considered in the operating environments where technologies will be deployed. According to one stakeholder involved in human factors work, because the air traffic control system has evolved—rather than being designed—it does not operate in a homogeneous fashion, and when the system is changed, the effects on humans can vary widely. For example, both en route and terminal facilities tailor their operations in many ways to factor in local conditions. As a result, this stakeholder stressed that as many as 1,000 letters of agreement between various components of FAA and users making adjustments to operating rules and procedures may exist—making it difficult for the agency to generalize across the system when considering the introduction of changes or improvements. In addition, under free flight, users and controllers (as well as maintenance staff) will rely more heavily on automated technologies to carry out their responsibilities—making the integrity of the system even more critical than it is now and increasing the need for more redundant systems and training to ensure that controllers can successfully switch, if necessary, to manual control techniques. Satellite navigation provides precise information on the position of aircraft and offers the potential for the required distances between aircraft to be safely reduced and, in turn, for the air traffic control system’s capacity to be increased. FAA initially planned its augmented satellite navigation system to be a sole means of navigation under free flight. However, FAA and stakeholders have expressed concerns about the vulnerability of an augmented satellite system to both intentional and unintentional (e.g., radio frequency interference) jamming, and about problems associated with the system’s weak signal. In view of these concerns, the Air Transport Association and the Aircraft Owners and Pilots Association have, in coordination with FAA, developed plans for a risk assessment of augmentations to satellite navigation. A research organization was selected in July 1998 to conduct the assessment, and a final report is expected in January 1999. An Air Transport Association official told us that this risk assessment will address concerns about the vulnerability of satellite navigation and stressed that such a study is critical because the use of satellite navigation as a sole means of navigation is the centerpiece of FAA’s architecture (blueprint) and is the basis for the agency’s cost/benefit analyses. According to this official, a risk assessment is needed to identify the risks and develop mitigation plans and cost estimates for mitigating each risk. The results of this study could affect both the costs and benefits for FAA and users because if FAA does not use the augmented system as a sole means of navigation, it could incur additional costs to retain some portion of its ground-based navigational aids. Similarly, users may find it necessary to maintain existing equipment and to purchase new equipment under free flight. FAA and stakeholders consider digital communication technologies—commonly referred to as data link—as critical to implementing free flight. FAA expects that the use of data link—in combination with other free flight technologies—will improve safety, increase capacity, reduce costs, and enhance the productivity of humans and equipment. Data link will replace or supplement many of the routine voice interactions between pilots and controllers with nonvocal digital data messages. For example, during peak periods, one controller often may be required to communicate on a single radio channel with 25 or more aircraft—leading to possible operational errors and system delays. FAA believes that using data link will (1) reduce nearly one-quarter of all domestic operational errors—caused directly or indirectly by miscommunication between pilots and controllers, (2) relieve highly congested voice communication channels, and (3) save the airlines millions of dollars annually on communication-related delays that occur during both taxi and in-flight operations. Data link comprises three components: (1) software applications—including Controller Pilot Data Link Communications (CPDLC), weather information, and Automatic Dependent Surveillance (ADS); (2) hardware systems installed on the ground and avionics in the cockpit; and (3) the communication medium that allows for the transfer of data between the ground and airborne equipment. FAA is responsible for implementing ground systems, and the aviation community is responsible for implementing airborne systems. As partners, both FAA and the aviation community are responsible for ensuring the interoperability of these systems. Stakeholders told us that despite the importance of data link, many issues remain unresolved. Chief among these issues is the lack of agreement within FAA on how, when, and at what pace to proceed with the use of data link. This lack of agreement may be attributed, at least in part, to the fact that data link efforts are being managed and implemented by different organizational elements of FAA and by the aviation community. Recognizing this, FAA has been working with stakeholders to reach agreement on data link issues. In May 1998, a group of FAA officials and stakeholders under the Administrator’s NAS Modernization Task Force began developing a consensus plan for implementing controller pilot data link in the en route environment. In July 1998, this group presented its plan to RTCA for consideration. In August 1998, RTCA modified the plan and endorsed the implementation of CPDLC Build 1 as part of Free Flight Phase 1—recommending that the location and communication medium for CPDLC Build 1 be changed. FAA—in consultation with stakeholders—intends to further develop the plans for deploying CPDLC Build 1 by the end of 1998. FAA’s approval is expected by early 1999. A number of other issues were identified by FAA officials and stakeholders as needing resolution for free flight to be implemented successfully. Among these issues were the need to (1) coordinate modernization activities with the international aviation community, (2) integrate free flight technologies, and (3) address airport capacity issues. Airlines that operate internationally and DOD believe that FAA needs to work diligently to ensure that, to the extent possible, carriers do not have to purchase multiple types of avionics to operate in different parts of the world. Currently, both FAA and various elements of the aviation community are working collaboratively with their international counterparts on a number of modernization issues. For example, FAA is a member of an airline-led group with international participation—including Eurocontroland several foreign airlines—known as the Communication, Navigation, and Surveillance/Air Traffic Management Focused Team. The purpose of this team is to facilitate the implementation of new communication, navigation, and surveillance and air traffic management technologies by developing consensus among global airlines on economic issues. In addition, the agency is working with the European community on human factors issues and data link applications. However, some stakeholders question the sufficiency of the agency’s efforts to coordinate technology selection decisions that will allow users to operate worldwide. Because the airline industry is becoming increasingly global, it requires the development of compatible operational concepts, technologies, and systems architectures throughout the world. One airframe manufacturer noted that the airlines are increasingly demanding global solutions to minimize the cost of changes to avionics and flight systems. The costs of purchasing new avionics, retrofitting them into the aircraft (and the down time required), and training pilots in their use for a large fleet of airplanes will quickly exceed any benefits if these benefits are not realized as soon as additional or improved capabilities are introduced. According to some stakeholders, FAA has historically been the international leader in air traffic control modernization efforts—a position that has given the agency the flexibility to develop and deploy technologies that best serve the needs of users in the United States. However, many stakeholders expressed concern that FAA’s position as the international leader in this arena has eroded in recent years. According to some of these stakeholders, the United States may have to follow the lead of the European community in selecting the types of new technologies that will be used under free flight. For example, some stakeholders noted that Europe is at least 3 years ahead of the United States in developing and deploying the data link technology that will serve as a centerpiece for implementing free flight. While several stakeholders noted that valuable lessons may be learned from the Europeans’ work on data link, one stakeholder stressed that it is important for the United States to position itself so that it can make decisions about technology requirements that best reflect the needs of U.S. operations. Some FAA officials and stakeholders told us that the agency needs to integrate free flight technologies with one another and into the operating air traffic control system. This integration is expected to allow FAA and users to fully exploit the capabilities of these technologies to help ensure that promised improvements in safety, capacity, and efficiency are realized. For example, as noted in chapter 2, FAA has new technologies that are expected to improve the efficiency of operations at high altitudes, close to the terminal, and on the ground. Because some of these technologies have not been designed to work together, some stakeholders and FAA officials contend that their potential benefits—e.g., allowing the distance between aircraft to be safely reduced, when practical, throughout a flight’s operation—will not be maximized unless they are integrated. One airframe manufacturer noted that the key impediment to changing the NAS is not new technology, but how to integrate that technology into an operating NAS. As a result, care must be taken to help ensure that planned changes in operations, procedures, and airspace usage will not adversely affect safety and will meet users’ future needs. Another stakeholder noted that integrating new technologies (and associated procedures) into the present operating system is difficult because there are complex interdependencies between the technologies currently being used—making incremental changes to the system complex and the consequences of introducing abrupt changes unpredictable. Stakeholders have raised concerns that FAA does not have sufficient internal expertise to complete integration tasks. FAA officials acknowledge that they do not have the internal expertise or experience to do the avionics systems integration work for Flight 2000 (now the Free Flight Operational Enhancement Program); the agency plans to hire an integration contractor to do this work. FAA believes that it has sufficient expertise to do the remainder of the integration work required for free flight. However, to enhance expertise within the agency, FAA has identified competencies essential to efficiently manage complex acquisition programs and is providing a variety of opportunities for staff to further develop their expertise. Stakeholders questioned whether FAA is paying enough attention to increasing airport capacity. Many stakeholders stressed that using free flight in the en route environment may get aircraft to their destinations sooner, but the planes may then be delayed by limits on airport surface capacity, such as too few runways and gates. Several stakeholders also stressed that poor weather conditions limit airports’ capacity and said that more sophisticated technology is needed to predict hazardous weather conditions so that airports’ capacity can be optimized. In June 1998, we reported that FAA has not assigned weather information a high priority in its plans for the NAS architecture. Because weather information is not considered critical, research on weather systems is often among the first to be cut—potentially jeopardizing mulityear studies of weather problems affecting aviation. Given the significant impact of hazardous weather on aviation safety and efficiency, improving the weather information available to all users should be one of FAA’s top priorities. The agency is taking steps to address its shortcomings in this area, and in fiscal year 1999, FAA is elevating weather research as a funding priority. | Pursuant to a congressional request, GAO reviewed the: (1) status of the Federal Aviation Administration's (FAA) efforts to implement free flight, including a planned operational demonstration formerly known as Flight 2000 and now called the Free Flight Operational Enhancement Program; and (2) views of the aviation community and FAA on the challenges that must be met to implement free flight in a cost-effective manner. GAO noted that: (1) since 1994, FAA officials and stakeholders, under the leadership of the Radio Technical Commission for Aeronautics (RTCA), have been collaborating to implement free flight; (2) these early efforts led to a definition of free flight, a set of recommendations, and an action plan to gradually move toward a more flexible operating system; (3) while working to implement the recommendations, FAA and stakeholders agreed on the need to focus their efforts on deploying technologies that will provide early benefits to users; (4) in early 1998, FAA and stakeholders developed a strategy that calls for the phased implementation of free flight, beginning with Free Flight Phase 1; (5) under this first phase, FAA and stakeholders have agreed upon the core technologies that are expected to provide these early benefits, as well as the locations where they will be deployed; (6) however, until recently, FAA and many stakeholders have not agreed on how best to conduct a limited operational demonstration of free-flight-related technologies and procedures--known as the Flight 2000 Program; (7) FAA is currently prohibited from spending any fiscal year 1998 funds on the Flight 2000 demonstration itself; (8) stakeholders concurred that FAA had yet to develop a detailed plan for conducting this demonstration; (9) to address the concerns of stakeholders, FAA has been working with them--under the leadership of RTCA--to restructure the Flight 2000 demonstration; and (10) FAA and stakeholders have identified numerous challenges that will need to be met if free flight--including Flight Phase 1 and Flight 2000--is to be implemented cost-effectively: (a) stakeholders told GAO that FAA will need to provide effective leadership and management of the modernization efforts both within and outside the agency; (b) stakeholders cited the need for FAA to further develop its plans for implementing free flight, including establishing clear goals for what it intends to achieve and developing measures for tracking the progress of modernization and free flight; (c) FAA and stakeholders agreed on the need to address outstanding issues related to technology development and deployment; and (d) FAA and stakeholders also identified a range of other challenges that will need the agency's attention, including coordinating FAA's modernization and free flight efforts with those of the international community and integrating the various technologies that will be used under free flight operations with one another as well as into the air traffic control system. |
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FHWA is responsible for administering and overseeing various highway transportation programs, including the Federal-Aid Highway Program—which provides financial assistance to the states for improving the efficiency of highway and traffic operations. FHWA relies on AASHTO to (1) provide technical guidance for the design, construction, and maintenance of highways and other transportation facilities; (2) publish manuals, guides, and specifications regarding design, safety, maintenance, and materials; and (3) conduct planning for highways, bridges, and other structures. Active membership in AASHTO is open to the state departments of transportation of the United States, Puerto Rico, and the District of Columbia. DOT is an active, albeit nonvoting, member. FHWA supports AASHTO’s manuals, guides, and specifications, which the states can use in designing and analyzing federally funded highway projects. In addition, states can use their own pavement design criteria and procedures for such projects, which generally mirror what is in AASHTO’s pavement design guide. Currently, highway pavement design criteria and procedures are documented in AASHTO’s 1993 Guide For the Design of Pavement Structures. AASHTO’s Joint Task Force on Pavements is responsible for the development and updating of the guide. The guide was first issued in 1961 and then updated in 1972, 1981, 1986, and 1993. Another update of the guide is forthcoming. The task force’s efforts to update the guide are overseen by a National Cooperative Highway Research Program (NCHRP) project panel, which functions under the Transportation Research Board (TRB) of the National Academy of Sciences’ National Research Council. While constructing new highways was once the primary goal of state transportation departments, the major emphasis in pavement design in the 1990s has progressed to rehabilitating existing highways. According to NCHRP, the current guide does not reflect this shift in emphasis, and the updated guide is the expected product of an NCHRP/TRB contract with an engineering consulting firm that is expected to be awarded in the near future. Under the contract, the guide would be updated by 2002. In updating the guide, NCHRP intends to improve upon the outdated pavement design procedures contained in the current guide. The current design guide and its predecessors were largely based on design equations empirically derived from the observations AASHTO’s predecessor made during road performance tests completed in 1959-60. Several transportation experts have criticized the empirical data thus derived as outdated and inadequate for today’s highway system. In addition, a March 1994 DOT Office of Inspector General report concluded that the design guide was outdated and that pavement design information it relied on could not be supported and validated with systematic comparisons to actual experience or research. In contrast to the current guide, which relied heavily on an empirical approach to derive its design equations, the NCHRP contract to update the guide by 2002 calls for the use of an approach that would more realistically characterize existing highway pavement usage and improve the reliability of designs. Under the first phase of the contract that ended in July 1997, Nichols Consulting Engineers developed a detailed work plan for completing the new pavement design guide. When the project manager resigned in June 1997, NCHRP decided to rebid the contract. The NCHRP program officer stated that he believes that the new guide will be completed as planned. An existing method called nonlinear 3D-FEM has the potential to significantly improve the design and analysis of highway pavement structures. A number of nonlinear 3D-FEM computer programs have been available since the 1970s that can be used for solving complex structural engineering problems, including designing safer, longer-lasting, more cost-effective highway pavement structures. Nonlinear 3D-FEM is considered by many experts to be superior to current design and analysis methods because values of stresses, strains, and pavement deflections can be calculated accurately from a variety of traffic loads—static, impact, vibratory, and moving mixes of traffic loads, including multiaxle truck/trailer loads both within and outside legal weight limits. The nonlinear 3D-FEM analysis allows a level of detail that aids in selecting pavement materials as well as improving the accuracy of determinations of the thickness needed for new, reconstructed, and overlay pavements. This method can be used to analyze pavements for strengthening that may be required for expected traffic loads in the future and for computing the pavements’ remaining structural and operational lives. Several highway departments and academic institutions have already used nonlinear 3D-FEM for various structural analysis applications. The Indiana, Mississippi, and Ohio departments of transportation, for example, have pioneered the use of nonlinear 3D-FEM in pavement design and analysis. Officials of these agencies told us that they are very satisfied with its application on various road systems. In 1995, the University of Mississippi used nonlinear 3D-FEM to analyze jointed concrete pavement for dynamic truck loads and thermal analysis.An official from the Mississippi State Department of Transportation told us that this method enabled the state to determine the conditions causing the rapid deterioration of its concrete pavement. Similarly, a senior scientist from a firm specializing in evaluating the integrity of engineering structures told us that, among other things, the finite element method—combined with statistical theory (which factors in uncertainties in material properties)—has been used to predict the expected life of a concrete runway at Seymour Johnson Air Force Base in North Carolina. Because it considers AASHTO’s pavement design guide to be outdated, the School of Civil Engineering, Purdue University, also has been using nonlinear 3D-FEM to analyze various pavement problems. The university has used this method to analyze responses to moving multiaxle truck/trailer loads within and outside legal weight limits on both flexible and rigid pavements. Studies the university has conducted to verify the analyses have shown a strong correlation between field and predicted pavement responses (strains and deflections). More recently, Purdue University conducted a study—including the use of field instrumentation, laboratory testing, field data collection, and subgrade and core sampling—of three asphalt pavement sections with different subdrainage configurations on a portion of Interstate 469 in Ft. Wayne, Indiana. Nonlinear 3D-FEM was used to evaluate the subdrainage performance and the analysis of moisture flow through the pavement. The results of the study indicated a strong correlation between the predicted and field-measured outflows of water. The effects of high moisture conditions on pavement performance include rutting, cracking, and faulting—leading to increased roughness, unsafe conditions, and a loss of serviceability. A pavement design manager with the Indiana Department of Transportation told us that the Purdue study, using nonlinear 3D-FEM, confirmed that the Department’s previously used subdrainage design procedures resulted in a drainage outflow pipe that was too small—thus limiting moisture outflow. Subdrainage layers with filter layers, a perforated pipe (subdrainage collector pipe), trench material, and an outlet pipe play a key role in reducing the extent and duration of high moisture conditions in pavement structures and their subgrade. The manager said that nonlinear 3D-FEM provided the (1) proper (increased) size of drainage outlet pipe and (2) best, most efficient filter material, which turned out to be less costly than the material previously being used. We were told that Indiana’s Transportation Department is now in the process of adopting nonlinear 3D-FEM as its preferred method for designing subdrainage systems. An Indiana research section engineer also told us that he believes that nonlinear 3D-FEM could be used by all state highway departments to design subdrainage systems. Battelle Memorial Institute recently applied nonlinear 3D-FEM to predict pavement response to a broad range of vehicle loads on 4 miles of newly constructed highway pavement (2 miles southbound and 2 miles northbound) north of Columbus, Ohio. According to a Battelle project scientist and an academician from Ohio University, the results of the heavily instrumented highway test sections showed a strong correlation with the analytical results achieved from nonlinear 3D-FEM. They also told us that nonlinear 3D-FEM is the best computational method to address pavement problems. A chief engineer of the Ohio Transportation Department further told us that the state was pleased with Battelle’s efforts to predict pavement response using the nonlinear method. According to an engineer-advisor with the DOT Inspector General’s Office, AASHTO’s pavement design guide has changed very little over the years. He was of the opinion that new design procedures are needed, incorporating nonlinear 3D-FEM, if FHWA and the states are going to be better able to ensure that highway pavement is constructed, reconstructed, or overlaid according to current FHWA policy that it be safe, durable, and cost-effective. We reviewed the scope of work of the contract NCHRP awarded in December 1996 to Nichols Consulting Engineers for the development of the new guide. The scope of the most recent contract work does not directly cite nonlinear 3D-FEM as a technique that can be used in the design and analysis of highway pavement. In discussions with Nichols’ project manager and with an NCHRP official and in our review of the contractor’s work plan for the guide, we did not find any specific reference that nonlinear 3D-FEM would be investigated for inclusion or exclusion in the 2002 update. Through interviews with FHWA, AASHTO, and NCHRP officials, we attempted to determine why the method was not specifically being considered. We did not receive any explanation. However, the program officer said that while the contractual documentation for this particular effort does not contain specific reference to nonlinear 3D-FEM as a pavement design and analysis method, the documentation does not exclude the use of such a method either. The pavement design guide developed and updated by AASHTO over the years for designing and analyzing highway pavement structures is outdated. NCHRP has undertaken a 5-year effort to update the guide employing improved design approaches. Research on nonlinear 3D-FEM and documented successes in its application suggest that this method could be an important tool for accurately (1) designing and analyzing new highway pavement structures and (2) analyzing the response of deteriorated pavement structures for rehabilitation. We believe it should be considered in NCHRP’s ongoing efforts to update AASHTO’s current pavement design and analysis guide. The recent decision to rebid the contract for the design guide update provides an opportunity for FHWA to specify the consideration of this method. To better assist states in designing safer, longer lasting, and more cost-effective new, reconstructed, and overlay highway pavement structures, we recommend that the Secretary of Transportation direct the Administrator, FHWA, to ensure that nonlinear 3D-FEM is considered in the current update of the pavement design guide. We provided a draft of this report to DOT for its review and comment. In written comments dated October 31, 1997 (see app. II), DOT stated that it has maintained a long- standing commitment to ensuring that the nation’s investment in its highway infrastructure is cost-effective. DOT concurred with our recommendation that nonlinear 3D-FEM be considered in the current update of AASHTO’s pavement design guide. DOT stated that it would work with NCHRP to encourage full consideration of the method along with other quantitative analytical methods. As part of its commitment to a cost-effective highway infrastructure, DOT stated that FHWA has supported research efforts at its own Turner-Fairbank Highway Research Center as well as efforts by AASHTO, NCHRP, and TRB. DOT further stated that FHWA is fully aware of and recognizes the potential benefits to highway design offered by 3D-FEM. According to DOT, FHWA has supported the development of this technology at its Turner-Fairbank facility and with individual states through the State Planning and Research program. DOT stated that FHWA considers 3D-FEM to be a very useful research tool for analyzing pavement structures but that it will be up to NCHRP and AASHTO to determine whether the method has achieved the maturity necessary to become a practical engineering tool. We are pleased to hear of DOT’s interest in and acceptance of nonlinear 3D-FEM as an analytical tool for designing and analyzing highway pavement structures. Such interest and acceptance was never made known to us (1) during discussions we had with the Chief, Pavement Division, FHWA; the project manager, AASHTO; a senior program officer, NCHRP; and the initial contractor’s project manager for the development of the 2002 pavement guide nor (2) in documentation we gathered and reviewed during the assignment. We made other clarifying changes to the report as appropriate on the basis of other comments by DOT. We performed our work from May 1996 through October 1997 in accordance with generally accepted government auditing standards. Appendix I contains details on our objectives, scope, and methodology. As you know, 31 U.S.C. 720 requires the head of a federal agency to submit a written statement of the actions taken on our recommendations to the Senate Committee on Governmental Affairs and to the House Committee on Government Reform and Oversight not later than 60 days from the date of this letter and to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of this letter. We are sending copies of this report to the Administrator, FHWA; the Director, Office of Management and Budget; and appropriate congressional committees. We will make copies available to others upon request. Please call me at (202) 512-2834 if you have any questions. Major contributors to this report are listed in appendix III. The objectives of this review were to (1) describe the roles of the Federal Highway Administration (FHWA) and others in developing and updating the pavement design guide and (2) examine the use and potential of a computer analysis method known as the nonlinear 3 Dimensional-Finite Element Method (3D-FEM) for improving the design and analysis of highway pavements. To accomplish these objectives, we first reviewed the American Association of State Highway and Transportation Officials’ (AASHTO) highway pavement guide, which is being used by many state departments of transportation as an aid in designing and analyzing pavement structures, federally funded and otherwise. We reviewed available literature and contacted officials from FHWA, AASHTO, and the Transportation Research Board. We also contacted contractor officials responsible for the development and updates of the pavement design guide. We contacted officials from the Transport Research Laboratory, Crawthorne, Berkshire, United Kingdom, and reviewed its pavement design practices. We contacted officials from the U.S. Army Engineer Waterways Experiment Station, Vicksburg, Mississippi; Indiana, Mississippi, and Ohio state highway departments; and various engineering consulting firms. We contacted academicians from the University of Arizona, the University of Cincinnati, Florida A&M University-Florida State University, Ohio University, the University of Iowa, the University of Mississippi, the University of Nebraska, and Purdue University, as well as Birmingham University in the United Kingdom. Also, we contacted scientists from Battelle Memorial Institute and Lawrence Livermore National Laboratory. We selected these educational institutions and nonprofit organizations because all have conducted research and development work related to pavement design and analysis and/or the application of nonlinear 3D-FEM for solving structural engineering problems. Furthermore, we performed a literature and database search to identify any individuals who have authored publications on the applications of nonlinear 3D-FEM to highway pavement design and analysis or other structural engineering problems. We discussed with FHWA and others their roles in keeping up with and promoting up-to-date techniques regarding pavement design and analysis. We reviewed FHWA’s pavement policy issued in December 1996, which states that pavements should be designed to accommodate current and predicted traffic needs in a safe, durable, and cost-effective manner. More broadly, we used in this review information we obtained through attendance at the Fourth International Conference on the Bearing Capacity of Roads and Airfields held in July 1994 in Minneapolis, Minnesota; the Third Materials Engineering Conference held in November 1994 in San Diego, California; annual Transportation Research Board meetings held in January 1995 and in January 1997 in Washington, D.C.; and the Structures Congress XV held in April 1997 in Portland, Oregon. Dr. Manohar Singh, P.E., Engineering Consultant Ralph W. Lamoreaux, Assistant Director The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO provided information on the: (1) roles of the Federal Highway Administration (FHwA) and others in developing and updating the pavement design guide; and (2) use and potential of a computer analysis method known as nonlinear 3 Dimensional-Finite Element Method (3D-FEM) for improving the design and analysis of highway pavement structures. GAO noted that: (1) FHwA has worked cooperatively with the American Association of State Highway and Transportation Officials (AASHTO) in developing and updating the pavement design guide; (2) the current guide is slated to be updated by the year 2002 to better reflect the changing priority of rehabilitating the nation's highways rather than building new ones; (3) in contrast to the current guide, that many transportation experts believe is outdated, the new guide is expected to incorporate the use of analytical methods to predict pavement performance under various loading and climatic conditions; (4) sponsors believe that a new design approach will more realistically characterize existing highway pavements and improve the reliability of designs; (5) a promising analytical method to accurately predict pavement response is the nonlinear 3D-FEM; (6) only with accurate response data can one reliably predict pavement performance; (7) the use of this method has the potential to improve the design of highway pavements, which encompasses highway safety, durability, and cost-effectiveness, because values of stresses, strains, and deflections (pavement response) can be calculated accurately from a variety of static, impact, vibratory, and moving mixes in traffic loads; (8) several state departments of transportation, academicians, and scientists have pioneered the use of the nonlinear 3D-FEM and are using it to solve a variety of complex structural engineering problems, including the design and analysis of highway pavement structures; and (9) while this is a promising method for improving highway pavement design and analysis, GAO could find no evidence that it is being considered for inclusion in the current design guide update. |
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Multiemployer defined benefit (DB) pension plans are created by collective bargaining agreements between labor unions and two or more employers, and generally operate under the joint trusteeship of unions and employers. Such plans typically exist in industries with many small employers who may be unable to support an individual DB plan, or where seasonal or irregular employment results in high labor mobility between employers. Industries where multiemployer plans are prevalent include trucking, construction, retail, and mining and manufacturing. Like single- employer DB plans, multiemployer DB plans pay retirees a defined benefit after retirement. Under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, the benefits of multiemployer plans are insured by PBGC. As shown in table 1, PBGC’s multiemployer fund is financed by insurance premiums paid by plans, with each multiemployer plan paying an annual premium of $12 per participant to PBGC as of 2013. In return, PBGC provides financial assistance in the form of loans to plans that become insolvent, that is, plans that do not have sufficient assets to pay pension benefits at the PBGC guaranteed level for a full plan year. Although such financial assistance is referred to as a “loan,” and is by law required to be repaid, in practice such loans have almost never been repaid, as plans generally do not emerge from insolvency. Before PBGC will provide the loans, participants’ retirement benefits must be reduced to a level specified in law. Even after insolvency, the plan remains an independent entity managed by its board of trustees. This contrasts with the agency’s single-employer program under which PBGC does not provide assistance to ongoing plans, but instead takes over terminated underfunded plans as a trustee, and pays benefits directly to participants. Congress included provisions directed at imposing greater financial discipline on multiemployer plans in the Pension Protection Act of 2006 (PPA). Specifically, as outlined in table 2, this law includes new provisions designed to compel multiemployer plans in poor financial shape to take action to improve their financial condition over the long term. The law established two categories of troubled plans—endangered status (commonly referred to as “yellow zone,” and which includes an additional subcategory of “seriously endangered”) and a more seriously troubled critical status (commonly referred to as “red zone”). PPA further requires plans in these categories to develop strategies that include contribution increases, benefit reductions, or both, designed to improve their financial condition in coming years. Multiemployer plans in endangered status are to document these strategies in a funding improvement plan, and multiemployer plans in critical status plans are to do so in a rehabilitation plan. The plan trustees can offer the bargaining parties multiple schedules from which to choose, but one of these must be designated as the “default schedule,” which is to be imposed if the bargaining parties do not select one of the schedules within a specified timeframe. Once plan trustees have adopted a funding improvement or rehabilitation plan, bargaining parties are to select one of the available benefit and/or contribution schedules through the collective bargaining process. The multiemployer plan is then required to report on progress made in implementing its funding improvement or rehabilitation plan. Because of the greater severity of critical status plans’ funding condition, such plans have an important exception to ERISA’s anti-cutback rule in that they may reduce or eliminate certain so-called “adjustable benefits” such as early retirement benefits or subsidies, certain post-retirement death benefits, and disability benefits for plan participants who have not yet retired. For example, if a critical status plan were to adopt a rehabilitation plan that proposed to eliminate an early retirement benefit, appropriate notice was provided, and the reduction agreed to in collective bargaining, then participants not yet retired would no longer be able to receive that early retirement benefit. PPA funding requirements took effect in 2008 just as the nation was entering a severe economic crisis. The dramatic decline in the value of stocks and other financial assets in 2008 and the accompanying recession broadly weakened multiemployer plans’ financial health. In response, Congress enacted the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) which contained provisions designed to help pension plans and participants by providing funding relief to help them navigate the difficult economic environment. For example, WRERA relief measures allowed multiemployer plans to temporarily freeze their funding status at the prior year’s level, and extend the timeframe for plans’ funding improvement or rehabilitation plans from 10 to 13 years. In addition, Congress enacted the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA), which provides additional funding relief measures for multiemployer plans as long as a plan meets certain solvency requirements. Generally, PRA allows a plan to amortize the investment losses from the 2008 market collapse over 29 years rather than 15 years, and to recognize such losses in the actuarial value of assets over 10 years instead of 5 years, so that the negative effects of the market decline on asset values are spread out over a longer period. Overall, since 2009, multiemployer plans have experienced improvements in funding status, but a sizeable portion of plans are still critical or endangered. According to plan-reported data—current through 2011—from the IRS (see fig. 1), while the funding status of plans has not returned to 2008 levels, the percentage of plans in critical status declined from 34 percent in 2009 to 24 percent in 2011. Similarly, the percentage of plans in endangered status also declined, and to a greater extent, from 34 percent in 2009 to 16 percent in 2011. However, based on the 2011 data from the IRS, despite these improvements, 40 percent of plans still have not emerged from critical or endangered status. The large majority of the most severely underfunded multiemployer plans—those in critical status—have, according to a 2011 survey, both increased required employer contributions and reduced participant benefits in an effort to improve plans’ financial positions. Plan officials explained that these changes have had or are expected to have a range of effects, and in some cases may severely affect employers and participants. While most critical status plans expect to recover from their current funding difficulties, about 25 percent do not and instead seek to delay eventual insolvency. A 2011 survey of 107 critical status multiemployer plans conducted by the Segal Company shows that the large majority developed rehabilitation plans that included a combination of both contribution increases and benefit reductions to be implemented in the coming years. Further, plans proposed to take these measures regardless of whether the bargaining parties adopt the preferred schedule or the default schedule. As figure 2 illustrates, of the preferred schedules of 107 critical plans surveyed, 81 included both contribution increases and benefits cuts, while 14 proposed contribution increases only, and 7 included benefit reductions only. Most default schedules also include both increased contributions and reduced benefits, but compared to the preferred schedules, a much larger percentage chose to reduce benefits only. The reason for this difference is not clear, but Segal Company officials noted that because prompt adoption of an acceptable schedule is desirable, some plans may take special steps to make the default plan especially unappealing. Most plans—95 out of 107—developed preferred schedules that called for contribution increases and, while the range of these increases varied widely among plans, some were quite high. As figure 3 shows, most plans proposed increases of 10 percent or more in the first year of the collective bargaining agreement, and a little over a quarter of plans proposed increases of 20 percent or more. The median first-year contribution increase was 12.5 percent. Overall, the range of first-year increases was quite broad however, ranging from less than 1 percent to 225 percent. These data tell only a partial story, however, because rehabilitation plans may mandate a series of contribution increases in subsequent years. Of the eight critical status plans we contacted, the rehabilitation plans of seven increased contribution rates, and six of these specified a series of contribution increases over subsequent years. For example, one plan proposed contribution increases of 10 percent compounded annually over 10 years, so that at the end of this period, a contribution rate of $2.00 per hour, for example, would have been increased to $5.25 per hour, or by 162 percent. Thirty-two plans developed rehabilitation plans that reduced the rate of future benefit accruals. As figure 4 illustrates, 15 of these plans reduced future benefit accruals by 40 percent or more, and another 12 plans reduced future benefit accruals 20-40 percent. The median reduction for all 32 plans was 38 percent. As with contribution increases, the survey data on reductions to benefit accrual rates paint only a partial picture. Reductions in the benefit accrual rate are more common among troubled multiemployer plans than these data show because such reductions were often made prior to the rehabilitation plan. For example, findings from the Segal Company’s survey show that, of the plans that expected to exit critical status within the specified timeframes, about one-third had cut future accrual rates before preparation of the rehabilitation plan, either directly or by a plan amendment that excluded recent contribution increases from the benefit formula. Also, a large majority of plans—88 out of 107—reduced one or more types of the adjustable benefits as outlined by the PPA. Typically, these reductions applied to both vested but inactive and active participants, but some plans applied them to only one or the other. Officials of seven of the eight critical status plans we contacted increased contributions rates, and several of these plans indicated that contribution increases could be absorbed without undue stress to the plan. For example, one plan representing maintenance workers proposed to increase the weekly employer contribution rate for each worker from $82.75 per employee in 2011 to $130.75 per employee in 2023, a 58 percent increase over 12 years. While this makes some significant demands on employers, they are nonetheless in agreement, and the reaction of both employers and participants to the rehabilitation plan has been constructive. Similarly, officials of another plan covering sheet metal workers said that the annual contribution increases ranging from 30 percent in 2009-2010 to 5.8 percent in 2015-2016 can be absorbed by plan employers without great difficulty. In contrast, officials of some plans and contributing employers we contacted said that contribution increases would have very severe negative effects on some employers and possibly the plan itself. For example, officials of one plan told us that a proposed series of annual increases of 10 percent (compounded) represents a significant increase in labor costs. Plan officials said contributing employers are competing against firms outside of the plan that do not have comparable pension or health insurance costs, and contribution increases put them at a competitive disadvantage. Similarly, an official of a long-distance trucking firm said that the high contribution rates of underfunded multiemployer plans have greatly affected this firm’s cost structure and damaged its competitive position in the industry. In other cases, plans may have been unable to increase contributions as much as necessary. For example, our review of one plan’s rehabilitation plan revealed that the 15 percent contribution increase resulted from a difficult balance between, among other factors, adequately funding the plan and avoiding excessive strain on employers. According to the plan administrator, plan trustees determined that many contributing employers were in financial distress and that a significant increase in contributions would likely lead to business failures or numerous withdrawals. After the rehabilitation plan was adopted, five employers withdrew from the plan. Contribution increases could have a significant impact on participating workers as well as employers because in some cases at least a portion of the increases will be funded through reductions in pay or other benefits. For example, officials of one large national plan with hundreds of contributing employers in a variety of industries told us that employers will pass a substantial part of the higher contributions to employees in the form of lower wages. They noted that workers’ wages have been stagnant for 10 years, so the need to return to full funding so quickly in accordance with the Pension Protection Act of 2006 (PPA) requirements is hurting workers in the short term. More broadly, a recent report developed by a construction industry consortium notes that higher contributions make less money available for wage increases and other benefits. The report further notes that in some cases the additional contribution comes directly from the existing wage package, so a worker’s take home pay may remain stagnant or even be reduced. In other cases, the contribution increases will not have an immediate impact on participants’ pay, but will affect other portions of their benefit package. For example, one plan opted to increase pension contributions by diverting 2 percent of employers’ contributions from another benefit account. An official of another plan explained that the plan funded increased pension contributions by, for example, reducing contributions to a health benefit plan. Instead of directly reducing current wages, these actions will likely lead to higher health care costs or reduced benefits for employees. Among plans we contacted that had reduced future benefit accruals in recent years, the cumulative impact varied. For example, officials of one plan covering sheet metal workers explained that since 2003 the plan had reduced future benefit accruals by 75 percent per each dollar contributed to the plan. Another plan covering mine industry workers completely eliminated future benefit accruals for new, inexperienced miners hired on or after January 1, 2012, even though a contribution of $5.50 per hour of work will be made on their behalf. Another plan made no changes to benefit accrual rates but made a series of changes to eligibility and thresholds for retirement credits, with the result that some employees will have to work longer to accrue the same benefit they would have before adoption of the rehabilitation plan. The reduction or elimination of adjustable benefits, such as those outlined in table 3, were also significant and controversial in some cases. Officials of several of the plans that we contacted told us that the reduction or elimination of early retirement benefits for participants working in physically demanding occupations would be particularly difficult for some workers. As one official explained, working longer can be a grim scenario for older workers who have a hard time bearing the physical demands of labor, such as in a paper mill, for example. At the same time, some plans also eliminated or imposed limitations on disability retirement, so that, as officials of one plan noted, even workers who have developed physical limitations will have to either continue to work, or retire on substantially reduced benefits. Representatives of one plan said that there was considerable resistance from workers to the cuts in early retirement benefits. The officials explained, however, that these benefits had been established in the early 1990s when the plan was very well funded and that these promises had to be withdrawn in light of the plan’s current poor financial picture. Benefit reductions can affect employers as well as plan participants. For example, representatives of one construction industry plan told us that the reduced benefits outlined in the rehabilitation plan had reduced their ability to recruit and train new apprentices. These representatives explained that the prospect of earning only $50 of monthly retirement benefit per year of work—which after a 30-year career would result in only $1,500 payment per month in retirement—is not very appealing to prospective employees. While this does present a barrier to recruitment, a plan representative told us it is mitigated by an attractive hourly wage of $31.40, and the fact that many of the younger workers today are thankful for a paycheck in the current economic environment. Some rehabilitation plans also included provisions designed to protect the plan from employer withdrawals. For example, as table 4 outlines, two of the eight critical status plans we contacted impose much more severe benefit reductions on employees of firms that subsequently choose to withdraw from the plan. According to one of the rehabilitation plans, maintaining the contribution base of the pension plan is essential to the success of the rehabilitation plans and hence for plan participants and their families. Officials of this pension plan said that the pension plan cannot survive if it continues to lose contributing employers, and penalizing their employees is one way of discouraging withdrawals. The Segal survey of critical status plans indicates that while most plans aimed to eventually emerge from critical status, a significant number reported that they do not and instead project eventual insolvency. As figure 5 illustrates, of the 107 plans surveyed, about 67 expect to emerge from critical status within the statutory time frames of either 10 to 13 years, and 12 others in an extended rehabilitation period. However, 28 of the surveyed plans had determined, as the authors of the survey noted, that no realistic combination of contribution increases and benefit reductions would enable them to emerge from critical status, and that their best approach is to forestall insolvency for as long as possible. Among these plans, the average number of years to expected insolvency was 12, with some expecting insolvency in less than 5 years and others not for more than 30 years. The majority of these plans expected insolvency in 15 or fewer years. Among the plans we contacted, four expected to eventually become insolvent. In general, officials of these plans told us that a combination of massive investment losses and deterioration in contribution bases were primary causes of their financial difficulties. For example, officials of one plan cited the closure of paper mills from which the plan previously derived a substantial share of contributions as a cause of the plan’s financial distress. Officials of these plans explained that their analyses concluded that no feasible combination of contribution increases or benefit reductions could lead them back to a healthy level of funding. Several officials indicated that an effort to do so would likely accelerate the demise of the plan. For example, our review of plan documents revealed that the actuary of one fund determined that mathematically the fund would be able to emerge from critical status if contribution rates were increased by 24 percent annually for each of the next 10 years, ultimately increasing to a rate that would be about 859 percent of the then-current contribution rate. The trustees of this plan determined that such a proposal would be rejected by representatives of employers and workers, and would likely lead to negotiated withdrawals by plan employers. This, in turn, could result in insolvency of the plan, possibly as early as 2019. Instead, this plan opted for measures that officials believed are most likely to result in continued participation in the fund, yet which nonetheless are projected to forestall insolvency until about 2029. Similarly, according to officials of another plan, plan trustees concluded that the significant contribution increases necessary to avoid insolvency were more than employers in that geographic area could bear. In addition, the plan considered the impact of funding the necessary contribution increases through reductions to base pay. The plan determined that this also would not be feasible because of the rising cost of living facing these employees and their families. Consequently, the plan trustees adopted a rehabilitation plan that forestalls insolvency until about 2025. Officials of plans that we contacted expressed a number of concerns about the future, including concerns about financial market returns, the overall economy, and the stability of contributing employers. For example, officials of one plan that expected to emerge from critical status within the next 10 years said that this could be impeded if investment returns were below expectations, and especially if another collapse in the financial markets occurs. Officials of the seven other critical status plans we contacted echoed this concern, and several mentioned that overall economic conditions affect hours worked and hence overall contributions. For example, officials of a plan covering construction industry workers expressed concerns that because of the economic downturn, the reduction in demand for infrastructure and construction maintenance work has greatly reduced the number of active workers in the plan. Finally, officials of several plans expressed concerns about attracting and retaining contributing employers. An official of a safe status or “green- zone” plan, for example, said that it is essential that the plan continue to attract new employers and that the ability to do so is a key basis for the plan’s overall financial health. An official of a critical status plan that is attempting to forestall insolvency told us that it is very concerned about the financial well-being of its remaining contributing employers and that plan insolvency could be hastened if one of these employers were to fail or otherwise cease making contributions. As PBGC officials and a construction industry organization noted, because the contribution base of multiemployer plans can overlap, financial stress in one plan has the potential to spill over to other plans. If, for example, the burden of increased contributions in one plan causes a large employer economic distress, it may impair its ability to remain competitive as well as make sufficient contributions to other plans. As shown in figure 6, this contagion effect could negatively affect the funded status of other plans. If the events of coming years are more favorable than the assumptions on which rehabilitation plans are based, some plans may emerge from critical status earlier than planned, and some may be able to avoid insolvency. However, the opposite is true as well—if future events are less favorable than assumed, contributing employers and plan participants may have to make additional sacrifices or additional plans could face insolvency. Our discussions with eight critical status and two endangered status plans show that while some plans believed they had flexibility to make further adjustments, others did not. For example, officials of one plan trying to avoid insolvency said that even the contribution increases included in the funding improvement plan will be very difficult to bear for employers and workers, and further concessions are not realistic. An official of a large national plan said that the ability of employers and participants to absorb more sacrifices varied considerably among the plan’s 900 participating groups, but that in general, additional concessions would be very difficult to accept. They said that it would almost certainly erode the plan’s contribution base, which would mean a slow progression towards insolvency. PBGC’s financial assistance to multiemployer plans has increased significantly in recent years, and projected plan insolvencies may exhaust PBGC’s multiemployer insurance fund. In fact, PBGC expects that, under current law, based on plans currently booked as liabilities (current and future probable plan insolvencies), the multiemployer insurance program is likely to become insolvent within the next 10 to 15 years, although the exact timing is uncertain and depends on key factors, such as investment returns and the timing of individual plan insolvencies. Additionally, PBGC estimates that if the projected insolvencies of either of two large multiemployer plans were to occur, the insurance fund would be completely exhausted within 2 to 3 years. While retirees of insolvent plans generally receive reduced monthly pension payments under the PBGC pension guarantee, this amount would be further reduced to an extremely small fraction of what PBGC guarantees, or nothing, if the multiemployer insurance fund were to be exhausted. As more multiemployer plans have become insolvent, the total amount of financial assistance PBGC has provided has increased markedly in recent years. Overall, for fiscal year 2012, PBGC provided $95 million in total financial assistance to help 49 insolvent plans cover pension benefits for about 51,000 plan participants. Generally, since 2001, the number of multiemployer plans needing financial assistance has steadily increased, as has the total amount of assistance PBGC has provided each year, slowing the increase in PBGC’s multiemployer insurance program funds. Moreover, as figure 7 indicates, the number of plans needing PBGC’s help has increased significantly in recent years, from 33 plans in fiscal year 2006 to 49 plans in fiscal year 2012. Likewise, the amount of annual PBGC assistance to plans has increased from about $70.1 million in fiscal year 2006 to about $95 million in fiscal year 2012 (a decrease in assistance, due to fewer plan closeouts, compared with about $115 million in fiscal year 2011). From fiscal years 2005 to 2006 alone, annual PBGC assistance increased from about $13.8 million to more than $70 million. Loans to insolvent plans comprise the majority of financial assistance that PBGC has provided to multiemployer plans. As figure 8 illustrates, based on available data from fiscal year 2011, loans to insolvent plans totaled $85.5 million and accounted for nearly 75 percent of total PBGC financial assistance. However, the loans are not likely to be repaid because the plans are insolvent. To date, only one plan has ever repaid a PBGC loan. In addition to providing loans to insolvent plans, PBGC provided $13.7 million in fiscal year 2011 to help support two plan partitions, which enabled those plans to carve out the benefit liabilities attributable to “orphaned” employees whose employers filed for bankruptcy, while keeping the remainders of the plans in operation. Once a plan is partitioned, PBGC assumes the liability for paying benefits to the orphaned participants. Additionally, PBGC provided $15.1 million in fiscal year 2011 to help plan sponsors close out five plans, which occurs when plans either merge with other multiemployer plans or purchase annuities from private-sector insurers for their beneficiaries. Plans considering a merger must provide notice to PBGC and may request a compliance determination; PBGC officials said they carefully consider each merger to ensure that the merger would not result in a weaker combined plan than the separately constituted plans. PBGC monitors the financial condition of multiemployer plans to identify plans that are at risk of becoming insolvent and that may require its financial assistance from the multiemployer insurance program. Based on this monitoring, PBGC maintains a contingency list of plans that are likely to become insolvent and make a claim to PBGC’s multiemployer insurance program. PBGC classifies plans on its contingency list according to the plans’ risk of insolvency. PBGC also assesses the effect that insolvencies among the plans on the contingency list would have on the multiemployer insurance fund. Table 5 outlines the various classifications and definitions based on risk. Both the number of multiemployer plans placed on PBGC’s contingency list and the amount of PBGC’s potential financial assistance obligations to those plans have increased steadily over time, with the greatest increases recorded in recent years. According to PBGC data, the number of plans where insolvency is classified as “probable”—plans that are already insolvent or are projected to become insolvent within 10 years—increased from 90 plans in fiscal year 2008 to 148 plans in fiscal year 2012. Similarly, the number of plans where insolvency is classified as “reasonably possible”—plans that are projected to become insolvent 10 to 20 years in the future—increased from 1 in fiscal year 2008 to 13 in fiscal year 2012. Although the increase in the number of multiemployer plans on PBGC’s contingency list has risen sharply, the present value of PBGC’s potential liability to those plans has increased by an even greater factor. For example, as illustrated in figure 9, the present value of PBGC’s liability associated with “probable” plans increased from $1.8 billion in fiscal year 2008 to $7.0 billion in fiscal year 2012. By contrast, for fiscal year 2012, PBGC’s multiemployer insurance fund only had $1.8 billion in total assets, resulting in net liability of $5.2 billion, as reported in PBGC’s 2012 annual report. Although PBGC’s cash flow is currently positive—because premiums and investment returns on multiemployer insurance fund assets exceed benefit payments and other assistance—PBGC expects plan insolvencies to more than double by 2017, placing greater demands on the multiemployer insurance fund and further weakening PBGC’s overall financial position. PBGC expects that the pension liabilities associated with current and future plan insolvencies will exhaust the multiemployer insurance fund. Under one projection using conservative (i.e., somewhat pessimistic) assumptions for budgeting purposes, PBGC officials reported that the agency’s projected financial assistance payments for plan insolvencies that have already occurred or are considered probable in the next 10 years would exhaust the multiemployer insurance fund in or about 2023. PBGC officials said that the precise timing of program insolvency is difficult to predict due to uncertainty about key assumptions, such as investment returns and the timing of individual plan insolvencies. Based on a range of estimates provided by multiple projections, PBGC officials said the multiemployer insurance program is likely to become insolvent within the next 10 to 15 years. Furthermore, exhaustion of the insurance fund may occur sooner because the financial health of two large multiemployer plans has deteriorated. According to PBGC officials, the two large plans for which insolvency is “reasonably possible,” have projected insolvency 10 to 20 years in the future. PBGC estimates that, for fiscal year 2012, the liability from these two plans accounted for $26 billion of the $27 billion in liability of plans in the “reasonably possible” category. Taken in combination, the number of retirees and beneficiaries of these two plans would represent about a six-fold increase in the number of people receiving guarantee payments in 2012. PBGC officials said that the insolvency of either of these two large plans would exhaust the insurance fund in 2 to 3 years. Generally, retirees who are participants in insolvent plans receive reduced pension benefits under PBGC’s statutory pension guarantee formula. In most cases, PBGC’s pension guarantee (see fig. 10) does not offer full coverage of the monthly pension benefits that a retiree of an insolvent plan has actually earned. When a multiemployer plan becomes insolvent and relies on PBGC loans to pay for benefit payments to plan retirees, retirees will most likely see a reduction in their monthly pension benefits. PBGC uses a formula that calculates the maximum PBGC benefit guarantee based on the amount of a plan participant’s pension benefit accrual rate and years of credit service earned. For example, if a retiree has earned 30 years of credit service, the maximum coverage under the PBGC guarantee is about $1,073 per month, which yields an annual pension benefit of $12,870. Generally, retirees receiving the highest pensions experience the steepest cuts when their plans become insolvent and their benefits are limited by the pension guarantees. According to PBGC, in 2009, the average monthly pension benefit received by retirees in all multiemployer plans was $821. However, as shown by PBGC in a hypothetical illustration of benefit distributions (see fig. 11), the line that spans the bar chart indicates that the range of pension benefits varies widely across retirees, and, with $692 as the median pension, about half of the plan’s retirees will experience 15 percent or greater reductions in their pensions under the PBGC guarantee. Additionally, under this illustration, one out of five retirees will experience 50 percent or greater reductions in their pensions under the PBGC guarantee. Ultimately, regardless of how long a retiree has worked and the amount of monthly benefits earned, any reduction in pension benefits—no matter the amount—may have significant effects on retirees’ living standards. According to PBGC, in the event that the multiemployer insurance fund is exhausted, affected participants then relying on the PBGC pension guarantee would receive an extremely small fraction of their already- reduced guarantees or, potentially, nothing. According to PBGC officials, once the insurance fund’s cash balance is depleted, the agency would have to rely solely on the annual insurance premium receipts, which totaled $92 million for fiscal year 2012. The precise effect that the insolvency of the multiemployer insurance fund would have on retirees receiving the PBGC guaranteed benefit depends on a number of factors—primarily the number of guaranteed benefit recipients and PBGC’s annual premium income at that time. The impact would, however, likely be severe. For example, if the insurance fund were to be drained by the insolvency of one very large and troubled plan, under one scenario, we estimate that the benefits paid by PBGC would be reduced to less than 10 percent of the PBGC guarantee level. In this scenario, a retiree who once received a monthly pension of $2,000 and whose pension was reduced to $1,251 under the PBGC guarantee, would see the monthly pension income further reduced to less than $125, or less than $1,500 per year. Additional plan insolvencies would further depress already drastically reduced income levels. Our contacts with plan officials and other stakeholders also suggested that the exhaustion of the PBGC multiemployer insurance fund would have effects well beyond direct financial impacts. For example, officials of another plan said that the exhaustion of the insurance fund could bring about the loss of public confidence in the multiemployer plan system’s ability to provide retirement security for plan participants and their beneficiaries. Experts and stakeholders we interviewed cited two key policy options to avoid the insolvencies of severely underfunded plans and the PBGC multiemployer insurance fund, and a number of other options for longer term reform of the multiemployer system (see fig. 12). To address the impending insolvency crisis, they proposed allowing severely troubled plans to reduce accrued benefits, including benefits of retirees, and providing PBGC with additional resources to prevent insolvencies that might otherwise threaten the fund. Longer term options would provide plans with flexibilities and resources to help attain financial stability in the future. These include encouraging the adoption of flexible benefit designs and reforming withdrawal liability policies. Various experts and plan representatives stressed the necessity of modifying ERISA’s anti-cutback rule to allow severely distressed plans to reduce the accrued benefits of active participants as well as retirees. They noted that this flexibility is essential because 1) the most severely distressed plans will be unable to avoid insolvency using traditional methods—increasing employer contributions and/or reducing future benefit accruals or adjustable benefits—and 2) benefit reductions will occur in any case and will be more severe in the event of plan insolvency, especially in the event of the insolvency of PBGC’s multiemployer insurance fund. As described in the first section of this report, the most severely distressed plans we contacted have already adjusted contributions and benefits and several stated that further adjustments would accelerate plan insolvency. In particular, the demographics of many multiemployer plans limit their ability to reduce liabilities through contribution increases or reductions in future benefit accruals because they are typically based on hours worked. For example, the majority of participants in one of the largest multiemployer plans have already retired or are inactive and no longer contributing to the plan—as of 2012, the plan had about 4.86 retired or otherwise inactive participants for every active worker. In light of the sacrifices already made by active participants—some of whom are absorbing the cost of significant contributions to support benefit payments at a level they will likely never see for themselves—some stakeholders noted that adjustments of retiree benefits would be equitable. Moreover, experts, as well as employer and plan representatives also noted that allowing plans to reduce accrued benefits now could avoid more severe reductions in the future. For example, representatives from an association of actuaries and from a large plan noted that for some plans, the alternative to reductions in accrued benefits is eventual plan insolvency, which would result in the much lower benefit level guaranteed by PBGC compared to the current benefits paid and, possibly, little to no benefit at all if PBGC’s multiemployer insurance fund became insolvent. Finally, some experts and a plan representative stressed the urgency of obtaining such flexibility because the longer the delay, the greater the eventual required benefit reductions. Nonetheless, allowing plans the flexibility to reduce accrued benefits for current workers and retirees would significantly compromise one of the founding principles of ERISA and could impose significant hardship on some retirees. While some plan representatives and other stakeholders told us that a very modest benefit reduction would be sufficient to avoid insolvency, others noted that reductions would be very painful for retirees who worked for many years and planned their retirements around a promised benefit. Representatives of one of these plans referred to appeal letters to the plan that had been submitted by participants and/or their spouses, noting that older workers or retirees can be in some financially difficult situations, and cuts to accrued benefits would deepen and increase the number of such hardships. Some also noted that while younger retirees may be able to obtain employment to supplement income, older retirees, especially in physically demanding industries like mining and construction would likely not have that option. Finally, some stakeholders indicated that the flexibility to reduce accrued benefits would harm the multiemployer system by undermining the credibility of multiemployer plans and diminishing their ability to attract and retain employers and participants. Plan representatives and experts we contacted proposed a number of considerations and limitations that could mitigate some concerns with allowing plans to reduce accrued benefits. As described in table 6, these measures include eligibility criteria and options for oversight, along with other key features. For example, given the sacrifice it would impose on participants, several experts and plan representatives said that allowing reductions in accrued benefits should only be considered as a last resort for plans headed for insolvency. Even with these protections and considerations, the flexibility to reduce accrued benefits would not occur without considerable sacrifice, and may not be sufficient to help some plans avoid insolvency. Several plan representatives and experts said the suggested benchmark for reducing accrued benefits—PBGC’s guarantee level of $12,870 on an annual basis for 30 years of service—is relatively low and could result in steep benefit cuts. For example, given the magnitude of financial challenges facing some severely underfunded plans, accrued benefits may be reduced by one-third or more of their original value. Moreover, in the case of at least one plan, PBGC officials said that reductions to the maximum guaranteed level may still not represent sufficient savings to avert insolvency. For example, representatives of one large plan told us that while reducing accrued benefits might be an option for some plans, it was not an option for their plan because the benefits were already quite modest—average retirement benefits in 2010 were about $600 per month. Further, plan representatives said it would be unconscionable to reduce benefits for a retiree with a work-related illness, such as a respiratory ailment, who may be barely surviving on current benefit levels. According to several experts, in an effort to save plans and conserve PBGC assets in the long term, PBGC could provide financial assistance to qualifying plans headed for insolvency through a partition. If a plan qualifies and its application is approved by PBGC, the partition population includes only orphaned participants—those whose employer left the plan due to bankruptcy—and their benefits are reduced to the guaranteed level. According to industry experts, partitions would allow plans with a substantial share of orphaned liabilities to avoid further benefit reductions for active participants and other beneficiaries. By removing the burden of the legacy costs associated with orphaned participants, the plan would be in a better position to adequately fund benefit obligations with ongoing contributions. In addition, one expert said that partitions could reduce the total liability for PBGC because extending the solvency of the plan means that fewer participants would rely on benefit payments from the PBGC than if the whole plan were to become insolvent. While partitions may prevent qualifying plans from becoming insolvent, neither PBGC’s current partitioning authority nor its financial resources are sufficient to address the impending insolvency of large, severely underfunded plans. In its entire history, PBGC has performed partitions for only two plans. According to PBGC officials, plan representatives, and experts, there are a number of reasons why partitions have not been more widely used: The magnitude of potential reductions for orphaned participants has dissuaded some plans from applying for help. Payments for the partitioned population will be reduced to the PBGC guarantee level, which could be a sizable reduction in some cases. PBGC does not have sufficient resources to cover orphaned liabilities of large severely underfunded plans. Plans may not meet the four statutory criteria to be eligible for a partition. For example, a plan must demonstrate that it is headed for insolvency due to a reduction in contributions due to employer bankruptcies, which numerous plan representatives and experts said may exclude plans in need of assistance. Some plan representatives said that many of their contributing employers are small businesses that do not have the wherewithal to go through formal bankruptcy proceedings, but instead close without paying their full share of liabilities. In other cases, contributing employers may have left when the plan was adequately funded, but, as a result of the market crash in 2008, the funded status deteriorated. Consequently, the plan is not able to collect any ongoing contributions from those employers to offset the poor investment returns, but the plan is still responsible for paying the full amount of vested benefits for their workers. While the reasons employers leave a plan may vary, their departure can result in significant legacy costs that experts said impair the ability of the plan to remain solvent or recover from funding shortfalls. For example, according to officials from one of the largest plans, about 40 percent of benefit payments go to orphaned participants and current employer contributions amounted to only about 25 percent of total annual benefit payments as of 2009. To address this issue, several experts said that partitions should be made more widely available so that, for example, orphaned liabilities could include any participants whose contributing employer left the plan without paying their full share of unfunded vested benefits. However, to cover the cost of these benefits, several experts noted that PBGC would need additional funding—the agency does not have nearly sufficient resources to pay even the reduced benefit levels for potential partition populations from some large plans. As an example, representatives of one of the largest plans for which insolvency is reasonably possible in the mining industry indicated they may not be eligible for assistance through a partition because the plan was sufficiently funded until the 2008 financial crisis. In the absence of a partition, some members of Congress have proposed financial assistance using an existing separate source of funds established from reclamation fees paid by coal companies for abandoned coal mines. According to plan representatives, this fund currently provides money to pay for health benefits of three related plans, which have not used the full amount of those funds. The proposal would transfer any remaining funds that are not needed for health benefits to improve the solvency of the pension plan. The representatives also noted that this financial assistance is essential and the only way the plan can avoid insolvency. Pension benefits for this plan are relatively low—retirees received an average pension of about $600 a month in 2010, which limits the plan’s ability to improve its funded status even if reductions to accrued benefits were allowed. Numerous industry experts and plan representatives emphasized the importance of providing timely assistance to severely underfunded plans, but some experts also cited drawbacks of providing additional financial assistance beyond PBGC’s multiemployer insurance fund. Regarding advantages, several experts and plan representatives said providing additional financial assistance sooner rather than later could prevent entire plans from going insolvent and reduce the number of participants relying on guaranteed payments from PBGC in the long term. Beyond the scope of an individual plan, representatives from a construction industry group said additional financial assistance could also prevent more widespread negative effects. Because employers across various industries contribute to some of the large severely underfunded multiemployer plans, as well as other plans, the continued decline of such a plan could trigger a contagion effect. Contributing employers may face large liabilities (e.g., increased contributions, increased withdrawal liability) that could prevent them from fulfilling obligations to other currently well-funded plans and some employers may be forced out of business. Moreover, a plan representative and an expert said additional financial assistance is necessary to prevent the insolvency of the multiemployer insurance program, which, as described in the previous section, would leave thousands of participants with a small fraction of their vested pension benefits. However, other experts cited drawbacks for providing additional financial assistance. In particular, some experts said that a partition may not be a permanent fix for the plan. For example, if the on-going portion of the plan continues to lose employers, it may still become insolvent and require financial assistance from PBGC. In addition, some experts expressed concern about the size of the burden federal financial assistance could potentially place on taxpayers. Considering the resources that may be needed to provide financial assistance to troubled plans, PBGC and others have identified increased premiums as a potential source of additional revenue for PBGC. According to projections in a recent PBGC report, doubling the insurance premium from the current level of $12 per participant to $24 per participant would reduce the likelihood of PBGC insurance fund insolvency in 2022 from about 37 percent to about 22 percent. The analysis also found that a tenfold increase to $120 per participant would virtually eliminate the likelihood of multiemployer insurance fund insolvency by 2022, although the analysis did not look beyond that timeframe. However, some stakeholders we spoke with noted that increased premiums also have limitations and drawbacks. Some stakeholders said further premium increases alone were not a feasible solution because they would be insufficient to solve PBGC’s long-term funding shortfall and would further stress employers in severely underfunded plans who have already borne considerable contribution increases. According to a PBGC analysis, even a ten-fold increase in the current premium would not prevent significant growth in the agency’s deficit. Under this analysis, PBGC estimates that the FY2012 deficit of $5.2 billion would still nearly triple, amounting to about $15 billion in 2022. Moreover, it is unclear what impact such premium increases would have on plans of varying financial health, especially plans seeking to delay eventual insolvency. PBGC officials acknowledged that, although premiums are generally not a significant percentage of plan costs, the most severely underfunded plans may not be able to afford any increases. PBGC officials also said that, given the range of financial circumstances across plans, a premium structure that would ensure affordable and appropriate premiums for all plans could help address this concern. In prior work, we assessed changing the premium structure for PBGC’s single-employer program to allow premiums to vary based on risk. However, we have not assessed the implications or implementation of increased premiums or a risk-based premium structure for PBGC’s multiemployer program. Given the distinctive features of the multiemployer plan design and program described earlier in this report, the development of a risk-based premium structure for multiemployer plans would entail unique considerations and require further analysis. ERISA requires that employers wishing to withdraw from a multiemployer plan pay for their share of the plan’s unfunded liabilities. As explained in the following text box, this requirement for withdrawal liability payments is intended to prevent employers from walking away from liabilities they have created, and, thus, help protect plan participants and other employers. However, despite the necessity of such a safeguard, plan representatives and other industry experts said changes are needed to address key challenges related to current provisions regarding withdrawal liability. In the event an employer seeks to leave a multiemployer plan and the plan has a funding shortfall, the employer is liable for its share of unfunded plan benefits, known as withdrawal liability. A plan can choose from several formulas established in the law for determining the amount of unfunded vested benefits allocable to a withdrawing employer and the employer’s share of that liability. Under three of these formulas, the employer’s proportional share is based on the employer’s share of contributions over a specified period. In addition, the plan can apply for approval from PBGC to use variations on these methods. Liabilities that cannot be collected from a withdrawing employer, for example, one in bankruptcy, are to be “rolled over” and eventually funded by the plan’s remaining employers—frequently referred to as orphaned liabilities. As we previously reported, this means that an employer’s pension liabilities can become a function of the financial health of other employer plan sponsors. These additional sources of potential liability can be difficult to predict, increasing employers’ level of uncertainty and risk. However, while the total amount of withdrawal liability is based on the unfunded vested benefits for the plan as a whole, a particular employer’s annual payments are strictly based on its own contributions and are generally subject to a 20-year cap. Current federal withdrawal liability policies give rise to three main problems, according to stakeholders and experts. First, plans often collect far less than the full value of liabilities owed to the plan. In the event of an employer bankruptcy, several experts said plan sponsors often collect little or no withdrawal liability payments. For example, several experts explained that in the recent Hostess Brands bankruptcy, the firm—a contributing employer to many plans—is likely to pay very little of its withdrawal liability obligations. One service provider said this bankruptcy doubled the unfunded liabilities attributable to remaining employers in some plans. Separately, the method of calculating withdrawal liability payments may not capture an employer’s full share of unfunded liabilities because a plan’s withdrawal liability obligation is based on its prior contributions rather than on attributed liabilities, and is also subject to a 20-year cap. In particular, some stakeholders said the 20-year cap on withdrawal liability payments limits the amount of money collected by plans. If the amount of the employer’s prior contributions is small relative to the size of their total withdrawal liability, the annual payments may not be sufficient to pay off their total withdrawal liability over the 20-year period. Second, existing withdrawal liability rules deter new employers from joining a plan with existing unfunded liabilities. Plan representatives said attracting new employers is essential to the long-term health of the plan, but an employer group said the existence of potential withdrawal liability strongly deters prospective employers who may otherwise want to join. Moreover, fear of greater withdrawal liability in the future may encourage current contributing employers to leave the plan. For example, in late 2007, UPS paid about $6 billion to withdraw from one of the largest multiemployer plans. Third, the presence of withdrawal liability can negatively affect an employer’s credit rating and ability to obtain loans for their business. For example, representatives from one large employer said their total withdrawal liability exceeds the net worth of their company and this has made it difficult for them to obtain loans and other financing, which might help revitalize their business. Table 7 describes options to address these problems identified through our contacts with various stakeholders, including plan and employer representatives. A comprehensive remedy to the problems arising from withdrawal liability is particularly elusive because a solution to one issue can exacerbate another. For example, eliminating the current 20-year cap may help allow plans to collect withdrawal liability payments until the full amount has been paid. However, increasing the amount of withdrawal liability that plans can collect may also discourage new employers from participating in a plan because it increases the potential withdrawal liability they could be required to pay. On the other hand, options that could reduce the deterrent effect on new employers—such as the proposal to omit contributions required by funding improvement or rehabilitation plans from withdrawal liability calculations—could reduce a plan’s ability to collect sufficient withdrawal liability. Numerous plan representatives, experts, and the NCCMP Commission recommend the adoption of a more flexible DB model to avoid a repetition of the current challenges facing multiemployer plans. While the specific plan design can vary, in general, this model allows trustees to adjust benefits based on key factors—such as the plan’s funded status, investment returns, or plan demographics—to keep the plan well-funded. Importantly, it reduces the risk that contributing employers would face contribution increases if the plan experiences poor investment returns or other adverse events. Investment risk is thus primarily shared by participants and the plan is designed to avoid incurring any withdrawal liability. Overall, the trustees of the plan would have greater flexibility than under a traditional DB plan to adjust benefits to keep the plan well- funded. See table 8 for a comparison of two alternative flexible DB plan designs, although other models could also be used. In addition, the NCCMP Commission’s proposal would also give more flexibility for traditional DB plans by allowing these plans to adjust the normal retirement age to harmonize with Social Security’s normal retirement age. Notably, the Cheiron proposal would also use more conservative approaches to investment and funding policy because it uses a relatively lower assumed rate of return and a contingency reserve fund. The Cheiron proposal calls for a more conservative asset allocation and, in addition to sharing some of the investment risk with participants through the flexible benefit design, would also reduce the overall amount of investment risk through the more conservative asset allocation. In addition, the Cheiron model would use a contingency reserve fund that could provide a cushion against unfavorable investment or demographic experience. The design of a flexible DB plan offers several key benefits, which some stakeholders said are essential to the long-term survival of the multiemployer system. In particular, several stakeholders cited limiting employer liability as a key benefit. Representatives of several employers said it is imperative to limit their liability to enable them to be competitive against competitors. By minimizing risks to employers, a flexible DB model may strengthen employers’ commitment to the plan and reduce incentives for them to leave. Similarly, reducing risk may also help attract new employers to these plans, which may improve a plan’s demographics and help it stay well-funded and viable in the long term. Additionally, a group of employer representatives said that a flexible DB plan, such as the one developed by Cheiron, in conjunction with the United Food and Commercial Workers (UFCW) International Union, provides trustees more tools to prudently manage the plan to keep it well-funded and able to pay promised benefits even when faced with adverse events, such as poor investment returns or demographic shifts. Moreover, some stakeholders said that a flexible DB plan reduces risk while also avoiding challenges associated with defined contribution (DC) plans. Specifically, representatives of a construction industry group said a flexible DB plan would still offer pooled and professionally managed investments, along with risk sharing among participants, which can mitigate some of the individual risks faced by participants in DC plans, such as investment risk and longevity risk. Given the potential long-term benefits of a flexible DB model, some experts said regulatory agencies could do more to help plans adopt a design with these features. For example, one expert said that PBGC could hold a conference on best practices in plan design. In addition, this expert said that PBGC could charge such plans lower premiums commensurate with their lower risk to encourage adoption of these plan design features; however, PBGC lacks the legal authority to do so. Some plan representatives and experts also noted that a flexible DB model entails tradeoffs. In particular, representatives from an actuarial firm and from an industry group said that while this approach shows promise for addressing prospective challenges, it does not help resolve problems for plans that already have financial shortfalls. Union and employer representatives said that plans may first need to address existing shortfalls before they could adopt a flexible DB model. Thus, new design options are unlikely to help large plans that are already severely underfunded. Further, in the flexible benefit models described in table 8, investment risk is primarily borne by participants. Representatives from an actuarial firm also said that this model may be relatively expensive when comparing the amount of contributions needed to attain a certain level of accrued benefits. For example, in order to minimize the risk of underfunding, a flexible DB plan may use a relatively low assumed rate of return—and, correspondingly, a more conservative investment strategy— than is more commonly used by multiemployer plans. Over the long term, this may result in a lower level of accrued benefit. However, representatives of one actuarial firm said that higher assumed rates of return used by some multiemployer plans may be too high and could entail a greater risk of the plan becoming underfunded. And, as recent events show, participants already assume a lot of risk in the event a plan becomes severely underfunded. As a result, a flexible benefit model that reduces risk might provide a somewhat lower promised benefit, but one that is more secure. Facilitating more plan mergers or allowing plans to form alliances may also help address financial challenges facing multiemployer plans, according to some plan representatives and industry experts. In a merger, two or more plans are combined into a single plan, including both plan assets and administration. Several stakeholders said that this consolidation helps plans—especially smaller plans—achieve more favorable economies of scale to reduce costs. For example, in a merger, plans can reduce costs by consolidating administrative services, such as annual audits and legal services. In some cases, PBGC provides financial assistance to facilitate a merger by paying a plan that is insolvent or nearing insolvency a portion of the present value of PBGC’s net liability for that plan, which serves as an incentive for a well-funded plan to take on the assets and liabilities of a less well-funded plan. PBGC officials said that they are careful to provide financial assistance only in the case of mergers expected to be successful and, thus, avoid paying financial assistance twice to the same plan. While PBGC has helped to facilitate some mergers, several plan representatives and a representative from an actuarial firm said more plans could merge if PBGC provided additional financial assistance. Alternatively, other stakeholders said similar cost- saving benefits from consolidation could be achieved by allowing plans to form alliances. In contrast to a merger, alliances allow plans to combine administrative and investment management services, but retain separate liabilities and funding accounts. Consequently, in an alliance, each plan would retain its own liabilities and withdrawal liability obligations would not be shared across plans. Along with cost savings from consolidating administrative services, plan representatives and industry experts said mergers and alliances can offer other important benefits. In particular, a merger or alliance would provide plans a larger asset pool that can also help plans reduce investment management fees. According to a representative from an actuarial firm, combined with administrative cost savings, consolidating investment management services can significantly reduce costs for small plans and may save some from insolvency. For example, some of their small plan clients pay between 30 and 40 percent of contributions towards administrative and investment management expenses while a larger plan would pay closer to 5 percent. However, another expert said cost savings for some plans may be negligible depending on the plan’s circumstances. For example, if a plan is already sufficiently large and efficiently managed, cost savings from merging with another plan may be relatively small. In addition, several stakeholders said that by helping plans avoid insolvency, PBGC may also benefit from plan mergers or alliances because the participants of these plans would continue to receive benefits from the plan rather than becoming insolvent and relying on benefit payments from PBGC. Consequently, the cost PBGC incurs to facilitate such arrangements may be more than offset by preventing the plan from becoming insolvent. While mergers can provide cost-savings and other benefits, plans face barriers to implementing them. For example, representatives from one of the largest plans said that due to the relatively large size of their plan and the amount of their funding shortfall, a merger is not an option for them. Several stakeholders said a merger between a plan that is relatively well- funded and a financially weaker plan poses concerns for plan trustees who have a fiduciary duty to act in the best interests of their plan’s participants. One employer representative said that a merger poses risks to the healthier plan and may not be in the best interests of those participants. To address potential risks to the healthier plan, some stakeholders said PBGC should be given greater resources to facilitate more mergers. In addition, some employer representatives said plans that undertake mergers could be afforded legal protection under a safe harbor to further alleviate concerns over fiduciary responsibility. While alliances may avoid some of these concerns—they would not require plans to harmonize their funding status as each plan retains its own liabilities— such arrangements are not currently permitted and would therefore require a change in law according to NCCMP. Despite unfavorable economic conditions, most multiemployer plans are currently in adequate financial condition and may remain so for many years. However, a number of plans, including some very large plans, are facing very severe financial difficulties. Many of these plans reported that no realistic combination of contribution increases or allowable benefit reductions—options available under current law to address their financial condition—will enable them to emerge from critical status. As a result, without Congressional action, the plans face the likelihood of eventual insolvency. While the multiemployer system was designed to limit PBGC’s exposure by having employers serve as principal guarantors, PBGC remains the guarantor of last resort. However, given their current financial challenges, neither the troubled multiemployer plans nor PBGC currently have the flexibility or financial resources to fully mitigate the effects of anticipated insolvencies. Should a critical mass of plan insolvencies drain the PBGC multiemployer insurance fund, PBGC will not be able to pay either current or future retirees more than a very small fraction of the benefit they were promised. Consequently, a substantial, and in some cases catastrophic, loss of income in old age looms as a real possibility for the hundreds of thousands of workers and retirees depending on these plans. Congressional action is needed to avoid this scenario, and stakeholders suggested a number of key policy options. For example, various stakeholders suggested that, as a last resort to avert insolvency, Congress could enact legislation permitting plans—subject to certain limitations, protections, and oversight—to reduce accrued benefits of both working participants and retirees. In addition, some stakeholders suggested that Congress could give PBGC the authority and resources to assist the most severely underfunded plans. Stakeholders acknowledged that each of these options poses tradeoffs. Providing PBGC with additional resources, as well as other more direct financial assistance to plans, would create yet another demand on an already strained federal budget. Similarly, reducing accrued benefits for active workers, and especially for those already in retirement, could result in significant reductions in income for a group that may have limited income alternatives and may be too infirm to return to the labor force. Such an option would also significantly compromise one of the key founding principles of ERISA—that accrued benefits cannot be reduced— essentially rupturing a promise to workers and retirees who have labored for many years, often in dangerous occupations, and in some of the nation’s most vital industries. The scope and severity of the challenges outlined by stakeholders suggest that a broad, comprehensive response is needed and Congress faces difficult choices in responding to these challenges. However, as the recent tri-agency federal report on multiemployer plans noted, unless timely action is taken to provide additional tools for the multiemployer plan trustees to stabilize the financial conditions of their plans, more costly and intrusive measures may later be necessary. Nevertheless, this situation can also be viewed as an opportunity both to protect the benefits of hundreds of thousands of older Americans and stabilize a pension system that has worked fairly well for decades. Without a comprehensive approach, efforts to improve the long-term financial condition of the multiemployer system may not be effective. Given the serious challenges facing PBGC’s multiemployer insurance fund and critically underfunded multiemployer plans, and to prevent the significant adverse effects of PBGC insolvency on workers and retirees, Congress should consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer system. In doing so, Congress should consider the relative burdens, as identified by key stakeholders, that each reform option would impose on the competing interests of employers, plans, workers and retirees, PBGC, and taxpayers. We provided a draft of this report to the Department of Labor, the Department of the Treasury, and the PBGC for review and comment. We received formal written comments from the PBGC, which generally agreed with our findings and analysis. During the review period, PBGC officials raised the potential role that increased multiemployer insurance program premiums could play in strengthening the program, and hence in helping to ensure that participants in insolvent plans received some financial protection in the long term. In addition, the issue of PBGC premiums was raised repeatedly during a March 5, 2013 hearing held by the House Subcommittee on Health, Employment, Labor and Pensions, Committee on Education and the Workforce. In light of the level of interest on this issue, we included a brief discussion of the matter of premiums in the final version of our report. PBGC, Labor, and Treasury also provided technical comments which we incorporated as appropriate. PBGC’s formal comments are reproduced in appendix II. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to relevant congressional committees, PBGC, the Secretary of Labor, the Secretary of the Treasury, and other interested parties. In addition, the report will be made available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact Charles Jeszeck 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 report. Key contributors to this report are found in appendix III. Our objectives were to answer the following research questions: 1) What actions have multiemployer plans in the weakest financial condition taken in recent years to improve their long-term financial position? 2) To what extent have plans relied on PBGC assistance since 2009, and what is known about the prospective financial condition of the multiemployer plan insurance program? 3) What options are available to address PBGC’s impending funding crisis and enhance the program’s future financial stability? We sought to answer the first question in two primary steps. First, we obtained data on the results of a survey of critical status plans performed by The Segal Company, a large actuarial firm that has a client base consisting of about 25 percent of all multiemployer plans, representing about 30 percent of all multiemployer plan participants. As figure 13 below illustrates, the industry distribution of Segal’s client base substantially parallels that of the broader multiemployer universe. Included as an addendum to Segal’s annual survey of plan funded status, the survey instrument requested information about the nature and size of contribution increases and benefit reductions, whether plans expected to emerge from the critical zone within statutory time frames, and the estimated number of years until emergence from the critical zone or, for plans not expecting to emerge, the number of years to plan insolvency. The information pertaining to each of the 107 critical plans in the survey was completed by Segal’s professional actuaries responsible for those clients. The survey was initiated in December 2010, and responses were received through February 2011. Through a review of the methodology underlying the survey, and discussions with a Segal representative knowledgeable about the survey, we determined that the results were reliable and useful for our research. Second, we supplemented this data with in-depth interviews with representatives of 13 multiemployer plans— 8 were in critical status, 2 in endangered or seriously endangered status, and 3 in neither critical nor endangered status. We selected the plans to ensure that we included a range of plan sizes, industries, geographical areas, and funding status. Plans selected ranged in size from about 2,000 participants to more than 531,000 participants and represented a variety of industries including those featuring some of the largest concentrations of multiemployer plans—construction, manufacturing, and transportation. Before speaking with plan officials, we reviewed available data, including rehabilitation or funding improvement plans, and other relevant documents. Our in-depth discussions with plan representatives covered various issues, including plans’ use of and views regarding funding relief, the nature and size of the contribution increases and benefit reductions, and the probable impact of contribution increases and benefit reductions on employers and plan participants. To answer the second question, we interviewed officials and analyzed data from PBGC, including recent PBGC annual reports and data books. We also developed several data requests for PBGC that were tailored to this objective, and reviewed information provided by PBGC in response. For example, we obtained data on the amount of PBGC’s annual assistance to plans due to plan insolvencies, plan partitions, and assistance granted for other reasons, such as plan mergers or closures. We also obtained and analyzed updated data regarding PBGC’s overall financial position and the size of its long-term deficits. Specifically, we obtained data on the liabilities attributable to plans on PBGC’s list of plans that are insolvent or considered likely to become insolvent in the next 10 years, as well as those thought likely to become insolvent in the next 10 to 20 years. To better understand the consequences of plan insolvency on retirees, we interviewed relevant PBGC officials and requested data regarding the impact of insolvency on retirees of various wage levels and tenures. Finally, we discussed the impact of potential PBGC insolvency in our discussions with multiemployer plan officials. To answer the third objective, we distinguished between options that would address the more immediate funding crisis facing plans headed toward insolvency and options that may enhance the long-run stability of the multiemployer system for plans that may not be headed for insolvency, but, nevertheless, face financial challenges. We assessed the tradeoffs of various options for current workers, retirees, and employers, as well as the federal government. To identify and assess available options, we interviewed a wide range of pension experts—including academics, actuaries, attorneys, plan trustees and administrators, employers and trade associations, unions, advocacy organizations, government officials, and other relevant stakeholders. We also reviewed relevant research and documentation, including a proposal by the National Coordinating Committee for Multiemployer Plans (NCCMP) and research by other industry experts. As appropriate for each of our objectives, we reviewed existing literature and relevant federal laws and regulations. We conducted this performance audit from March 2012 through March 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, David Lehrer (Assistant Director), Michael Hartnett, Sharon Hermes, and Kun-Fang Lee made key contributions to this report. In addition, support was provided by Frank Todisco, GAO Chief Actuary, James Bennett, David Chrisinger, Julianne Cutts, Jessica Gray, Theresa Lo, Ashley McCall, Sheila McCoy, and Walter Vance. | Multiemployer pension plans--created by collective bargaining agreements including more than one employer-- cover more than 10 million workers and retirees, and are insured by the PBGC. In recent years, as a result of investment market declines, employers withdrawing from plans, and demographic challenges, many multiemployer plans have had large funding shortfalls and face an uncertain future. GAO examined (1) actions that multiemployer plans in the weakest financial condition have taken to improve their funding levels; (2) the extent to which plans have relied on PBGC assistance since 2009, and the financial condition of PBGC's multiemployer plan insurance program; and (3) options available to address PBGC's impending funding crisis and enhance the multiemployer insurance program's future financial stability. GAO analyzed government and industry data and interviewed government officials, pension experts--including academics, actuaries, and attorneys, multiemployer plans' trustees and administrators, employers and trade associations, unions, advocacy organizations, and other relevant stakeholders. The most severely distressed multiemployer plans have taken significant steps to address their funding problems and, while most plans expected improved financial health, some did not. A survey conducted by a large actuarial and consulting firm serving multiemployer plans suggests that the large majority of the most severely underfunded plans--those designated as being in critical status--either have increased or will increase employer contributions or reduce participant benefits. In some cases, these measures will have significant effects on employers and participants. For example, several plan representatives stated that contribution increases had damaged some firms' competitive position in the industry, and, in some cases, threatened the viability of such firms. Similarly, reductions in certain benefits--such as early retirement subsidies--may create hardships for some older workers, such as those with physically demanding jobs. Most of the 107 surveyed plans expected to emerge from critical status, but about 25 percent did not and instead seek to delay eventual insolvency. The Pension Benefit Guaranty Corporation's (PBGC) financial assistance to multiemployer plans continues to increase, and plan insolvencies threaten PBGC's multiemployer insurance fund's ability to pay pension guarantees for retirees. Since 2009, PBGC's financial assistance to multiemployer plans has increased significantly, primarily due to a growing number of plan insolvencies. PBGC estimated that the insurance fund would be exhausted in about 2 to 3 years if projected insolvencies of either of two large plans occur in the next 10 to 20 years. More broadly, by 2017, PBGC expects the number of insolvencies to more than double, further stressing the insurance fund. PBGC officials said that financial assistance to plans that are insolvent or are likely to become insolvent in the next 10 years would likely exhaust the insurance fund within the next 10 to 15 years. If the insurance fund is exhausted, many retirees will see their benefits reduced to an extremely small fraction of their original value because only a reduced stream of insurance premium payments will be available to pay benefits. Experts and stakeholders cited two policy options to avoid the insolvencies of severely underfunded plans and the PBGC multiemployer insurance fund, as well as other options for longer term reform. Experts and stakeholders said that, in limited circumstances, trustees should be allowed to reduce accrued benefits for plans headed toward insolvency. Also, some experts noted that, in their view, the large size of these reductions for some severely underfunded plans may warrant federal financial assistance to mitigate the impact on participants. Experts and stakeholders also noted tradeoffs, however. For example, reducing accrued benefits could impose significant hardships on some retirees, and any possible financial assistance must be considered in light of the existing federal debt. Options to improve long term financial stability include changes to withdrawal liability--payments assessed to an employer upon leaving the plan based on their share of unfunded vested benefits--to increase the amount of assets plans can recover or to encourage employers to remain in or join the plan. In addition, experts and stakeholders said an alternative plan design that permits adjustments in benefits tied to key factors, such as the funded status of the plan, would provide financial stability and lessen the risk to employers. These and other options also have important tradeoffs, however. Congress should consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer system. PBGC generally agreed with our findings and analysis. |
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The Decennial Census is at a critical stage in the 2008 Dress Rehearsal, in which the Bureau has its last opportunity to test its plans for 2010 under census-like conditions. The dress rehearsal features a mock Census Day, now set for May 1, 2008. Last year at this time, the Bureau carried out a major dress rehearsal operation—address canvassing—in which the Bureau updated address lists and collected global positioning coordinates for mapspots. The largest field operation of the dress rehearsal was to have begun this month. In this operation (nonresponse follow-up), field staff were to conduct face-to-face interviews with households that did not mail back their questionnaires. Prior to the redesigning effort, the Bureau had already changed its plans for the dress rehearsal, in part, to focus greater attention on the testing of technology. In a November 20, 2007, decision memo, the Bureau announced that it would delay Census Day for the dress rehearsal by 1 month, to May 1, 2008. The Bureau also listed a number of operations it no longer planned to rehearse, including group quarters enumeration and census coverage measurement. Also in February 2008, the Bureau announced that it would remove from the scope of the FDCA program contract the development of all systems and software associated with the census coverage measurement operation. The redesign approach selected by the Secretary will require that the Bureau quickly develop and test a paper-based nonresponse follow-up operation. Any paper-based option has its own set of unique issues, such as setting up operations to support paper field data collection centers and seeking printing solutions for enumerator forms. Among other issues, decisions on a printing solution will need to be made soon. Although the Bureau has carried out paper-based operations before, in some cases they now involve new procedures and system interfaces that as a result of their exclusion from the dress rehearsal, will not be tested under census-like conditions. For nonresponse follow-up in 2010 the Bureau will be using newly developed systems for integrating responses and controlling workload. For example, the Bureau will need to rely on a newly developed system called the Decennial Response Integration System to help identify households that have not returned census forms and for collecting the results of enumerators conducting nonresponse follow-up person interviews. Dropping the use of the HHCs for nonresponse follow-up and reverting to paper for that operation this late in the decade also precludes nonresponse follow-up from being fully tested in the dress rehearsal. Under the delayed dress rehearsal this operation was to begin next month, soon after households in dress rehearsal locations were to return their census forms. A paper operation requires different training, maps, and other material to be prepared prior to the operation. The Bureau has announced no specific plans for conducting field testing of certain key operations, such as nonresponse follow-up. Without sufficient testing, operational problems can go undiscovered and the opportunity to improve operations will be lost. The redesign’s move from the use of HHCs to a paper-based nonresponse follow-up operation may limit the Bureau’s ability to reduce follow-up with persons who are late in returning their census questionnaires. One of the primary advantages the Bureau cited for using HHCs was the ability, as late mail returns came in, to remove those addresses from enumerators’ assignments—preventing enumerators from doing unnecessary work. According to the Bureau, in 2000 enumerators visited over 4 million households that had returned their census form late. In 2004, the Bureau tested the capability of an earlier prototype of the HHC to adjust workloads by identifying late mail returns. We reported in 2007 that based on these tests it appears that if the Bureau had possessed this capability during the 2000 Census, it could have eliminated the need to visit nearly 773,000 late-responding households and saved an estimated $22 million (based on our estimate that a 1 percentage point increase in workload could add at least $34 million in direct salary, benefits, and travel costs to the price tag of nonresponse follow-up). The Director of the Census Bureau stated that he believes that the Bureau can still partially adjust enumerator workload to recognize late mail returns without the use of HHCs. To achieve this objective, the Bureau will need to specify the process it will use and conduct appropriate tests. The redesign will also affect the 2010 Census address canvassing operation. The Secretary’s decision to use the HHCs for the 2010 address canvassing operation means that certain performance issues with the handheld technology must be addressed promptly. Field staff experienced difficulties using the technology during the address canvassing dress rehearsal. For example, workers reported problems with HHCs when working in large assignment areas during address canvassing. The devices could not accommodate more than 720 addresses—3 percent of dress rehearsal assignment areas were larger than that. The amount of data transmitted and used slowed down the HHCs significantly. Identification of these problems caused the contractor to create a task team to examine the issues, and the team recommended improving the end-to-end performance of the mobile solution by controlling the size of assignment area data delivered to the HHC both for address canvassing and nonresponse follow-up operations. One specific recommendation was limiting the size of assignment areas to 200 total addresses. However, the redesign effort took another approach deciding not to use HHCs in certain large assignment areas. It is not yet clear how this workaround will be carried out. Furthermore, the Bureau will need to define specific and measurable performance requirements for the HHCs as we recommended in January 2005. Another operational issue is the ability of the contractor to accept changes to its address files after it completes address canvassing updates. This could preclude the Bureau from conducting “restart/redo” operations for an area where the address file is discovered to be incorrect. This function is critical in developing an accurate and complete address list. Without the ability to update the mailing list for “restart/redo” operations, the Bureau would consider not mailing census questionnaires to addresses in that area and instead deliver census forms by hand. This has the potential to significantly increase costs. The Bureau still needs to agree upon and finalize requirements for the FDCA program. In March 2006, we reported that the FDCA project office had not implemented the full set of acquisition management capabilities (such as project and acquisition planning and requirements development and management) that were needed to effectively manage the program. For example, although the project office had developed baseline functional requirements for the acquisition, the Bureau had not yet validated and approved them. Subsequently, in October 2007, we reported that changes to requirements had been a contributing factor to both cost increases and schedule delays experienced by the FDCA program. In June 2007, an assessment by an independent contractor of the FDCA program reported on requirements management problems—much like those we reported in March 2006. Similar to our recommendation, the independent assessors recommended that the Bureau immediately stabilize requirements by defining and refining them. The Bureau has recently made efforts to further define requirements for the FDCA program, and it has estimated that the revised requirements will result in significant cost increases. On January 16, 2008, the Bureau provided the FDCA contractor with a list of over 400 requirements for the FDCA program to reconcile. Although some of these new requirements will be dropped based on the Secretary’s recent decision, many will still need to be addressed to ensure that FDCA will perform as needed. Commerce and Bureau officials need to address critical weaknesses in risk management practices. In October 2007, we reported that the FDCA project had weaknesses in identifying risks, establishing adequate mitigation plans, and reporting risk status to executive-level officials. For example, the FDCA project team had not developed mitigation plans that were timely or complete nor did it provide regular briefings on risks to senior executives. The FDCA project team’s failure to report a project’s risks to executive-level officials reduces the visibility of risks to executives who should be playing a role in mitigating them. As of October 2007, in response to the cost and schedule changes, the Bureau decided to delay certain system functionality for FDCA. As a result, the operational testing that was to occur during the dress rehearsal period around May 1, 2008, would not include tests of the full complement of Decennial Census systems and their functionality. Operational testing helps verify that systems function as intended in an operational environment. In late 2007, according to Bureau officials, testing plans for IT systems were to be finalized in February 2008. Therefore, we recommended that the Bureau plan and conduct critical testing, including end-to-end testing of the Decennial Census systems. As of March 2008, the Bureau still had not developed these test plans. In the recent program redesign, the Bureau included conducting end-to-end testing. The inability to perform comprehensive operational testing of all interrelated systems increases the risk that further cost overruns will occur, that decennial systems will experience performance shortfalls, or both. Given the redesigning effort, implementing our recommendations associated with managing the IT acquisitions is as critical as ever. Specifically, the Bureau needs to strengthen its acquisition management capabilities, including finalizing FDCA requirements. Further, it also needs to strengthen its risk management activities, including developing adequate risk mitigation plans for significant risks and improving its executive-level governance of these acquisitions. The Bureau also needs to plan and conduct key tests, including end-to-end testing, to help ensure that decennial systems perform as expected. Even without considering the recent expected cost increases announced by the Bureau to accommodate the redesign of the FDCA program, the Bureau’s cost projections for the 2010 Census revealed an escalating trend from the 1970 Census. As shown in figure 1, the estimated $11.8 billion cost (expressed in constant 2010 dollars) of the 2010 Census, before the FDCA program redesign, represented a more than tenfold increase over the $1 billion spent on the 1970 Census. The 1970 Census was the first Census to rely on mailing census forms to households and asking for a mail return—a major part of the data collection. Although some of the cost increase could be expected because the number of housing units—and hence the Bureau’s workload—has gotten larger, the cost growth has far exceeded the increase in the number of housing units. The Bureau estimated that the number of housing units for the 2010 Census would increase by almost 14 percent over Census 2000 levels. As figure 2 shows, before the FDCA program redesign, the Bureau estimated that the average cost per housing unit for the 2010 Census was expected to increase by approximately 26 percent over 2000 levels, from $69.79 per housing unit to $88.19 per housing unit in constant 2010 dollars. When the projected cost increase that accompanies the FDCA program redesign is considered, the average cost per housing unit will increase by an even greater percentage. Given the projected increase in spending, it will be imperative that the Bureau effectively manage the 2010 Census, as the risk exists that the actual, final cost of the census could be considerably higher than anticipated. Indeed, this was the case for the 2000 Census, when the Bureau’s initial cost projections proved to be too low because of such factors as unforeseen operational problems and changes to the fundamental design. The Bureau estimated that the 2000 Census would cost around $5 billion. However, the final price tag for the 2000 Census was more than $6.5 billion, a 30 percent increase in cost. Large federal deficits and other fiscal challenges underscore the importance of managing the cost of the census, while promoting an accurate, timely census. We have repeatedly reported that the Bureau would be challenged to control the cost of the 2010 Census. In January 2004, we reported that under the Bureau’s approach for reengineering the 2010 Census, the Bureau might find it difficult to reduce operational risk because reengineering introduces new risks. To manage the 2010 Census and contain costs, we recommended that the Bureau develop a comprehensive, integrated project plan for the 2010 Census that should include the itemized estimated costs of each component, including a sensitivity analysis and an explanation of significant changes in the assumptions on which these costs were based. In response, the Bureau provided us with the 2010 Census Operations and Systems Plan, dated August 2007. This plan represented an important step forward at the time. It included inputs and outputs and described linkages among operations and systems. However, it did not yet include sensitivity analysis, risk mitigation plans, a detailed 2010 Census timeline, or itemized estimated costs of each component. Going forward, it will be important for the Bureau to update its operations plan. The assumptions in the fiscal year 2009 President’s Budget life cycle cost estimate of $11.5 billion may not have included recent productivity data from last year’s address canvassing dress rehearsal. According to the Bureau, initially, the cost model assumed productivity for address canvassing to be 25.6 addresses per hour for urban/suburban areas. However, results from the address canvassing dress rehearsal showed productivity of 13.4 addresses per hour for urban/suburban areas. While the life cycle cost estimate increased slightly to $11.5 billion in the fiscal year 2009 President’s Budget, these increases were attributed to other factors and not to lower-than-expected canvassing productivity. Best practices call for cost model assumptions to be updated as new information becomes available. We previously reported that the life cycle cost estimate has not been updated to reflect changes in assumptions. In July 2006, we testified that the estimate had not been updated to reflect the results of testing conducted in 2004. As the Bureau updates its estimate of the life cycle cost annually and as part of the redesigning effort, it will be important that it reflect changing assumptions for productivity and hours worked. Given its size and complexity, carrying out the Decennial Census presents significant challenges under any circumstances. Late changes in census plans and operations, long-standing weaknesses in IT acquisition and contract management, limited capacity for undertaking these critical management functions, scaling back of dress rehearsal activities, and uncertainty as to the ultimate cost of the 2010 Census puts the success of this effort in jeopardy. Managing these risks is critical to the timely completion of a reliable and cost-effective census. Implementing our recommendations would help the Bureau effectively manage the myriad of interrelated operations needed to ensure an accurate and complete count in 2010 (Bureau officials have agreed with many of our recommendations, but have not fully implemented them). The dress rehearsal represents a critical stage in preparing for the 2010 Census. This is the time when the Congress and others should have the information they need to know how well the design for 2010 is likely to work, what risks remain, and how those risks will be mitigated. We have highlighted some of the risks today. Going forward, it will be important for the Bureau to specify how it will ensure that planned dress rehearsal operations will be successfully carried out, and how it will provide assurance that the largest operation—nonresponse follow-up—will be tested in the absence of a full dress rehearsal. Likewise, the Bureau will need to establish plans for working around limitations in the technology to be used in address canvassing operations. It is critical that the Bureau ensure that the technology for conducting address canvassing is a success. The Bureau should implement prior recommendations in moving forward. Contractor-developed IT systems and deliverables need to be closely monitored to ensure that contractors are performing within budget. As we have stressed throughout this testimony and in our prior recommendations, the Bureau needs to practice aggressive project management and governance over both the IT and non-IT components. Further, it is essential that the Bureau implement our recommendations related to information technology. The Bureau must solidify the FDCA program requirements, strengthen risk management activities, and plan and conduct critical testing of the Decennial Census systems. Mr. Chairman, Census Day is less than 2 years away and address canvassing is 1 year away. The challenges we highlighted today call for effective risk mitigation by the U.S. Census Bureau, and careful monitoring and oversight by the Department of Commerce, the Office of Management and Budget, the Congress, GAO, and other key stakeholders. As in the past, we look forward to supporting the committee‘s oversight efforts to promote an accurate and cost-effective census. Mr. Chairman, this concludes our statement. We would be glad to answer any questions you and the committee members may have. If you have any questions on matters discussed in this testimony, please contact Mathew Scirè at (202) 512-6806 or [email protected] or David A. Powner at (202) 512-9286 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Other key contributors to this testimony include Signora May, Assistant Director; Mathew Bader; Thomas Beall; Jeffrey DeMarco; Elizabeth Hosler; Richard Hung; Anne Inserra; Andrea Levine; Lisa Pearson; Sonya Phillips; Cynthia Scott; Niti Tandon; Jonathan Ticehurst; Timothy Wexler; and Katherine Wulff. 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. | In 2007, the U.S. Census Bureau (Bureau) estimated the 2010 Census would cost $11.5 billion, including $3 billion on automation and technology. At a March hearing, the Department of Commerce (Commerce) stated that the Field Data Collection Automation (FDCA) program was likely to incur significant cost overruns and announced a redesign effort. At that time, GAO designated the 2010 Decennial Census as high risk, citing long-standing concerns in managing information technology (IT) investments and uncertain costs and operations. This testimony is based on past work and work nearing completion, including GAO's observation of the address canvassing dress rehearsal. For IT acquisitions, GAO analyzed system documentation, including deliverables, cost estimates, other acquisitions-related documents, and interviewed Bureau officials and contractors. This testimony describes the implications of redesign for (1) dress rehearsal and decennial operations, (2) IT acquisitions management, and (3) Decennial Census costs. The Decennial Census is at a critical stage in the 2008 Dress Rehearsal, in which the Bureau has its last opportunity to test its plans for 2010 under census-like conditions. On April 3, 2008, Commerce announced significant changes to the FDCA program. It also announced that it expected the cost of the decennial to be up to $3 billion greater than previously estimated. The redesign will have fundamental impacts on the dress rehearsal as well as 2010 Census operations. Changes this late in the decade introduce additional risks, making more important the steps the Bureau can take to manage those risks. The content and timing of dress rehearsal operations must be altered to accommodate the Bureau's design. For example, Commerce has selected an option that calls for the Bureau to drop the use of handheld computers (HHCs) during the nonresponse follow-up operation, and the Bureau may now be unable to fully rehearse a paper-based operation. Additionally, reverting to a paper-based nonresponse follow-up operation presents the Bureau with a wide range of additional challenges, such as arranging for the printing of enumerator forms and testing the systems that will read the data from these forms once completed by enumerators. Given the redesign effort, implementing GAO's recommendations associated with managing the IT acquisitions is as critical as ever. Specifically, the Bureau needs to strengthen its acquisition management capabilities, including finalizing FDCA requirements. Further, it also needs to strengthen its risk management activities, including developing risk mitigation plans for significant risks and improving its executive-level governance of these acquisitions. The Bureau also needs to plan and conduct key tests, including end-to-end testing, to help ensure that decennial systems perform as expected. According to the Bureau, the redesign and related revision of the FDCA program is expected to result in significant increases to the life cycle cost estimate for the 2010 Census. Even without considering the recent expected cost increases announced by the Bureau to accompany the redesign of the FDCA program, the Bureau's cost projections for the 2010 Census revealed an escalating trend from previous censuses. Previously, GAO recommended that the Bureau develop an integrated and comprehensive plan to manage operations. Specifically, to understand and manage the assumptions that drive the cost of the decennial census, GAO recommended, among other actions, that the Bureau annually update the cost of the 2010 Census and conduct sensitivity analysis on the $11.5 billion estimate. However, while the Bureau understands the utility of sensitivity analysis, it has not conducted such an analysis. |
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In 1990, we designated DOE program and contract management as an area at high risk of fraud, waste, abuse, and mismanagement. In January 2009, to recognize progress made at DOE’s Office of Science, we narrowed the focus of the high-risk designation to two DOE program elements—NNSA and the Office of Environmental Management. In February 2013, our most recent high-risk update, we further narrowed this focus to major projects (i.e., projects over $750 million) at NNSA and the Office of Environmental Management. DOE has taken some steps to address our concerns, including developing an order in 2010 (Order 413.3B) that defines DOE’s project management principles and process for executing a capital asset construction project, which can include building or demolishing facilities or constructing remediation systems. NNSA is required by DOE to manage the UPF construction project in accordance with this order. The project management process defined in Order 413.3B requires DOE projects to go through five management reviews and approvals, called “critical decisions” (CD), as they move forward from project planning and design to construction to operation. The CDs are as follows: CD 0: Approve a mission-related need. CD 1: Approve an approach to meet a mission need and a preliminary cost estimate. CD 2: Approve the project’s cost, schedule and scope targets. CD 3: Approve the start of construction. CD 4: Approve the start of operations. In August 2007, the Deputy Secretary of Energy originally approved CD 1 for the UPF with a cost range of $1.4 to $3.5 billion. In June 2012, prior to the UPF contractor’s August 2012 determination that the facility would need to be enlarged due to the space/fit issue, the Deputy Secretary of Energy reaffirmed CD 1 for the UPF with an estimated cost range of $4.2 to $6.5 billion and approved a phased approach to the project, which deferred significant portions of the project’s original scope. According to NNSA documents, this deferral was due, in part, to the multibillion dollar increase in the project’s cost estimate and to accelerate the completion of the highest priority scope. In July 2013, NNSA decided to combine CD 2 and CD 3 for the first phase of UPF, with approval planned by October 2015.of June 2012, and proposed start of operations. Table 1 shows the UPF’s phases, scope of work, cost estimate as Infrastructure Strategy for the Y-12 plant. In early February 2014, the NNSA Deputy Administrator for Defense Programs directed his staff to develop an Enriched Uranium Infrastructure Strategy to establish the framework of how NNSA will maintain the Y-12 plant’s uranium mission capabilities into the future. Key aspects considered during the strategy’s development included, among other things: (1) an evaluation of the uranium purification capabilities currently conducted in building 9212 and the throughput needed to support requirements for life extension programs and nuclear fuel for the U.S. Navy; (2) an evaluation of the alternatives to the UPF that prioritizes replacement capabilities by risk to nuclear safety, security, and mission continuity; (3) an identification of existing infrastructure as a bridging strategy until replacement capability is available in new infrastructure. A draft of the strategy was delivered to the Deputy Administrator in April 2014. NNSA is currently revising the draft, and an NNSA official said that the agency has not yet determined when it will deliver a revised version to the Deputy Administrator. NNSA is currently evaluating alternatives to replacing enriched uranium operations at the Y-12 plant with a single facility. In early January 2014, NNSA began to consider options other than the UPF for enriched uranium operations at the Y-12 plant because, according to the UPF Federal Project Director, the project is facing budget constraints, rising costs, and competition from other high-priority projects within NNSA—such as the planned B61 bomb and W78/88 warhead nuclear weapon life extension projects. On April 15, 2014, NNSA completed a peer review that identified an alternative to replacing enriched uranium operations with a single facility. The results of the review, which were released to the public on May 1, 2014, included a proposed solution for replacing or relocating only Building 9212 capabilities (uranium purification and casting) by 2025 at a cost not exceeding $6.5 billion. This proposed solution would require NNSA to (1) construct two new, smaller facilities to house casting and other processing capabilities, (2) upgrade existing facilities at the Y-12 plant to house other uranium processing capabilities currently housed in Building 9212, and (3) appoint a senior career executive within NNSA’s Office of Defense Programs with the responsibility and authority to coordinate the agency’s overall enriched uranium strategy. As of July 2014, NNSA was still evaluating the review’s recommendations, but the NNSA Acting Administrator previously stated that NNSA does not plan to continue full operations in Building 9212, which has been operational for over 60 years, past 2025 because the building does not meet modern safety standards, and increasing equipment failure rates present challenges to meeting required production targets. In addition, according to NNSA officials, while NNSA was conducting its review, the UPF project team suspended some design, site preparation, and procurement activities that could potentially be impacted by the range of alternatives being considered. In January 2013, NNSA completed a review to identify the factors that contributed to the space/fit issue. This review took into account the actions completed by the contractor or in progress since the space/fit issue was identified, input from the contractor, and NNSA’s own experience with and knowledge of the project. NNSA identified a number of factors that contributed to the space/fit issue within both the contractor and NNSA organizations. Specifically: NNSA oversight. NNSA identified limitations in its oversight of the project. Specifically, NNSA determined that it did not have adequate staff to perform effective technical oversight of the project, and requests and directives from NNSA to the UPF contractor were not always implemented because NNSA did not always follow up. According to NNSA officials, when the space/fit issue was identified in 2012, the UPF project office was staffed by nine full-time equivalents (FTE). The Defense Nuclear Facilities Safety Board also raised concerns on several occasions prior to the space/fit issue about whether this level of staffing was adequate to perform effective oversight of the contractor’s activities. Design integration. NNSA found that the design inputs from subcontractors for the contractor’s 3D computer model, used to allocate and track space usage within the facility, were not well integrated. In 2008, the UPF contractor subcontracted portions of the design work, such as glovebox and process area design, to four subcontractors, and to track how these design elements fit together, the UPF contractor developed a model management system that generates a 3D computer model of the facility as the design progresses. This 3D model was intended to, among other things, allow the contractor to determine whether there is adequate space in the building’s design for all processing equipment and utilities, or whether changes to the design are necessary to provide additional space. However, according to NNSA officials, prior to the space/fit issue, the design work of the four subcontractors was not well integrated into the model, and as a result, the model did not accurately reflect the most current design. Communications. NNSA identified communications shortcomings throughout the project. For example, the contractor did not always provide timely notification to the NNSA project office of emerging concerns and did not engage NNSA in development of plans to address these concerns. NNSA found that there was reluctance on the part of the contractor to share information with NNSA without first fully vetting the information and obtaining senior management approval. In addition, NNSA found that a “chilled” work environment had developed within the UPF contractor organization, and that, as a result, communications from the working level and mid-level managers up to senior management were limited because of concerns of negative consequences. Furthermore, communications between the NNSA project office, the UPF contractor, and NNSA headquarters were limited by a complex chain of command. According to NNSA officials, prior to 2013, the UPF project was managed by NNSA’s Y-12 Site Office, and the UPF Federal Project Director reported to NNSA at a relatively low level. NNSA officials said that, as a result, any concerns with the UPF project had to compete for attention with many other issues facing the Y-12 site as a whole. Management processes and procedures. NNSA found that the contractor’s management processes and procedures did not formally identify, evaluate, or act on technical concerns in a timely manner. In addition, NNSA found that the UPF contractor’s project management procedures had shortcomings in areas such as risk management, design integration, and control of the technical baseline documents. Specifically, some of the contractor’s procedures were not project- specific and could not be used for work on the UPF project without authorizing deviations or providing additional instructions. According to NNSA, these shortcomings led in part to inadequate control of the design development process, as the contractor did not document interim decisions to deviate from the design baseline, adequately describe the design, or maintain it under configuration control. In response to NNSA’s review of the factors that contributed to the space/fit issue, NNSA and the UPF contractor have both taken some actions to address the factors identified by the review. In addition, NNSA has begun to share lessons learned from the UPF project consistent with both DOE’s project management order, which states that lessons learned should be captured throughout the course of capital asset construction projects, as well as our prior recommendation to ensure that future projects benefit from lessons learned. The specific actions NNSA and the contractor have taken include the following: NNSA oversight. NNSA has taken actions to improve its oversight of the UPF project to ensure that it is aware of emerging technical issues and the steps the contractor is taking to address them by, among other things, increasing staffing levels for the UPF project office from 9 FTEs in 2012 to more than 50 FTEs as of January 2014. According to NNSA officials, many of the additional staff members are technical experts in areas such as engineering and nuclear safety, and these additional staff have enabled NNSA to conduct more robust oversight of the contractor’s design efforts than was previously possible. For example, in July 2013, NNSA used some of these additional staff to conduct an in-depth assessment of the UPF contractor’s design solution for the space/fit issue. This assessment found that, among other things, as of July 2013, the facility design and 3D model were not sufficiently complete to determine whether there was adequate space remaining in parts of the facility to accommodate all required equipment while still providing adequate margin for future design changes during construction and commissioning. The assessment also found that the contractor’s monthly space/fit assessment reports, developed to evaluate and report on space utilization in the facility, were providing an overly optimistic view of space/fit, leading to a low level of senior management engagement in resolving these issues. According to NNSA officials, as of January 2014, the UPF contractor had taken actions to address many of the assessment’s findings, and the agency plans to continue to monitor the contractor’s performance closely in these areas through its normal oversight activities, such as attending periodic meetings to review the 3D model. Design integration. According to NNSA and UPF contractor officials, the UPF contractor took steps to better integrate the efforts of the subcontractors conducting design and engineering work on different elements of the facility. For example, in late 2012, the UPF contractor hired a model integration engineer to integrate the subcontractors’ design work and ensure that all design changes are incorporated into the model so that it accurately reflects the most current design. The model integration engineer also manages a team of subject matter experts who monitor space utilization in each individual process area as the design progresses and conduct monthly assessments of the space margins remaining in each area. In addition, the UPF contractor also developed a formal change control process to define and manage space within the 3D model. Under this process, design changes made by the individual design teams must be submitted to the model integration engineer for approval to ensure that they do not exceed the boundaries established for each process area or interfere with other equipment. Furthermore, changes that have a significant impact on equipment layout must be approved by a review board prior to being accepted and integrated into the model. According to contractor officials, as of January 2014, the subcontractor teams had submitted 111 change requests, and 75 requests had been approved. The officials said that they are working to reduce the remaining backlog. According to NNSA, the contractor also developed a monthly space/fit assessment process to evaluate and report on space utilization in the facility. As part of this process, the model integration team evaluates the space remaining in each process area of the facility to determine whether each area has (1) no space/fit challenges, (2) no current space/fit challenges but the potential for challenges in the future as a result of the design being less complete than other areas, or (3) confirmed space/fit challenges, i.e., areas where design changes are necessary to ensure that all equipment will fit into the space allotted to it. The model integration team then prepares a report and briefs senior project management on its findings. According to a UPF contractor document, as of December 2013, 26 process areas had no space/fit challenges, 13 process areas had no challenges but had the potential for challenges in the future, and 2 process areas had confirmed space/fit challenges. NNSA and UPF contractor officials said that, as of January 2014, they were confident that these remaining space/fit challenges can be addressed within the current size parameters of the facility, but that the project will not have absolute certainty about space/fit until the design is fully complete. Instead, the project will only be able to gradually reduce the amount of space/fit uncertainty and risk as the detailed design progresses. However, the officials said that, prior to CD 2/3 approval, the contractor is required to conduct a detailed review of the 3D model to ensure there is adequate space for all equipment and utilities, and NNSA plans to assess the results of this review. Communications. According to an NNSA official, communications between NNSA and the contractor significantly improved after the space/fit issue was identified, and the contractor kept NNSA better informed of emerging concerns and its plans to address these concerns. In addition, NNSA held a partnering session with the contractor in June 2014, which included management representatives from NNSA and the contractor in functional areas such as engineering, nuclear safety, and procurement, and included discussions on defining federal and contractor roles, managing change, and mapping the path forward for the project. On July 15, 2014, NNSA and the contractor signed a formal partnering agreement to enhance (1) clarity and alignment on mission and direction, (2) transparency, (3) responsiveness, and (4) effectiveness in meeting commitments, among other things. The agreement also included a commitment to meet quarterly to discuss progress made toward achieving these goals. NNSA and UPF contractor officials also said that the contractor took steps to enhance communications between working-level employees and senior management and improve its organizational culture after the space/fit issue was identified. For example, the contractor established a Differing Professional Opinion (DPO) process through which employees can raise concerns to project management, began conducting annual surveys of the project’s safety culture to determine the extent to which employees are willing to raise concerns, and formally defined its safety culture policy to conform to guidelines established by the Nuclear Regulatory Commission. According to NNSA and UPF contractor officials, the contractor’s annual surveys showed a steady improvement in employees’ willingness to bring concerns and issues to management since the space/fit issue was identified. In addition, the contractor also brought in additional senior project and engineering managers from outside the UPF project in order to foster greater communication between senior managers and working-level employees. In addition, NNSA recently reorganized its management of major construction projects, including the UPF, resulting in more direct communications between the UPF project office and NNSA headquarters. Specifically, in 2012, the UPF FPD began reporting directly to APM, rather than reporting to NNSA at a relatively low level through the Y-12 Site Office, and NNSA officials said that this new organizational structure has streamlined NNSA’s management of the project by increasing the FPD’s control over project resources and functions, as well as the FPD’s responsibility and accountability for achieving project goals. Management processes and procedures. According to the UPF contractor, it developed formal processes for identifying and tracking the status of major technical and engineering issues. For example, according to NNSA and contractor officials, the contractor implemented a process for tracking the project’s highest-priority action items, as determined by the project’s management team, including certain issues related to space/fit. Specifically, as of January 2014, these items included actions to ensure that technical changes are fully reviewed so that their impact on the project’s design, procurement activities, and construction is understood. In addition, according to UPF contractor officials, the contractor implemented a separate system to track the identification and resolution of significant technical issues during the design process, and any employee can submit a technical issue for inclusion in this system if they believe that it is serious enough to require management attention. After an issue is added to the system, the corrective actions implemented to address it are tracked until they are completed, and technical issues affecting space/fit are placed into a separate, higher-priority category within the system. As of January 2014, there were nine technical issues affecting space/fit in this higher-priority category, and three of those issues had been resolved. For example, in August 2013, the project identified a technical issue in which one processing area did not contain enough space to accommodate the replacement of a component, but the project developed a solution that resolved the issue in October 2013. In addition, according to NNSA and the UPF contractor, the contractor uses a separate system to track the status of non-technical issues that are identified by project reviews. The contractor uses this system to formally assign responsibility for any corrective actions to the appropriate contractor personnel and to monitor the status of each action until completion. In order for a corrective action to be closed out in this system, the personnel responsible for the corrective action must provide evidence of completion. For example, in April 2013, the contractor identified nine corrective actions needed to address a number of the contributing factors for the space/fit issue, and began using this system to track their status. As of January 2014, six of these actions had been completed, two were in process, and one had been cancelled. For example, the contractor was still in the process of reviewing and evaluating the procedure set used for the project to identify any improvements necessary, and the cancelled corrective action—the development of a communication partnering policy between NNSA and the contractor—was replaced by the June 2014 partnering session discussed above. NNSA has also recently begun to share lessons learned from the space/fit issue. This was an original goal of NNSA’s review of the factors that contributed to the space/fit issue, and is consistent with both DOE’s project management order, which states that lessons learned should be captured throughout the course of capital asset construction projects, as well as our prior recommendation to ensure that future projects benefit from lessons learned. NNSA officials said that lessons learned from the space/fit issue had been informally incorporated into other NNSA activities in a variety of ways, to include informing independent project reviews and cost estimates, and led to a broader recognition of the need for increased federal staffing levels to enhance NNSA’s oversight activities on other projects. More recently, the UPF Federal Project Director conducted a presentation on lessons learned from the UPF project, including lessons learned from the space/fit issue, at a July 2014 training session for federal project directors. As we have noted in other work, the sharing of lessons learned is an important element of NNSA’s and DOE’s efforts to better inform and improve their management of other capital acquisition projects. As we reported in December 2013, NNSA estimated that it will need approximately $300 million per year between 2019 and 2038 in order to fund the construction projects it plans to undertake during that time. Documenting the lessons learned as a result of the UPF space/fit issue may help prevent other costly setbacks from occurring on these other projects. We are not making any new recommendations in this report. We provided a draft of this report to NNSA for comment. In its written comments (see appendix I), NNSA generally agreed with our findings. NNSA also provided technical comments that were incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, the Administrator of NNSA, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. David C. Trimble, (202) 512-3841 or [email protected]. In addition to the individual named above, Jonathan Gill (Assistant Director), Mike Armes, John Bauckman, Patrick Bernard, Antoinette Capaccio, Will Horton, and Steven Putansu made key contributions to this report. | NNSA conducts enriched uranium activities—including producing components for nuclear warheads—at the Y-12 National Security Complex in Tennessee. NNSA has identified key shortcomings in the Y-12 plant's current uranium operations, including rising costs due to the facility's age. In 2004, NNSA decided to build a new facility—the UPF—to consolidate and modernize its enriched uranium activities. In July 2012, the UPF contractor concluded that the UPF's processing equipment would not fit into the facility as designed, and that addressing this issue—which NNSA refers to as a “space/fit” issue—would cost an additional $540 million. The Fiscal Year 2013 National Defense Authorization Act mandated that GAO periodically assess the UPF. This is the fourth report, and it assesses (1) factors NNSA identified that contributed to the UPF space/fit issue and (2) actions, if any, NNSA and the UPF contractor have taken to address the space/fit issue. GAO reviewed NNSA and contractor documents, visited the Y-12 plant, interviewed NNSA and UPF contractor representatives, and observed the computer model NNSA and the UPF contractor use to track space usage within the facility. GAO is not making any new recommendations. In commenting on a draft of this report, NNSA generally agreed with GAO's findings. In January 2013, the National Nuclear Security Administration (NNSA) completed a review to identify the factors that contributed to the space/fit issue with the Uranium Processing Facility (UPF), and identified a number of factors within both NNSA and the contractor managing the UPF design at that time. NNSA's review identified shortcomings in 1) federal oversight of the project, 2) design integration, 3) communications, and 4) the UPF contractor's management processes and procedures. For example, NNSA determined that it did not have adequate federal staff to perform effective oversight of the project, and that the design inputs for the computer model the contractor used to allocate and track space utilization within the facility were not well integrated. NNSA also found that communications shortcomings occurred because the contractor did not always provide timely notification to the NNSA project office of emerging concerns, and that the contractor's management processes and procedures did not formally identify, evaluate, or act on technical concerns in a timely manner. NNSA and the UPF contractor took actions to address the factors that contributed to the space/fit issue, and NNSA has begun to share lessons learned from the space/fit issue, consistent with both Department of Energy (DOE) guidance and GAO's prior recommendation to ensure that future projects benefit from lessons learned. Specifically, NNSA has taken actions to improve its oversight of the project by increasing federal staffing levels for the UPF project office from 9 full-time equivalents (FTE) in 2012 to more than 50 FTEs as of January 2014. According to NNSA officials, these additional staff enabled NNSA to conduct more robust oversight of the contractor's design efforts than was previously possible. The contractor also took steps to better integrate the efforts of the four subcontractors that are conducting design and engineering work on different elements of the facility. For example, in late 2012 the contractor hired an engineer to integrate the subcontractors' design work and ensure that all design changes were incorporated into the contractor's computer model. The contractor also improved design integration by developing a monthly assessment process to evaluate and report on space utilization in the facility. In addition, according to an NNSA official, communications between NNSA and the contractor significantly improved after the space/fit issue was identified as the contractor kept NNSA better informed of emerging concerns and its plans to address them. The contractor also developed formal management processes for identifying and tracking the status of major technical and engineering issues. For example, the contractor implemented processes for tracking the identification and resolution of both technical and non-technical issues during the design process. In addition, NNSA has recently begun to share lessons learned from the space/fit issue, consistent with DOE guidance and our prior recommendation to ensure that future projects benefit from lessons learned. For example, in July 2014, the UPF federal project director conducted a presentation on lessons learned from the UPF project, including lessons learned from the space/fit issue, at a training session for NNSA federal project directors. |
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Of the Education programs funded in the Recovery Act, the newly created SFSF program was the largest in terms of funding. It included approximately $48.6 billion awarded to states by formula and up to $5 billion awarded as competitive grants. SFSF was created, in part, to help state and local governments stabilize their budgets by minimizing budgetary cuts in education and other essential government services, such as public safety. SFSF funds for education distributed under the Recovery Act were required to first be used to alleviate shortfalls in state support for education to LEAs and public institutions of higher education (IHE). States were required to use SFSF education stabilization funds to restore state funding to the greater of fiscal year 2008 or 2009 levels for state support to LEAs and public IHEs. When distributing these funds to LEAs, states must use their primary education funding formula, but they can determine how to allocate funds to public IHEs. In general, LEAs maintain broad discretion in how they can use education stabilization funds, but states have some ability to direct IHEs in how to use these funds. Several other programs received additional funding through the Recovery Act. For example, the Recovery Act provided $10 billion to help LEAs educate disadvantaged youth by making additional funds available beyond those regularly allocated for ESEA Title I, Part A. These additional funds are distributed through states to LEAs using existing federal funding formulas, which target funds based on such factors as high concentrations of students from families living in poverty. The Recovery Act also provided $12.2 billion in supplemental funding for programs authorized by IDEA, the major federal statute that supports the provisions of early intervention and special education and related services for infants, toddlers, children, and youth with disabilities. Part B of IDEA funds programs that ensure preschool and school-aged children with disabilities have access to a free appropriate public education and is divided into two separate grants—Part B grants to states (for school-age children) and Part B preschool grants. While one purpose of the Recovery Act was to preserve and create jobs, it also required states to report information quarterly to increase transparency and SFSF required recipients to make assurances relating to progress on educational reforms. To receive SFSF, states were also required to provide several assurances, including that they will maintain state support for education at least at fiscal year 2006 levels; and that they would implement strategies to advance four core areas of education reform. The four core areas of education reform, as described by Education, are: 1. Increase teacher effectiveness and address inequities in the distribution of highly qualified teachers. 2. Establish a pre-K-through-college data system to track student progress and foster improvement. 3. Make progress toward rigorous college- and career-ready standards and high-quality assessments that are valid and reliable for all students, including students with limited English proficiency and/or disabilities. 4. Provide targeted, intensive support, and effective interventions to turn around schools identified for corrective action or restructuring. Education required states receiving SFSF funds to report about their collection and reporting of 34 different indicators and 3 descriptors related to these four core areas of education reform or provide plans for making information related to the education reforms publicly available no later than September 30, 2011. Previously, we reported that, while states are responsible for assuring advancement of these reform areas, LEAs were generally given broad discretion in how to spend the SFSF funds. It is not clear how LEA progress in advancing these four reforms would affect states’ progress toward meeting their assurances. Additionally, Recovery Act recipients and subrecipients are responsible for complying with other requirements as a condition of receiving federal funds. For example, for Recovery Act education programs we reviewed, states and LEAs must meet applicable maintenance of effort (MOE) requirements, which generally mandate them to maintain their previous level of spending on these programs. Generally, this also helps to ensure that states continue to fund education even with the influx of the Recovery Act funds. Specifically, the newly created SFSF program required states to maintain support for elementary and secondary education, in fiscal years 2009, 2010, and 2011, at least at the level that the state provided in fiscal year 2006, but did not place any MOE requirements on subrecipients. IDEA generally prohibits states and LEAs from reducing their financial support, or MOE, for special education and related services for children with disabilities below the level of that support for the preceding year. For ESEA, Title I, states and LEAs are also required to maintain their previous level of funding with respect to the provision of free public education. As long as states met certain criteria, including that the states maintained MOE for SFSF funding, this funding could be counted to meet MOE for other programs including ESEA, Title I, and IDEA. In addition, section 1512 of the Recovery Act requires recipients to report certain information quarterly. Specifically, the Act requires, among other types of information, that recipients report the total amount of Recovery Act funds received, associated obligations and expenditures, and a detailed list of the projects or activities for which these obligations and expenditures were made. For each project or activity, the information must include the name and description of the project or activity, an evaluation of its completion status, and an estimate of the number of jobs funded through that project or activity. The job calculations are based on the total hours worked divided by the number of hours in a full-time schedule, expressed in FTEs—but they do not account for the total employment arising from the expenditure of Recovery Act funds. The prime recipient is responsible for the reporting of all data required by section 1512 of the Recovery Act each quarter for each of the grants it received under the act. According to our nationally representative survey of LEAs conducted in spring 2011, nearly all LEAs reported that they had obligated the majority of their Recovery Act funds, primarily for retaining instructional positions, which assisted LEAs in restoring shortfalls in state and local budgets that LEAs have had to cope with over the past few school years. As a result of the fiscal stress states faced during the recession, a number of state educational agencies (SEA) and LEAs have had difficulty meeting their required MOE requirements for IDEA. States that do not either fully meet their MOE requirements or receive a waiver from Education may face a reduction in future IDEA allocations. State and LEA officials we visited stated that the actions they have taken to deal with decreased budgets and the expiration of their Recovery Act funds—such as reducing instructional supplies and equipment and cutting instructional positions— could have a negative impact on the educational services they provide to students. According to our survey, the majority of LEAs reported they had already obligated most of their SFSF; ESEA Title I, Part A; and IDEA, Part B funds. Nearly all of the LEAs—99 percent for SFSF; and 97 percent for ESEA Title I and IDEA, Part B—reported that they expected to obligate all of their Recovery Act funds prior to September 30, 2011. However, approximately one-quarter (23 percent) of LEAs reported that uncertainty about allowable uses of the funds impacted their ability to expend them in a timely and effective manner. According to data from Education, as of September 9, 2011, about 4 percent of the states’ obligated Recovery Act funds remain available for expenditure. See appendix II for percentages of awarded Recovery Act funds drawn down by states. As of September 9, 2011, two states had drawn down 100 percent of their ESEA Title I, Part A funds. Additionally, 27 states had drawn down all of their SFSF education stabilization funds, while Wyoming, for example, had the lowest drawdown rate for SFSF— 34 percent. Drawdowns can lag behind actual expenditures for various reasons. For example, SEA officials in Wyoming stated that funds for certain uses, such as professional development, tended to be expended in large amounts during the middle and end of the school year which did not require them to draw down funds at a constant rate throughout the school year. Additionally, SEA officials in Alaska told us their drawdown rates appeared low because the state draws down funds on a quarterly basis to reimburse LEAs after their allocations have been spent. SEA officials in the states we visited told us they provided guidance on obligating Recovery Act funds in an effort to assist LEAs in meeting the deadline for obligation of the funds. For example, SEA officials in Massachusetts told us that they sent four communiqués and conducted teleconferences with LEAs with the goal of ensuring that SFSF funds were spent appropriately and in a timely fashion. In Wyoming, SEA officials stated they requested that districts submit Periodic Expenditure Reports on a quarterly basis so that they could assess districts’ spending of Recovery Act funds. They also told us that they contacted districts to determine if they were having challenges obligating the funds by the September 2011 deadline and sent e-mails to their districts notifying them of the amount of funds they had remaining. Retaining staff was the top use cited by LEAs of SFSF; IDEA, Part B; and ESEA Title I, Part A Recovery Act funding over the entire grant period. According to our survey, about three-quarters of LEAs spent 51 percent or more of their SFSF funds on job retention (see fig. 1). A smaller, but substantial, percentage of LEAs also reported using 51 percent or more of their ESEA Title I, Part A and IDEA, Part B Recovery Act funding—an estimated 43 percent and 38 percent, respectively—for job retention. Specifically, in the 2010-2011 school year, the large majority of LEAs (84 percent) used Recovery Act funds to retain instructional positions, which typically include classroom teachers and paraprofessionals. Salaries and benefits comprise the majority of public school’s budgets, and funds authorized by the Recovery Act provided LEAs additional funds to pay for the retention of education staff. In addition to retaining instructional positions, LEAs spent Recovery Act funds on one-time, nonrecurring purchases and sustainable items that built capacity without creating recurring costs. According to our survey, 78 percent of LEAs reported using 1 to 25 percent of at least one of their Recovery Act funding sources—SFSF; ESEA Title I, Part A; or IDEA, Part B—on one-time expenditures, such as professional development for instructional staff, computer technology, and instructional materials. For example, LEA officials in one district in Mississippi told us that they used Recovery Act funds to invest in technology, security equipment, and a handicapped-accessible school bus for students with special needs. In the New Bedford Public Schools district in Massachusetts, LEA officials stated that Recovery Act funds were used to rehabilitate and redeploy computers around the district, purchase iPad connections to enable online learning, and provide professional development to teachers on various technological efforts. See figure 2. Other one-time purchases made with Recovery Act funds enhanced districts’ capacity to provide services in the future, sometimes with anticipated long-term cost savings. In Massachusetts, we visited two LEAs—Newton Public Schools and New Bedford Public Schools—that used IDEA, Part B Recovery Act funds to provide or expand their services for students with special needs instead of paying more expensive schools or facilities to provide the alternative programs and services. LEA officials in Fairfield-Suisun Unified School District in California told us they used IDEA, Part B Recovery Act funds to implement two initiatives they expected to lead to significant cost savings in the future. The first initiative involved partnering with the nearby University of the Pacific to recruit recent speech pathology graduates. In exchange for externships and student loan stipends paid for with Recovery Act funds, the students committed to working in the district for 3 years upon graduation. These newly licensed therapists would be paid salaries around $45,000 per year, considerably less than the contracted therapists that cost the district over $100,000 per year. Further, because of the 3-year commitment, officials stated the graduates were more likely to continue working in the district as permanent employees. Officials estimated that this initiative could save them $800,000 in the 2011-2012 school year. The second initiative used IDEA, Part B Recovery Act funds to start a public school for emotionally disturbed students who previously attended non-public schools at the district’s expense. According to the officials, remodeling the old school building was both cost-effective and programmatically effective, since non-public schools for emotionally disturbed students could cost up to $85,000 per student, with additional costs for occupational and speech therapy if needed. The new public school costs from $25,000 to $35,000 per student, according to district officials. Additionally, officials at Hinds Community College in Mississippi used SFSF education stabilization funds to invest in energy conservation. Specifically, the college contracted with an organization to help educate students and staff on energy conservation efforts, such as turning off lights and computers. The officials stated that they saved approximately $1 million on utilities in fiscal year 2010, which offset the need to increase tuition. Compared to the year prior to receiving Recovery Act funds, a large majority of LEAs reported being able to, with the use of Recovery Act funds, maintain or increase the level of service they could provide to students (see table 1). LEA officials in the Center Point-Urbana Community School District in Iowa told us that Recovery Act funds allowed the district to maintain its core curriculum, provide professional development to instructional staff, and maintain the collection of assessment data that helps them align the district’s curriculum with the state’s core curriculum. LEA officials in the Water Valley School District in Mississippi stated that SFSF funds allowed the district to maintain its reform efforts because they allowed students greater access to teachers. They explained that saving those teacher positions allowed them to keep class sizes small and offer more subjects, such as foreign language, fine arts, and business classes. However, an estimated 13 percent of LEAs were not able to maintain the same level of service even with Recovery Act SFSF funds. These LEAs reported a number of factors that had an effect on their decreased level of service, including increases in class size, reductions in instructional and non-instructional programs, and reductions in staff development. For example, LEA officials at the Tipton Community School District in Iowa stated that, even with Recovery Act funding, they could not afford to maintain their high school agriculture program and middle school vocal music program on a full-time basis. The fiscal condition of LEAs across the country is mixed, but many school districts continued to face funding challenges in the 2010-2011 school year. One sign of state fiscal stress has been mid-year budget reductions resulting from lower revenues than those forecasted. Nationwide, in state fiscal year 2011, one of the program areas where many states made mid- year general fund expenditure reductions was K-12 education, according to the Fiscal Survey of States. Out of the 23 states that reported making mid-year reductions, 18 states reduced K-12 education funding. Looking forward to fiscal year 2012, reductions for K-12 education had been proposed in 16 states, according to the Fiscal Survey of States. Given that nearly half of education funding, on average, is provided by the states, the impact of state-level reductions to education could significantly affect LEA budgets. Over the course of our work on the Recovery Act, our surveys of LEAs have shown a mixed but deteriorating fiscal situation for the nation’s LEAs. Specifically, our survey of LEAs conducted in the 2009-2010 school year indicated that an estimated one-third of LEAs reported experiencing funding decreases in that year. Our survey conducted in the 2010-2011 school year showed that an estimated 41 percent of LEAs reported experiencing funding decreases in that year. Moreover, nearly three-quarters (72 percent) anticipated experiencing funding-level decreases in school year 2011-2012 (see fig. 3). Further, LEAs anticipated decreases of varying amounts—24 percent expected decreases between 1 and 5 percent, 29 percent expected decreases between 6 and 10 percent, and 19 percent expected decreases over 10 percent. All types of LEAs have had to cope with declining budgets in the past few school years, but LEAs with high student poverty rates were especially hard hit. LEAs that had high student poverty rates (54 percent) more often reported experiencing funding decreases compared to those with low student poverty rates (38 percent). Additionally, 45 percent of suburban LEAs reported experiencing a decrease in funding from the 2009-2010 school year to the 2010-2011 school year. Likewise, 41 percent of rural LEAs and 33 percent of urban LEAs reported experiencing funding decreases in the same year. In addition, 62 percent of LEAs that experienced a decrease in funding in the 2010-2011 school year reported that they formed or planned to form an advisory committee or hold meetings with community stakeholders to develop budget recommendations as a cost-saving strategy. To address their funding decreases in school year 2010-2011, about one- quarter or more of LEAs reported taking actions such as reducing instructional supplies and equipment and cutting instructional positions. Moreover, about one-half of LEAs that expected a decrease in funding in the upcoming 2011-2012 school year reported that they would likely have to reduce instructional supplies and equipment or cut instructional and non-instructional positions in the 2011-2012 school year to address the budget shortfall (see fig. 4). LEAs across the country will soon exhaust their SFSF; ESEA Title I, Part A; and IDEA, Part B Recovery Act funds, which will place them at the edge of a funding cliff—meaning that they will not have these funds to help cushion budget declines in the upcoming 2011-2012 school year. However, many LEAs planned to spend Education Jobs Fund awards, which could mitigate some of the effects of the funding cliff. Congress created the Education Jobs Fund in 2010, which generally provides $10 billion to states to save or create education jobs for the 2010-2011 school year. States distribute the funds to LEAs, which may use the funds to pay salaries and benefits, and to hire, rehire, or retain education-related employees for the 2010-2011 school year. According to our survey, an estimated 51 percent of LEAs spent or planned to spend 75 to 100 percent of their Education Jobs fund allocation in the 2010-2011 school year and about 49 percent planned to spend the same amount in the 2011-2012 school year. The large majority of LEAs (72 percent) spent or planned to spend most of the funds on retaining jobs, as opposed to hiring new staff or rehiring former staff. State and LEA officials we visited stated that the actions they have taken to deal with decreased budgets and the expiration of their Recovery Act funds could have an impact on the educational services they provide. For example, officials at the Fairfield-Suisun Unified School District in California told us that they tried to make cuts that had the least impact on the classroom, but they had begun making cuts that would impact the students. For example, they reported that they will increase class sizes, cut administrative and student support staff, eliminate summer school programs, and close schools because of their decreased budget. LEA officials at the Newton Public School District in Massachusetts stated that they cut many support services and were reviewing under-enrolled classes to determine which programs to eliminate. They stated that they tried to insulate cuts to mitigate the impact on student learning, but stated that the cuts would nonetheless negatively impact the students’ educational services. In Hawaii, SEA officials told us that their state was considering certain cost-saving scenarios to help mitigate the state’s strained fiscal climate, including decreasing wages for all SEA employees, increasing class size, and eliminating school bus transportation for all students except those with special needs. Officials noted that eliminating bus transportation could lead to increased student absences and could be a challenge for students living in rural areas. Additionally, officials at the Center Point-Urbana School District in Iowa told us that they made several adjustments to save costs and be more efficient, such as reducing custodial staff. Because it is a small, rural district, Center Point-Urbana officials told us that any further cuts would jeopardize the quality of education it can provide to students. Further, a recent Center on Education Policy report found funding cuts also hampered progress on school reform. According to their national survey of school districts, they estimate that 66 percent of school districts with budget shortfalls in 2010-2011 responded to the cuts by either slowing progress on planned reform, or postponing or stopping reform initiatives. Further, about half (54 percent) of the districts that anticipated shortfalls in 2011-2012 expected to take the same actions next school year. According to our survey, over a quarter of LEAs decreased their spending on special education because of the local MOE spending flexibility allowed under IDEA and the large influx of Recovery Act IDEA funds. Under IDEA, LEAs must generally not reduce the level of local expenditures for children with disabilities below the level of those expenditures for the preceding year. The law allows LEAs the flexibility to adjust local expenditures, however, in certain circumstances. Specifically, in any fiscal year in which an LEA’s federal IDEA, Part B Grants to States allocation exceeds the amount the LEA received in the previous year, an eligible LEA may reduce local spending on students with disabilities by up to 50 percent of the amount of the increase. If an LEA elects to reduce local spending, those freed up funds must be used for activities authorized under the ESEA. Because Recovery Act funds for IDEA count as part of the LEA’s overall federal IDEA allocation, the total increase in IDEA funding for LEAs was far larger than the increases in previous years, which allowed many LEAs the opportunity to reduce their local spending. As we have previously reported, the decision by LEAs to decrease their local spending may have implications for future spending on special education. Because LEAs are required to assure that they will maintain their previous year’s level of local, or state and local, spending on the education of children with disabilities to continue to receive IDEA funds, if an LEA lowers its spending using this flexibility, the spending level that it must meet in the following year will be at this reduced level. If LEAs that use the flexibility to decrease their local spending do not voluntarily increase their spending in future years—after Recovery Act funds have expired—the total local, or state and local, spending for the education of students with disabilities may decrease, compared to spending before the Recovery Act. Many LEAs anticipate difficulty meeting the IDEA MOE requirement for the next few years and could experience financial consequences if they do not comply. Through our survey, we found that 10 percent of LEAs expected to have trouble meeting their MOE for school year 2010-11 and, in the 2011-12 school year, this percentage jumps to 24 percent of LEAs. For example, Florida officials reported that nearly two-thirds of the LEAs in their state may be in jeopardy of not meeting their MOE requirement. Further, Education officials told us the LEA MOE amount can be difficult to calculate because there are various exceptions and adjustments LEAs can make, such as considering spending changes in the case of students with high-cost services leaving a program, hiring lower salary staff to replace retirees, and extensive one-time expenditures like a computer system. Education officials reported that they provided technical assistance to help states and LEAs understand how to include these exceptions and adjustments in their MOE calculations. Of LEAs that exercised the flexibility to adjust their IDEA MOE amount, 15 percent reported they anticipated having difficulty meeting MOE in 2010- 11 even though their required local spending level was reduced. And in 2011-12, 33 percent of the LEAs that took advantage of the MOE adjustment still expected difficulty in meeting their MOE level. According to Education’s guidance, if an LEA is found to have not maintained its MOE, the state is required to return to Education an amount equal to the amount by which the LEA failed to maintain effort. Additionally, IDEA does not provide LEAs an opportunity to receive a waiver from MOE requirements. As of August 2011, seven states had applied for a total of 11 waivers of IDEA MOE requirements and other states reported they were considering applying for a waiver because of fiscal declines in their states. In addition to LEAs, states must also meet MOE requirements. To be eligible for Part B funding, states must provide an assurance that they will not reduce the amount of state financial support for special education below the amount of that support for the preceding fiscal year, and must operate consistent with that assurance. However, Education may waive this state MOE requirement under certain circumstances. While Education has granted full waivers for five instances, it has also denied or partially granted waivers in five instances for Iowa, Kansas, Oregon, and South Carolina (twice) and is currently reviewing an additional waiver request from Kansas (see table 2). In their waiver requests, all seven states cited declining fiscal resources as the reason for not being able to maintain their spending on special education, but waiver requests varied in amount from nearly half a million dollars in West Virginia to over $75 million in South Carolina. Education’s guidance states that it considers waiver requests on a case- by-case basis and seeks to ensure that reductions in the level of state support for special education are not greater in proportion than the reduction in state revenues. In addition, as part of its review of waiver requests, Education seeks to ensure that states are not reducing spending on special education programs more severely than other areas. When Education receives a request for a waiver, officials told us they request state budget data to better understand the state’s calculation of MOE, and to assess whether granting a waiver would be appropriate. According to Education officials, as well as state officials, this process can be lengthy and may involve a lot of back-and-forth between the department and the state to acquire the necessary information, understand the state’s financial situation, and determine the state’s required MOE level. Once all the data have been collected and reviewed to determine whether the state experienced exceptional or uncontrollable circumstances and whether granting a waiver would be equitable due to those circumstances, Education officials inform states that their waiver has either been approved, partially granted, or denied. For states whose waivers are denied or are partially granted, according to Education officials, the state must provide the amount of the MOE shortfall for special education during the state fiscal year in question or face a reduction in its federal IDEA grant award by the amount equal to the MOE shortfall. Education officials told us that because a state must maintain financial support for special education during a fiscal year, IDEA does not permit a state to make up this shortfall after that fiscal year is over. Education officials also told us that once a state’s funding is reduced, the effect may be long-lasting in that the IDEA requires that each subsequent year’s state allocation be based, in part, on the amount the state received in the prior year. Both Kansas and South Carolina now face reductions of IDEA awards for fiscal year 2012 of approximately $2 million and $36 million, respectively. Education officials reported that it is impossible to predict with certainty the effect this may have on the states’ future IDEA awards, but they indicated that these reductions may have a long-lasting negative effect on future IDEA awards. South Carolina has filed an “Appeal of Denial of Waiver Request/Reduction in Funds” with Education’s Office of Hearings and Appeals regarding Education’s decision to partially grant its waiver request for 2009-2010. Education plans to conduct two common types of systematic program assessment: program evaluation and performance measurement. In the coming years, Education plans to produce an evaluation that will provide an in-depth examination of various Recovery Act programs’ performance in addressing educational reform. In addition to this overall assessment of the programs’ results, for the SFSF program, Education plans to measure states’ ability to collect and publicly report data on preestablished indicators and descriptors of educational reform. Education intends for this reporting to be a means for improving accountability to the public in the shorter term. Education plans to conduct a national evaluation to assess the results of Recovery Act-funded programs and initiatives addressing educational reform. The evaluation is intended to focus on efforts to drive innovation, improve school performance, and reduce student achievement gaps. According to Education officials, the programs covered by the evaluation include SFSF; IDEA, Part B; ESEA Title I, Part A; Race to the Top; the Teacher Incentive Fund; and Ed Tech. Including these Recovery Act education programs in one evaluation will allow for a broad view of the results of programs focused on education reform. As part of this integrated evaluation, Education plans to issue four reports over the next several years that are descriptive in nature, with the final report in 2014 including analysis of outcome data. The four planned reports are described in table 3. In addition, studies are planned related to measuring progress in meeting performance goals under the Recovery Act, according to Education officials. For example, Education’s Policy and Program Studies Service will issue a report in 2012 that will examine teacher evaluation and other teacher-related issues based on state reported data under SFSF and through Education’s EDFacts database. Although the Recovery Act does not require states and LEAs to conduct evaluations of their Recovery Act-funded reform activities, officials in a few states and LEAs we talked with said they are considering conducting evaluations. For example, Mississippi has implemented LEA program evaluations of some Recovery Act funded initiatives using student achievement data. At the local level, between about 43 and 56 percent of LEAs reported that they are neither collecting nor planning to collect data that would allow for the evaluation of the use of SFSF; IDEA, Part B; or ESEA Title I, Part A funds, while between about 19 and 31 percent of LEAs indicated they were either collecting or planning to collect information for this purpose. (See table 4.) For example, officials at one LEA in Massachusetts said that they are evaluating their use of IDEA Recovery Act funds to provide special education programs within the district rather than through private schools. In addition to the more comprehensive evaluation, Education intends to assess each state’s progress on collecting and publicly reporting data on all of the 37 SFSF-required indicators and descriptors of educational reform because, according to Education officials, the public will benefit from having access to that information. States have until September 30, 2011, to report this performance data. As part of that assessment, Education officials said they have reviewed states’ SFSF applications and self-reported annual progress reports on uses of funds and the results of those funds on education reform and other areas. Coupled with reviews of the applications and annual reports, Education requires states that receive SFSF funds to maintain a public Web site that displays information responsive to the 37 indicator and descriptor requirements in the four reform areas. For example, on its Web site as of August 2011, Iowa’s SEA reported that it includes 9 of the 12 required reporting indicators for its statewide longitudinal data system. These Web-based, publicly-available data are intended for use within each state, according to Education officials, because individual states and communities have the greatest power to hold their SEAs and LEAs accountable for reforms. Specifically, Education intended this information to be available to state policymakers, educators, parents, and other stakeholders to assist in their efforts to further reforms by publicly displaying the strengths and weaknesses in education systems. Officials in most of the states we talked with said that the requirements to report this information are useful. For example, some state officials pointed out that publicly reporting such data could serve as a catalyst of reform by pointing out areas where the state could improve. In addition to each state publicly reporting this information, Education plans to report states’ progress toward complying with the conditions of the SFSF grant at the national level. Education officials said they will summarize states’ ability to collect and report on the required indicators and descriptors across the four reform areas. Not all states were able to collect and report this information as of March 2011, but states have until September 30, 2011, to do so. If a state could not report the information, it was required to create a plan to do so as soon as possible and by the September deadline. As part of its reporting, Education will summarize states’ responses for certain indicators and descriptors and present it on Education’s Web site. For many other indicators and all three descriptors, Education officials said that it faces challenges in presenting a national perspective on states’ progress. For example, there are no uniform teacher performance ratings among LEAs within states and across states, which limits Education’s ability to present comparisons. Moreover, states are not required to present information in a consistent manner, making it difficult to present aggregated or comparative data for many of the indicators. Also, Education officials said that because information addressing the three descriptors is presented in narrative, it is difficult to provide summary information. According to Education officials, they did not provide specific guidance on how states are to report the other data elements because they did not want to be too prescriptive. However, according to Education officials, through their reviews of state Web sites they found cases where the sites do not clearly provide the information, and states have acted on Education’s suggested improvements to the sites. Additionally, Education plans to use states’ progress toward collecting and reporting this information to inform whether states are qualified to participate in or receive funds under future reform-oriented grant competitions, such as they did for the Race to the Top program. GAO has found that using applicant’s past performance to inform eligibility for future grant competitions can be a useful performance accountability mechanism. Education communicated its intention to use this mechanism in the final requirements published in the Federal Register on November 12, 2009, but Education has not yet specified how this mechanism will be used. As a result, officials in most of the states we spoke with said they were unaware of how Education planned to use the indicators or how Education would assess them with regards to their efforts to meet assurances. Education officials said they also plan to use the information to inform future policy and technical assistance to states and LEAs. To help ensure accountability of Recovery Act funds, a wide variety of entities oversee and audit Recovery Act programs, and Education officials told us they routinely review monitoring and audit results from many of these sources. Federal and state entities we spoke with described various accountability mechanisms in place over Recovery Act education programs, including financial reviews, program compliance reviews, and recipient report reviews. For example, state auditors and independent public accountants conduct single audits that include tests of internal control over and compliance with grant requirements such as allowable costs, maintenance of effort, and cash management practices. The Department of Education, the Education Office of Inspector General (OIG), and various state entities also examine internal controls and financial management practices, as well as data provided quarterly by grant recipients and subrecipients as required by section 1512 of the Recovery Act. Additionally, many of these entities conduct programmatic reviews that include monitoring compliance with program requirements, such as funding allowable activities and achieving intended program goals. These accountability efforts have helped identify areas for improvement at the state and local levels, such as issues with cash management, subrecipient monitoring, and reporting requirements. For example, since 2009 the Education OIG has recommended that several states improve their cash management procedures after finding that states did not have adequate processes to both minimize LEA cash balances and ensure that LEAs were properly remitting interest earned on federal cash advances. The Education OIG also found that several states had not developed plans to monitor certain Recovery Act funds or had not incorporated Recovery Act-specific requirements into their existing monitoring protocols. With regard to recipient reporting, various recipients had difficulty complying with enhanced reporting requirements associated with Recovery Act grants. For example, an independent public accounting firm contracted by the Mississippi Office of the State Auditor found 32 instances of noncompliance with reporting requirements in the 43 LEAs it tested. Some of the findings included failure to file quarterly recipient reports on Recovery Act funds as required and providing data in the quarterly reports that differed from supporting documentation. During the fiscal year 2010 single audits of the state governments we visited, auditors identified noncompliance with certain requirements that could have a direct and material effect on major programs, including some education programs in California and Massachusetts. In Iowa and Mississippi, the auditors found that the states complied in all material respects with federal requirements applicable to each of the federal programs selected by the auditors for compliance testing. Auditors also identified material weaknesses and significant deficiencies in internal control over compliance with SFSF; ESEA Title I, Part A; and IDEA, Part B, for some SEAs and LEAs we visited. For example, auditors reported that California’s SEA continued to have a material weakness because it lacked an adequate process of determining the cash needs of its ESEA Title I subrecipients. At the state level, Iowa, Massachusetts, and Mississippi were found to have no material weaknesses in internal control over compliance related to Recovery Act education funds, though auditors did identify significant deficiencies in Iowa. For example, in Iowa auditors found several instances of excess cash balances for the SFSF grant. According to our survey of LEAs, nearly 8 percent of all LEAs reported having Single Audit findings related to Recovery Act education funds. For example, an auditor found that one LEA in Iowa had a material weakness because it did not properly segregate duties for SFSF—one employee was tasked with both preparing checks and recording transactions in the general ledger. In Massachusetts, the auditors identified a material weakness because an LEA was not complying with Davis-Bacon Act requirements, such as failing to obtain certified payrolls for vendors contracted for special education construction projects in order to verify that employees were being paid in accordance with prevailing wage rates. As part of the single audit process, grantees are responsible for follow-up and corrective action on all audit findings reported by their auditor, which includes preparing a corrective action plan at the completion of the audit. For all the 2010 single audit findings described above, the recipients submitted corrective action plans. Our survey of LEAs showed that federal and state entities also have been monitoring and auditing their Recovery Act funds through both site visits and desk reviews. As figure 5 indicates, over a third of LEAs reported their SEA conducted a desk review to oversee their use of Recovery Act funds, and nearly a fifth reported their SEA conducted a site visit. States are responsible for ensuring appropriate use of funds and compliance with program requirements at the subrecipient level, and Education in turn works to ensure that the states are monitoring and implementing federal funds appropriately. Education does select some school districts for desk reviews and site visits, as shown in figure 5. While few LEAs reported that Education monitored their Recovery Act funds directly, Education program offices told us that as part of their oversight efforts, they routinely review and follow up on information from a broad range of other entities’ monitoring and audit reports. SFSF; ESEA Title I, Part A; and IDEA, Part B program officials told us that information drawn from multiple sources helps to (1) inform their monitoring priorities, (2) ensure states follow up on monitoring findings, and (3) target technical assistance in some cases. Education’s approach to ensuring accountability of SFSF funds, which was designed to take into consideration the short timeframes for implementing this one-time stimulus program, as well as the need for unprecedented levels of accountability, has helped some states address issues quickly. Two of Education’s goals in monitoring these funds are to (1) identify potential or existing problem areas or weaknesses and (2) identify areas where additional technical assistance is warranted. SFSF officials told us that they have prioritized providing upfront technical assistance to help states resolve management issues before they publish monitoring reports. This is intended to be an iterative process of communicating with states about issues found during monitoring, helping them develop action plans to address findings, and working with them to ensure successful completion of any corrections needed. Some states we spoke with told us that Education’s approach to SFSF monitoring allowed them to resolve issues prior to Education issuing a final monitoring report to the state, and also allowed them to correct systemic or cross-programmatic issues beyond SFSF. For example, New York officials told us that after their monitoring review, Education provided a thorough explanation of the corrective actions that were required. This allowed the state the opportunity to resolve the issues, which were specific to individual subrecipients, prior to the issuance of Education’s final monitoring report. North Carolina officials said Education’s monitoring helped them to implement new cash management practices, and reported that Education staff were proactive about communicating with the state to enable the issue to be resolved. District of Columbia officials also stated that Education’s SFSF monitoring raised awareness of subgrantee cash management requirements and the need for state policies for those requirements across programs. District of Columbia, New York, and North Carolina officials all reported that the technical assistance they received as part of Education’s SFSF monitoring follow up was timely and effective. While some states reported helpful and timely contact from Education after their monitoring reviews were completed, we found that communication varied during the follow-up process, which left some states waiting for information about potential issues. According to data provided by Education, most states that were monitored before June 2011 received contact at least once before the department issued a draft report with monitoring results. However, several states received no contact from Education before they received draft reports presenting areas of concern. Education officials explained that if complete documentation was available by the end of the state’s monitoring review, the situation would require less follow-up communication than if the state needed to submit additional documentation. Additionally, while the department did contact most states after monitoring reviews, they did not consistently communicate feedback to states regarding their reviews. Some states that did not receive monitoring feedback promptly, either orally or in writing, have expressed concerns about their ability to take action on potential issues. For example, an Arizona official told us in June 2011 that the state had not been contacted about the results of its monitoring visit in December 2010 and that follow up contact from Education would have been helpful to make any necessary adjustments during the final months of the SFSF program in the state. According to Education officials, the department did communicate with Arizona on several occasions following the monitoring visit, primarily to request additional information or clarification on such things as the state’s method for calculating MOE. Education officials told us in that as a result of receiving further information and documentation from the state, they were finalizing the state’s draft report and would share the information with the state as soon as possible. In July 2011 California officials told us they had not heard about the results of the monitoring review that was completed 10 months earlier in September 2010. California officials told us that Education raised a question during its review, but the state was unsure about the resolution and whether they would be required to take corrective action. Education officials told us in September 2011 that they had numerous communications with California officials, often to clarify issues such as the state’s method for calculating MOE, and that they were still in communication with the state as part of the process of identifying an appropriate resolution. As a result of Education’s approach to monitoring, the length of time between the Department’s monitoring reviews and the issuance of the monitoring reports varied greatly—from as few as 25 business days to as many as 265 business days (see fig. 6). The need to address issues identified during monitoring and the subsequent frequency of communication during monitoring follow up can affect the amount of time it takes to issue reports with monitoring results. For example, after Maine’s desk review in September 2010, Education contacted the state 10 times to request additional information and clarification before sending the state a draft interim report 7 months later in April 2011. In contrast, Rhode Island was contacted once after its site visit, and Education provided a draft report with results about a month later. In part because of the need for continuous collaboration with states, Education’s written SFSF monitoring plan does not include specific internal time frames for when it will communicate the status of monitoring issues to states after desk reviews and site visits. In the absence of such time frames, the length of time between Education’s monitoring reviews and issuance of draft interim reports with monitoring feedback varied widely across states. Education officials told us they believe states benefit more from the iterative monitoring process that emphasizes early resolution of issues than through the issuance of written monitoring reports. Due to its SFSF monitoring approach, Education has provided limited information publicly on the results of its oversight efforts, but it has plans to provide more detailed reports on what it has found during monitoring in the future and has taken steps to share information on common issues found among the states. While most SFSF monitoring reviews have been completed for the 2010-2011 cycle, Education has not communicated information about most of these reviews to the public and the states’ governors. Of the 48 completed reviews, only three reports for site visits and 12 reports for desk reviews have been published (see fig. 7). Additionally, the reports that have been published are brief and present a general description of the area of concern without detailing what the specific issues and their severity were. For example, in Tennessee’s final letter report, Education wrote that it found issues with LEA funding applications, fiscal oversight, allowable activities, cash management, and subrecipient monitoring. However, Education officials told us that they planned to publish more detailed final reports after the 2011-2012 SFSF monitoring cycle, at which point they would have completed both a desk review and a site visit for each state. In the meantime, to help other states learn from common issues found during SFSF monitoring reviews, Education provided technical assistance to all states via a webinar in February 2011. The webinar highlighted lessons learned during monitoring reviews, including best practices for cash management and separate tracking of funds. To meet our mandate to comment on recipient reports, we continued to monitor recipient-reported data, including data on jobs funded. For this report, we focused our review on the quality of data reported by SFSF; ESEA Title I, Part A; and IDEA Part B education grant recipients. Using education recipient data from the eighth reporting period, which ended June 30, 2011, we continued to check for errors or potential problems by repeating analyses and edit checks reported in previous reports. Education uses various methods to review the accuracy of recipient reported data to help ensure data quality. Specifically, Education compared data from the agency’s grant database and financial management system with recipient reported data. These systems contain internal data for every award made to states, including the award identification number, award date, award amount, outlays, and recipient names. Education program officials told us they verified expenditure data in states’ quarterly reports by comparing it to data in their internal grants management system. Education officials told us that state expenditures can vary from outlays depending on how the state reimburses its subrecipients, but Education officials review the figures to determine if they are reasonable. In addition, SFSF officials told us they cross-walked the recipient reported data with previous quarterly reports to check for reasonableness. For example, the officials told us they compared the number of subrecipients and vendors from quarter to quarter to see if they increased or stayed the same, as would be expected for a cumulative data point. Education officials stated they worked directly with states to correct any issues found during their checks of recipient reported data. Overall, Education officials agreed that they have made significant progress in ensuring data quality, as compared to the early quarters when they had to focus on helping states understand basic reporting requirements. At this point, the program officials told us they do not generally see significant data quality issues or mistakes when they review recipient reports. In August 2011, the Education OIG reported that they performed 49,150 data quality tests of recipient reported data for grant awards and found anomalies in 4 percent of the tests. The OIG reported that the Department’s processes to ensure the accuracy and completeness of recipient reported data were generally effective. In addition to Education’s efforts to ensure data quality, selected state officials we spoke with said they examined recipient reports of individual subrecipients. For example, Georgia officials told us they reviewed FTE data for reasonableness, compared revenues and expenditures, and ensured all vendors were included in vendor payment reports. The officials stated that they followed up on any questionable items with district staff. As we previously reported, calculating FTE data presented initial challenges for many LEAs, and states worked to ensure the accuracy of the data through a variety of checks and systems. For example, the Mississippi Department of Education helped LEAs calculate FTE data correctly by providing LEAs spreadsheets with ready-made formulas. New York officials told us they examined the calculation of FTEs funded and compared that data with payroll records. North Carolina officials told us that through their review of LEA data, they identified issues with FTE figures that were budgeted but not ultimately verified against actual figures. To improve the accuracy of the data, the state now compares LEA payroll records to their budgeted figures. Education and selected states told us they used recipient reports to obtain data on expenditures, FTEs, and other activities funded to enhance their oversight and management efforts. For example, Education’s special education program officials and most selected states used recipient reported data to track the amount of Recovery Act funds LEAs spent. In particular, Education officials that administer the IDEA, Part B grant told us they monitored LEA expenditures through recipient reports because it was the only information they had on how much subrecipients had spent. Education and several selected states also told us they examined recipient reports as part of their monitoring efforts. For example, SFSF program officials reviewed recipient reports, particularly expenditure data and the subrecipient award amount, to help choose subrecipients for monitoring. Officials from Arizona, the District of Columbia, and North Carolina told us they used recipient reported data to assess risk and inform their monitoring efforts. For example, the District of Columbia tracks spending rates to ensure subrecipients meet the deadline for using the funds. If a subrecipient has lower than expected spending rates, they are subject to increased monitoring. Arizona uses recipient reported data to verify that internal controls are working, for instance by examining expenditure rates to see whether there may be cash management issues. In addition, Iowa and New York officials said they used recipient reported data to ensure appropriate uses of funds. State and LEA officials we spoke with continued to report greater ease in collecting and reporting data for recipient reports. As we previously reported, recipients told us they have gained more experience reporting and the reporting process was becoming routine. For example, Arizona officials told us that their centralized reporting process now runs with very little effort or burden on state and local recipients of Recovery Act education funds. Alaska officials stated that the early quarters were challenging for reporting, but the state training sessions with LEAs helped establish a smooth process by the third quarter. At the local level, an LEA official in Iowa told us that while recipient reporting was confusing in the beginning, her district changed some internal procedures and automated some calculations to make the process more efficient. One measure of recipients’ understanding of the reporting process is the number of noncompliant recipients. There were no non-compliers in the eighth reporting period for recipients of SFSF, ESEA Title I, Part A or IDEA, Part B funds. Although the recipient reporting process has become smoother over time, some states and LEAs noted that there continues to be a burden associated with meeting reporting requirements, particularly due to limited resources. For example, California officials stated it had been burdensome to collect data from over 1,500 LEAs when there were significant budget cuts. Officials from the Massachusetts SEA stated that the most burdensome aspect of recipient reporting was the short time frame for collecting data from nearly 400 LEAs when local staff were already stretched thin. At the local level, officials at a rural Mississippi school district stated that gathering the supporting documents for their quarterly reports was cumbersome and took a significant amount of time. For example, in the previous quarter one staff member had to upload more than 70 supporting documents to the state’s centralized reporting system. Further, Education officials noted that the improvements in the process for recipient reporting have not eliminated the burden on LEAs. Moreover, according to Education officials, although the primary goal of the Recovery Act grants was not reporting, grantees were spending significant amounts of time complying with the reporting process when the Department already had some data elements, such as grant awards and drawdowns, from other sources. Two recent actions indicate that recipient reporting could be expanded to funds beyond those from the Recovery Act. A White House Executive Order dated June 13, 2011, established a Government Accountability and Transparency Board (Board) to provide strategic direction for enhancing the transparency of federal spending and advance efforts to detect and remediate fraud, waste, and abuse in federal programs, among other things. By December 2011, the Board is required to develop guidelines for integrating systems that support the collection and display of government spending data, ensuring the reliability of those data, and broadening the deployment of fraud detection technologies. In addition, one of the objectives of proposed legislation—the Digital Accountability and Transparency Act of 2011 (DATA Act)—is to enhance transparency by broadening the requirement for reporting to include recipients of non- Recovery Act funds. According to Recovery.gov, during the quarter beginning April 1, 2011, and ending June 30, 2011, the Recovery Act funded approximately 286,000 FTEs using funds under the programs in our review (see fig. 8). Further, for this eighth round of reporting, similar to what we observed in previous rounds, education FTEs for these programs accounted for about half of all FTEs reported for the quarter. Following OMB guidance, states reported on FTEs directly paid for with Recovery Act funding, not the employment impact on suppliers of materials (indirect jobs) or on the local communities (induced jobs). According to Education officials, FTE numbers were expected to decrease over time because fewer prime recipients would be reporting as they exhaust all of their Recovery Act funds. FTE data provide an overall indication of the extent to which the Recovery Act met one of its intended goals of saving and creating jobs in order to help economic recovery, although some limitations with these data may make it difficult to determine the impact the Recovery Act made in any one particular reporting period. In May 2010, GAO identified a number of issues that could lead to under- or over-reporting of FTEs. Our analysis of the data on Recovery.gov showed variations in the number of FTEs reported, which Education officials said could be explained by states’ broad flexibility in determining what they used Recovery Act SFSF funds on and when they allocated those funds. For example, Illinois reported less than 1 FTE in the second reporting round and over 40,000 in the third reporting round for the SFSF education stabilization funds. Education officials stated that rarely would the districts in one state hire 40,000 teachers in 1 quarter. Rather, Education officials said the state likely made a decision to allocate those funds in that quarter to teacher salaries. Similarly, from the fourth to fifth reporting rounds, the number of FTEs more than doubled in Arkansas and nearly doubled in Florida for the SFSF education stabilization funds. Education officials explained that any significant increase or decrease in FTEs likely reflects the state’s decision to allocate the funds in one quarter rather than during another quarter. They noted that some states used their funds consistently over time, whereas others used a large portion of the funds at the beginning or end of a school year. Therefore, sharp increases or decreases in the FTE data are not uncommon or unexpected. Delaware reported no FTEs for SFSF government services funds in the eighth reporting round. Education officials stated that Delaware decided to use those funds on operating costs, not salaries. Education officials told us that recipient reported FTE data were useful to them when assessing the impact of grants on jobs funded. Education does not have any comparable data on jobs funded. Therefore, FTE data provided them a measure of the extent to which the Recovery Act programs, particularly SFSF, accomplished that specific goal of funding jobs. According to Education officials, determining jobs funded was an important, but secondary impact of the Recovery Act funding for the ESEA Title I, Part A and IDEA, Part B grants. The purpose of ESEA Title I is to ensure that all children have a fair, equal, and significant opportunity to obtain a high-quality education by providing financial assistance to LEAs and schools with high numbers or percentages of poor children. The purpose of IDEA, Part B is to ensure that all students with disabilities have available to them a free appropriate public education that emphasizes special education and related services designed to meet their unique needs. According to Education officials, some of the services provided to students using the ESEA Title I, Part A and IDEA, Part B Recovery Act funds led to the creation of jobs while others served the needs of children but did not directly create jobs. Therefore, while FTE data did provide a useful indication of jobs funded for those programs under the Recovery Act, other measures such as student outcomes will be more useful after the Recovery Act ends when assessing the impact of programs with education-related goals. A key goal of Recovery Act funding was to create and retain jobs and, for SFSF, to advance education reforms, and our work has consistently shown that LEAs primarily used their funding to cover the cost of retaining jobs. Additionally, the transparency required by Recovery Act reporting allowed the public access to data on the number of jobs funded and the amount of funds spent, but as the deadline for obligating funds approaches, little is currently known nationally about the advancement of the four areas of educational reform. Education’s planned evaluation could make an important contribution to understanding any outcomes related to reform. This national evaluation could be especially important considering that officials in many of our selected states have not planned evaluations, and many LEAs reported that they are neither collecting nor planning to collect data to evaluate the effect of SFSF on education reform efforts. While Education will assess results through its own evaluation, it will not be fully completed for several years. In the shorter term, state reporting on the SFSF indicators and descriptors of reform is the mechanism through which Education and the public track the extent to which a state is making progress. As these final data become available at the end of this fiscal year, Education has plans for assessing state compliance and analyzing the results in order to present, where possible, information to policymakers and the public. Given the accountability and transparency required by the Recovery Act, we feel it is important for Education to follow through with its plans to hold states accountable for presenting performance information and in its efforts to assist the public and policymakers in understanding the reform progress made by states. In addition to evaluations and reporting, program accountability can be facilitated through monitoring and taking corrective action on audit findings. Because of the historic amount of Education funding included in the Recovery Act, effective oversight and internal controls are of fundamental importance in assuring the proper and effective use of federal funds to achieve program goals. Education’s new SFSF monitoring process took into account the one-time nature of these funds and was designed to make states aware of monitoring and audit findings to help them resolve any issues or make improvements to their program prior to Education publishing a final report. However, Education’s implementation of this process has varied, with some states waiting months to get feedback on monitoring results. When states do not receive timely feedback on monitoring findings, they may not have time to resolve these issues before they have obligated their SFSF funds. To ensure all states receive appropriate communication and technical assistance for SFSF, consistent with what some states received in response to SFSF monitoring reviews, we recommend that the Secretary of Education establish mechanisms to improve the consistency of communicating monitoring feedback to states, such as establishing internal time frames for conveying information found during monitoring. We provided a draft copy of this report to Education for review and comment. Education’s comments are reproduced in appendix III. Education agreed with our recommendation to improve the consistency of communicating SFSF monitoring feedback to states. Specifically, Education responded that their SFSF monitoring protocols should include procedures for effectively communicating the status of monitoring feedback to states. Additionally, Education officials reiterated that the new SFSF monitoring approach was designed as an iterative method to take into consideration the large amount of funding, the complexities of state budget situations, the need to expeditiously resolve monitoring issues due to the short time frames, and the large numbers and diverse types of grantees. Through this monitoring approach, Education officials noted that the department has completed reviews of all but one state and is currently planning the second cycle of monitoring. Education officials reported that the feedback provided to states through this new approach was ongoing and that not all states have required the same level of follow up discussions. GAO agrees that this approach is appropriate given the one-time nature of the SFSF program and, as we point out in our report, this approach has helped states to quickly address potential issues. Since the amount of contact between Education and the states can be numerous and involve multiple officials and agencies, we believe that any actions taken by the department to improve the consistency of communication with states will improve its monitoring process. Education also provided some additional and updated information about their monitoring efforts and we modified the report to reflect the data they provided. In addition, Education provided us with several technical comments that we incorporated, as appropriate. We are sending copies of this report to relevant congressional committees, the Secretary of Education, and other interested parties. In addition, 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 about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. To obtain national level information on how Recovery Act funds made available by the U.S. Department of Education (Education) under SFSF; ESEA Title I, Part A; and IDEA, Part B were used at the local level, we designed and administered a Web-based survey of local educational agencies (LEA) in the 50 states and the District of Columbia. We surveyed school district superintendents across the country to learn how Recovery Act funding was used and what impact these funds had on school districts. We selected a stratified random sample of 688 LEAs from the population of 15,994 LEAs included in our sample frame of data obtained from Education’s Common Core of Data (CCD) in 2008-09. We conducted our survey between March and May 2011, with a 78 percent final weighted response rate. We took steps to minimize nonsampling errors by pretesting the survey instrument with officials in three LEAs in January 2011 and February 2011. Because we surveyed a sample of LEAs, survey results are estimates of a population of LEAs and thus are subject to sampling errors that are associated with samples of this size and type. Our sample is only one of a large number of samples that we might have drawn. As each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. All estimates produced from the sample and presented in this report are representative of the in-scope population and have margins of error of plus or minus 7 percentage points or less for our sample, unless otherwise noted. We excluded nine of the sampled LEAs because they were no longer operating in the 2010-11 school year or were not an LEA, and therefore were considered out of scope. This report does not contain all the results from the survey. The survey and a more complete tabulation of the results can be viewed at GAO-11-885SP. At the state and local level, we conducted site visits to four states (California, Iowa, Massachusetts, and Mississippi), and contacted an additional seven states (Alaska, Arizona, Georgia, Hawaii, North Carolina, New York, and Wyoming) and the District of Columbia to discuss how they were using, monitoring, and planning to evaluate the effect of their Recovery Act funds. In addition, we contacted officials from Florida, Kansas, and South Carolina for information regarding IDEA, Part B waivers. We selected these states in order to have an appropriate mix of recipients that varied across certain factors, such as drawdown rates, economic response to the recession, and data availability, with consideration of geography and recent federal monitoring coverage. During our site visits, we met with SFSF, ESEA Title I, and IDEA officials at the state level as well as LEAs and an Institution of Higher Education (IHE). For the additional seven states, we gathered information by phone or e-mail from state education program officials on fund uses, monitoring, and evaluation. We also met with program officials at Education to discuss ongoing monitoring and evaluation efforts for Recovery Act funds provided through SFSF, ESEA Title I, and IDEA. We also interviewed officials at Education and reviewed relevant federal laws, regulations, guidance, and communications to the states. Further, we obtained information from Education’s Web site about the amount of funds these states have drawn down from their accounts with Education. The recipient reporting section of this report responds to the Recovery Act’s mandate that we comment on the estimates of jobs created or retained by direct recipients of Recovery Act funds. For our review of the eighth submission of recipient reports covering the period from April 1, 2011, through June 30, 2011, we built on findings from our prior reviews of the reports. We performed edit checks and basic analyses on the eighth submission of recipient report data that became publicly available at Recovery.gov on July 30, 2011. To understand how the quality of jobs data reported by Recovery Act education grantees has changed over time, we compared the 8 quarters of recipient reporting data that were publicly available at Recovery.gov on July 30, 2011. In addition, we also reviewed documentation and interviewed federal agency officials from Education who have responsibility for ensuring a reasonable degree of quality across their programs’ recipient reports. Due to the limited number of recipients reviewed and the judgmental nature of the selection, the information we gathered about state reporting and oversight of FTEs is limited to those selected states in our review and not generalizable to other states. GAO’s findings based on analyses of FTE data are limited to those Recovery Act education programs and time periods examined and are not generalizable to any other programs’ FTE reporting. We compared, at the aggregate and state level, funding data reported directly by recipients on their quarterly reports against the recipient funding data maintained by Education. The cumulative funding data reported by the recipients aligned closely with the funding data maintained by the Department of Education. An Education Inspector General report included a similar analysis comparing agency data to recipient reported data from the first quarter of 2010. Although not directly comparable to our analysis, their assessment identified various discrepancies between agency and recipient reported data. We also noted some discrepancies across the education programs we reviewed where the state recipients’ reported expenditures were either greater or less than 10 percent of the respective outlays reported by Education. In general, however, we consider the recipient report data to be sufficiently reliable for the purpose of providing summary, descriptive information about FTEs or other information submitted on grantees’ recipient reports. To update the status of open recommendations from previous bimonthly and recipient reporting reviews, we obtained information from agency officials on actions taken in response to the recommendations. We conducted this performance audit from October 2010 to September 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 this appendix, we update the status of agencies’ efforts to implement the 16 recommendations that remain open and are not implemented, 8 newly implemented recommendations, and 1 newly closed recommendation from our previous bimonthly and recipient reporting reviews. Recommendations that were listed as implemented or closed in a prior report are not repeated here. Lastly, we address the status of our matters for congressional consideration. Given the concerns we have raised about whether program requirements were being met, we recommended in May 2010 that the Department of Energy (DOE), in conjunction with both state and local weatherization agencies, develop and clarify weatherization program guidance that: Clarifies the specific methodology for calculating the average cost per home weatherized to ensure that the maximum average cost limit is applied as intended. Accelerates current DOE efforts to develop national standards for weatherization training, certification, and accreditation, which is currently expected to take 2 years to complete. Sets time frames for development and implementation of state monitoring programs. Revisits the various methodologies used in determining the weatherization work that should be performed based on the consideration of cost-effectiveness and develops standard methodologies that ensure that priority is given to the most cost- effective weatherization work. To validate any methodologies created, this effort should include the development of standards for accurately measuring the long-term energy savings resulting from weatherization work conducted. In addition, given that state and local agencies have felt pressure to meet a large increase in production targets while effectively meeting program requirements and have experienced some confusion over production targets, funding obligations, and associated consequences for not meeting production and funding goals, we recommended that DOE clarify its production targets, funding deadlines, and associated consequences, while providing a balanced emphasis on the importance of meeting program requirements. DOE generally concurred with these recommendations and has made some progress in implementing them. For example, to clarify the methodology for calculating the average cost per home, DOE has developed draft guidance to help grantees develop consistency in their average cost per unit calculations. The guidance further clarifies the general cost categories that are included in the average cost per unit. DOE had anticipated issuing this guidance in June 2011, but as of late July 2011 this guidance has not yet been finalized. In response to our recommendation that it develop and clarify guidance that develops a best practice guide for key internal controls, DOE distributed a memorandum dated May 13, 2011, to grantees reminding them of their responsibilities to ensure compliance with internal controls and the consequences of failing to do so. DOE officials stated that they rely on existing federal, state, and local guidance; their role is to monitor states to ensure they enforce the rules. DOE officials felt that there were sufficient documents in place to require internal controls, such as the grant terms and conditions and a training module. Because all of the guidance is located in one place, the WAPTAC Web site, DOE officials commented that a best practice guide would be redundant. Therefore, DOE officials stated that they do not intend to fully implement GAO’s recommendation. To better ensure that Energy Efficiency and Conservation Block Grant (EECBG) funds are used to meet Recovery Act and program goals, we recommended that DOE explore a means to capture information on the monitoring processes of all recipients to make certain that recipients have effective monitoring practices. DOE generally concurred with this recommendation, stating that “implementing the report’s recommendations will help ensure that the Program continues to be well managed and executed.” DOE also provided additional information on changes it has implemented. DOE added additional questions to the on-site monitoring checklists related to subrecipient monitoring to help ensure that subrecipients are in compliance with the terms and conditions of the award. These changes will help improve DOE’s oversight of recipients, especially larger recipients, which are more likely to be visited by DOE project officers. However, not all recipients receive on-site visits. As noted previously, we believe that the program could be more effectively monitored if DOE captured information on the monitoring practices of all recipients. To better ensure that Energy EECBG funds are used to meet Recovery Act and program goals, we recommended that DOE solicit information from recipients regarding the methodology they used to calculate their energy-related impact metrics and verify that recipients who use DOE’s estimation tool use the most recent version when calculating these metrics. In our report, we concluded that DOE needed more information regarding the recipients’ estimating methods in order to assess the reasonableness of energy-related estimates and thus determine the extent to which the EECBG program is meeting Recovery Act and program goals for energy- related outcomes. DOE officials noted that they have made changes to the way they collect impact metrics in order to apply one unified methodology to the calculation of impact metrics. DOE issued guidance effective June 23, 2011, that eliminates the requirement for grant recipients to calculate and report estimated energy savings. DOE officials said the calculation of estimated impact metrics will now be performed centrally by DOE by applying known national standards to existing grantee-reported performance metrics. Based on DOE’s action, we concluded that DOE has addressed the intent of this recommendation. To help ensure that grantees report consistent enrollment figures, we recommended that the Director of the Department of Health and Human Services’ (HHS) Office of Head Start (OHS) should better communicate a consistent definition of “enrollment” to grantees for monthly and yearly reporting and begin verifying grantees’ definition of “enrollment” during triennial reviews. OHS issued informal guidance on its Web site clarifying monthly reporting requirements to make them more consistent with annual enrollment reporting. This guidance directs grantees to include in enrollment counts all children and pregnant mothers who are enrolled and have received a specified minimum of services (emphasis added). According to officials, OHS is considering further regulatory clarification. To oversee the extent to which grantees are meeting the program goal of providing services to children and families and to better track the initiation of services under the Recovery Act, we recommended that the Director of OHS should collect data on the extent to which children and pregnant women actually receive services from Head Start and Early Head Start grantees. OHS has reported that, in order to collect information on services provided to children and families, it plans to require grantees to report average daily attendance, beginning in the 2011-2012 school year. To provide grantees consistent information on how and when they will be expected to obligate and expend federal funds, we recommended that the Director of OHS should clearly communicate its policy to grantees for carrying over or extending the use of Recovery Act funds from one fiscal year into the next. Following our recommendation, HHS indicated that OHS would issue guidance to grantees on obligation and expenditure requirements, as well as improve efforts to effectively communicate the mechanisms in place for grantees to meet the requirements for obligation and expenditure of funds. HHS has subsequently reported that grantees have been reminded that the timely use of unobligated balances requires recipients to use the “first in/first out” principle for recognizing and recording obligations and expenditures of those funds. To better consider known risks in scoping and staffing required reviews of Recovery Act grantees, we recommended that the Director of OHS should direct OHS regional offices to consistently perform and document Risk Management Meetings and incorporate known risks, including financial management risks, into the process for staffing and conducting reviews. HHS reported OHS was reviewing the Risk Management process to ensure it is consistently performed and documented in its centralized data system and that it had taken related steps, such as requiring the grant officer to identify known or suspected risks prior to an on-site review. More recently, HHS has indicated that the results and action plans from the Risk Management Meetings are documented in the Head Start Enterprise System and used by reviewers to highlight areas where special attention is needed during monitoring reviews. HHS also notes that the Division of Payment Management (DPM) sends OHS monthly reports on grantees to assist OHS in performing ongoing oversight, monitoring grantee spending, and assessing associated risks and that it has incorporated a new fiscal information form as a pre-review requirement to ensure that fiscal information and concerns known to the regional office staff are shared with on-site reviewers. Because the absence of third-party investors reduces the amount of overall scrutiny Tax Credit Assistance Program (TCAP) projects would receive and the Department of Housing and Urban Development (HUD) is currently not aware of how many projects lacked third-party investors, we recommended that HUD should develop a risk-based plan for its role in overseeing TCAP projects that recognizes the level of oversight provided by others. HUD responded to our recommendation by saying it must wait for final reports from housing finance agencies on TCAP project financing sources in order to identify those projects that are in need of additional monitoring. When the final reports are received, HUD said it will develop a plan for monitoring those projects. HUD said it will begin identifying projects that may need additional monitoring at the end of September 2011 when sufficient information should be available to determine which projects have little Low-Income Housing Tax Credit investment and no other leveraged federal funds. To enhance the Department of Labor’s (Labor) ability to manage its Recovery Act and regular Workforce Investment Act (WIA) formula grants and to build on its efforts to improve the accuracy and consistency of financial reporting, we recommended that the Secretary of Labor take the following actions: To determine the extent and nature of reporting inconsistencies across the states and better target technical assistance, conduct a one-time assessment of financial reports that examines whether each state’s reported data on obligations meet Labor’s requirements. To enhance state accountability and to facilitate their progress in making reporting improvements, routinely review states’ reporting on obligations during regular state comprehensive reviews. Labor reported that it has taken actions to implement our recommendations. To determine the extent of reporting inconsistencies, Labor awarded a contract in September 2010 and completed the assessment of state financial reports in June 2011. Labor is currently analyzing the findings and expects to have a final report and recommendations in the fall of 2011. To enhance states’ accountability and facilitate their progress in making improvements in reporting, Labor issued guidance on federal financial management and reporting definitions on May 27, 2011, and conducted training on its financial reporting form and key financial reporting terms such as obligations and accruals. Labor also reported that it routinely monitors states’ reporting on obligations as part of its oversight process and comprehensive on-site reviews. Our September 2009 bimonthly report identified a need for additional federal guidance in defining green jobs and we made the following recommendation to the Secretary of Labor: To better support state and local efforts to provide youth with employment and training in green jobs, provide additional guidance about the nature of these jobs and the strategies that could be used to prepare youth for careers in green industries. Labor agreed with our recommendation and has taken several actions to implement it. Labor’s Bureau of Labor Statistics (BLS) has developed a definition of green jobs, which was finalized and published in the Federal Register on September 21, 2010. In addition, Labor continues to host a Green Jobs Community of Practice, an online virtual community available to all interested parties. The department also hosted a symposium on April 28 and 29, 2011, with the green jobs state Labor Market Information Improvement grantees. Symposium participants shared recent research findings, including efforts to measure green jobs, occupations, and training in their states. In addition, the department released a new career exploration tool called “mynextmove” (www.mynextmove.gov) in February 2011 that includes the Occupational Information Network (O*NET) green leaf symbol to highlight green occupations. Additional green references have recently been added and are noted in the latest update, The Greening of the World of Work: O*NET Project’s Book of References. Furthermore, Labor is planning to release a Training and Employment Notice this fall that will provide a summary of research and resources that have been completed by BLS and others on green jobs definitions, labor market information and tools, and the status of key Labor initiatives focused on green jobs. To leverage Single Audits as an effective oversight tool for Recovery Act programs, we recommended that the Director of the Office of Management and Budget (OMB) 1. take additional efforts to provide more timely reporting on internal controls for Recovery Act programs for 2010 and beyond; 2. evaluate options for providing relief related to audit requirements for low-risk programs to balance new audit responsibilities associated with the Recovery Act; 3. issue Single Audit guidance in a timely manner so that auditors can efficiently plan their audit work; 4. issue the OMB Circular No. A-133 Compliance Supplement no later than March 31 of each year; 5. explore alternatives to help ensure that federal awarding agencies provide their management decisions on the corrective action plans in a timely manner; and 6. shorten the time frames required for issuing management decisions by federal agencies to grant recipients. GAO’s recommendations to OMB are aimed toward improving the Single Audit’s effectiveness as an accountability mechanism for federally awarded grants from Recovery Act funding. We previously reported that OMB has taken a number of actions to implement our recommendations since our first Recovery Act report in April 2009. We also reported that OMB had undertaken initiatives to examine opportunities for improving key areas of the single audit process over federal grant funds administered by state and local governments and nonprofit organizations based upon the directives in Executive Order 13520, Reducing Improper Payments and Eliminating Waste in Federal Programs issued in November 2009. Two sections of the executive order related to federal grantees, including state and local governments, and required OMB to establish working groups to make recommendations to improve (1) the effectiveness of single audits of state and local governments and non- profit organizations that are expending federal funds and (2) the incentives and accountability of state and local governments for reducing improper payments. OMB formed several working groups as a result of the executive order, including two separate working groups on issues related to single audits. These two working groups developed recommendations and reported them to OMB in May and June of 2010. OMB formed a “supergroup” to review these recommendations for improving single audits and to provide a plan for OMB to further consider or implement them. The “supergroup” finalized its report in August 2011. OMB also formed a Single Audit Metrics Workgroup as a result of one of the recommendations made in June 2010 to improve the effectiveness of single audits. In addition, the President issued a memorandum entitled “Administrative Flexibility, Lower Costs, and Better Results for State, Local, and Tribal Governments” (M-11-21) in February 2011 that directed OMB to, among other things, lead an interagency workgroup to review OMB circular policies to enable state and local recipients to most effectively use resources to improve performance and efficiency. Agencies reported their actions and recommendations to OMB on August 29, 2011. Among the recommendations included in the report were recommendations aimed toward improving single audits. Since most Recovery Act funds will be expended by 2013, some of the recommendations that OMB acts upon may not be implemented in time to affect single audits of grant programs funded under the Recovery Act. However, OMB’s efforts to enhance single audits could, if properly implemented, significantly improve the effectiveness of the single audit as an accountability mechanism. OMB officials stated that they plan to review the “supergroup’s” August 2011 report and develop a course of action for enhancing the single audit process, but have not yet developed a time frame for doing so. We will continue to monitor OMB’s efforts in this area. (1) To address our recommendation to encourage timelier reporting on internal controls for Recovery Act programs for 2010 and beyond, we previously reported that OMB had commenced a second voluntary Single Audit Internal Control Project (project) in August 2010 for states that received Recovery Act funds in fiscal year 2010. The project has been completed and the results have been compiled as of July 6, 2011. One of the goals of these projects was to achieve more timely communication of internal control deficiencies for higher-risk Recovery Act programs so that corrective action could be taken more quickly. The project encouraged participating auditors to identify and communicate deficiencies in internal control to program management 3 months sooner than the 9-month time frame required under statute. The projects also required that program management provide a corrective action plan aimed at correcting any deficiencies 2 months earlier than required under statute to the federal awarding agency. Upon receiving the corrective action plan, the federal awarding agency had 90 days to provide a written decision to the cognizant federal agency for audit detailing any concerns it may have with the plan. Fourteen states volunteered to participate in OMB’s second project, submitted interim internal control reports by December 31, 2010, and developed auditee corrective action plans on audit findings by January 31, 2011. However, although the federal awarding agencies were to have provided their interim management decisions to the cognizant agency for audit by April 30, 2011, only 2 of the 11 federal awarding agencies had completed the submission of all of their management decisions, according to an official from the Department of Health and Human Services, the cognizant agency for audit. In our review of the 2009 project, we had noted similar concerns that federal awarding agencies’ management decisions on proposed corrective actions were untimely, and our related recommendations are discussed later in this report. Overall, we found that the results for both projects were helpful in communicating internal control deficiencies earlier than required under statute. The projects’ dependence on voluntary participation, however, limited their scope and coverage. This voluntary participation may also bias the projects’ results by excluding from analysis states or auditors with practices that cannot accommodate the project’s requirement for early reporting of internal control deficiencies. Even though the projects’ coverage could have been more comprehensive, the results provided meaningful information to OMB for better oversight of Recovery Act programs and for making future improvements to the single audit process. In August 2011, OMB initiated a third Single Audit Internal Control Project with similar requirements as the second OMB Single Audit Internal Control Project. The goal of this project is also to identify material weaknesses and significant deficiencies for selected Recovery Act programs 3 months sooner than the 9-month time frame currently required under statute so that the findings could be addressed by the auditee in a timely manner. This project also seeks to provide some audit relief for the auditors that participate in the project as risk assessments for certain programs are not required. We will continue to monitor the status of OMB’s efforts to implement this recommendation and believe that OMB needs to continue taking steps to encourage timelier reporting on internal controls through Single Audits for Recovery Act programs. (2) We previously recommended that OMB evaluate options for providing relief related to audit requirements for low-risk programs to balance new audit responsibilities associated with the Recovery Act. OMB officials have stated that they are aware of the increase in workload for state auditors who perform Single Audits due to the additional funding to Recovery Act programs subject to audit requirements. OMB officials also stated that they solicited suggestions from state auditors to gain further insights to develop measures for providing audit relief. For state auditors that participated in the second and third OMB Single Audit Internal Control Projects, OMB provided some audit relief by modifying the requirements under Circular No. A-133 to reduce the number of low-risk programs to be included in some project participants’ risk assessment requirements. However, OMB has not yet put in place a viable alternative that would provide relief to all state auditors that conduct Single Audits. (3) (4) With regard to issuing Single Audit guidance, such as the OMB Circular No. A-133 Compliance Supplement, in a timely manner, OMB has not yet achieved timeliness in its issuance of Single Audit guidance. We previously reported that OMB officials intended to issue the 2011 Compliance Supplement by March 31, 2011, but instead issued it in June. OMB officials stated that the delay of this important guidance to auditors was due to the refocusing of its efforts to avert a governmentwide shutdown. OMB officials stated that although they had prepared to issue the 2011 Compliance Supplement by the end of March by taking steps such as starting the process earlier in 2010 and giving agencies strict deadlines for program submissions, they were not able to issue it until June 1, 2011. OMB officials developed a timeline for issuing the 2012 Compliance Supplement by March 31, 2012. In August 2011, they began the process of working with the federal agencies and others involved in issuing the Compliance Supplement. We will continue to monitor OMB’s efforts in this area. (5) (6) Regarding the need for agencies to provide timely management decisions, OMB officials identified alternatives for helping to ensure that federal awarding agencies provided their management decisions on the corrective action plans in a timely manner, including possibly shortening the time frames required for federal agencies to provide their management decisions to grant recipients. OMB officials acknowledged that this issue continues to be a challenge. They told us they met individually with several federal awarding agencies that were late in providing their management decisions in the 2009 project to discuss the measures that the agencies could take to improve the timeliness of their management decisions. However, as mentioned earlier in this report, most of the federal awarding agencies had not submitted all of their management decisions on the corrective actions by the April 30, 2011, due date in the second project (and still had not done so by July 6, 2011, when the results of the completed project were compiled). OMB officials have yet to decide on the course of action that they will pursue to implement this recommendation. OMB formed a Single Audit Metrics Workgroup to develop an implementation strategy for developing a baseline, metrics, and targets to track the effectiveness of single audits over time and increase the effectiveness and timeliness of federal awarding agencies’ actions to resolve single audit findings. This workgroup reported its recommendations to OMB on June 21, 2011, proposing metrics that could be applied at the agency level, by program, to allow for analysis of single audit findings. OMB officials stated that they plan to initiate a pilot to implement the recommendations of this workgroup starting with fiscal year 2011 single audit reports. We recommended that the Director of OMB provide more direct focus on Recovery Act programs through the Single Audit to help ensure that smaller programs with higher risk have audit coverage in the area of internal controls and compliance; Based on OMB’s actions, we have concluded that OMB has addressed the intent of this recommendation. To provide direct focus on Recovery Act programs through the Single Audit to help ensure that smaller programs with higher risk have audit coverage in the area of internal controls and compliance, the OMB Circular No. A-133, Audits of States, Local Governments, and Non-Profit Organizations Compliance Supplement (Compliance Supplement) for fiscal years 2009 through 2011 required all federal programs with expenditures of Recovery Act awards to be considered as programs with higher risk when performing standard risk-based tests for selecting programs to be audited. The auditors’ determinations of the programs to be audited are based upon their evaluation of the risks of noncompliance occurring that could be material to an individual major program. The Compliance Supplement has been the primary mechanism that OMB has used to provide Recovery Act requirements and guidance to auditors. One presumption underlying the guidance is that smaller programs with Recovery Act expenditures could be audited as major programs when using a risk-based audit approach. The most significant risks are associated with newer programs that may not yet have the internal controls and accounting systems in place to help ensure that Recovery Act funds are distributed and used in accordance with program regulations and objectives. Since Recovery Act spending is projected to continue through 2016, we believe that it is essential that OMB provide direction in Single Audit guidance to help to ensure that smaller programs with higher risk are not automatically excluded from receiving audit coverage based on their size and standard Single Audit Act requirements. We spoke with OMB officials and reemphasized our concern that future Single Audit guidance provide instruction that helps to ensure that smaller programs with higher risk have audit coverage in the area of internal controls and compliance. OMB officials agreed and stated that such guidance will continue to be included in future Recovery Act guidance. We also performed an analysis of Recovery Act program selection for single audits of 10 states for fiscal year 2010. In general, we found that the auditors selected a relatively greater number of smaller programs with higher risks with Recovery Act funding when compared to the previous period. Therefore, this appears to have resulted in a relative increase in the number of smaller Recovery Act programs being selected for audit for 7 of the 10 states we reviewed. To ensure that Congress and the public have accurate information on the extent to which the goals of the Recovery Act are being met, we recommended that the Secretary of Transportation direct the Department of Transportations’ (DOT) Federal Highway Administration (FHWA) to take the following two actions: Develop additional rules and data checks in the Recovery Act Data System, so that these data will accurately identify contract milestones such as award dates and amounts, and provide guidance to states to revise existing contract data. Make publicly available—within 60 days after the September 30, 2010, obligation deadline—an accurate accounting and analysis of the extent to which states directed funds to economically distressed areas, including corrections to the data initially provided to Congress in December 2009. In its response, DOT stated that it implemented measures to further improve data quality in the Recovery Act Data System, including additional data quality checks, as well as providing states with additional training and guidance to improve the quality of data entered into the system. DOT also stated that as part of its efforts to respond to our draft September 2010 report in which we made this recommendation on economically distressed areas, it completed a comprehensive review of projects in these areas, which it provided to GAO for that report. DOT recently posted an accounting of the extent to which states directed Recovery Act transportation funds to projects located in economically distressed areas on its Web site, and we are in the process of assessing these data. To better understand the impact of Recovery Act investments in transportation, we believe that the Secretary of Transportation should ensure that the results of these projects are assessed and a determination made about whether these investments produced long- term benefits. Specifically, in the near term, we recommended that the Secretary direct FHWA and FTA to determine the types of data and performance measures they would need to assess the impact of the Recovery Act and the specific authority they may need to collect data and report on these measures. In its response, DOT noted that it expected to be able to report on Recovery Act outputs, such as the miles of road paved, bridges repaired, and transit vehicles purchased, but not on outcomes, such as reductions in travel time, nor did it commit to assessing whether transportation investments produced long-term benefits. DOT further explained that limitations in its data systems, coupled with the magnitude of Recovery Act funds relative to overall annual federal investment in transportation, would make assessing the benefits of Recovery Act funds difficult. DOT indicated that, with these limitations in mind, it is examining its existing data availability and, as necessary, would seek additional data collection authority from Congress if it became apparent that such authority was needed. DOT plans to take some steps to assess its data needs, but it has not committed to assessing the long-term benefits of Recovery Act investments in transportation infrastructure. We are therefore keeping our recommendation on this matter open. To the extent that appropriate adjustments to the Single Audit process are not accomplished under the current Single Audit structure, Congress should consider amending the Single Audit Act or enacting new legislation that provides for more timely internal control reporting, as well as audit coverage for smaller Recovery Act programs with high risk. We continue to believe that Congress should consider changes related to the Single Audit process. To the extent that additional coverage is needed to achieve accountability over Recovery Act programs, Congress should consider mechanisms to provide additional resources to support those charged with carrying out the Single Audit Act and related audits. We continue to believe that Congress should consider changes related to the Single Audit process. To provide housing finance agencies (HFA) with greater tools for enforcing program compliance, in the event the Section 1602 Program is extended for another year, Congress may want to consider directing the Department of the Treasury to permit HFAs the flexibility to disburse Section 1602 Program funds as interest-bearing loans that allow for repayment. We have closed this Matter for Congressional Consideration because the Section 1602 Program has not been extended. | The American Recovery and Reinvestment Act of 2009 (Recovery Act) provided $70.3 billion for three education programs--the State Fiscal Stabilization Fund (SFSF); Title I, Part A of the Elementary and Secondary Education Act (Title I); and Individuals with Disabilities Education Act (IDEA), Part B. One goal of the Recovery Act was to save and create jobs, and SFSF also requires states to report information expected to increase transparency and advance educational reform. This report responds to two ongoing GAO mandates under the Recovery Act. It examines (1) how selected states and local recipients used the funds; (2) what plans the Department of Education (Education) and selected states have to assess the impact of the funds; (3) what approaches are being used to ensure accountability of the funds; and (4) how Education and states ensure the accuracy of recipient reported data. To conduct this review, GAO gathered information from 14 states and the District of Columbia, conducted a nationally representative survey of local educational agencies (LEA), interviewed Education officials, examined recipient reports, and reviewed relevant policy documents. As of September 9, 2011, in the 50 states and the District of Columbia, about 4 percent of the obligated Recovery Act funds remain available for expenditure. Teacher retention was the primary use of Recovery Act education funds according to GAO's nationally representative survey of LEAs. The funds also allowed recipients to restore state budget shortfalls and maintain or increase services. However, the expiration of funds and state budget decreases may cause LEAs to decrease services, such as laying off teachers. We also found that nearly a quarter of LEAs reported lowering their local spending on special education, as allowed for under IDEA provisions that provide eligible LEAs the flexibility to reduce local spending on students with disabilities by up to half of the amount of any increase in federal IDEA funding from the prior year. However, even with this flexibility, many LEAs reported having difficulty maintaining required levels of local special education spending. In addition, two states have not been able to meet required state spending levels for IDEA or obtain a federal waiver from these requirements. States whose waivers were denied and cannot make up the shortfall in the fiscal year in question face a reduction in their IDEA funding equal to the shortfall, which may be long-lasting. Education plans to conduct two types of systematic program assessments to gauge the results of Recovery Act-funded programs that focus on educational reform: program evaluation and performance measurement. In the coming years, Education plans to produce an evaluation that will provide an in-depth examination of various Recovery Act programs' performance in addressing educational reform. In addition, for the SFSF program, Education plans to measure states' ability to collect and publicly report data on preestablished indicators and descriptors of educational reform, and it plans to provide a national view of states' progress. Education intends for this reporting to be a means for improving accountability to the public in the shorter term. Further, Education officials plan to use states' progress to determine whether a state is qualified to receive funds under other future reform-oriented grant competitions. Numerous entities help ensure accountability of Recovery Act funds through monitoring, audits, and other means, which have helped identify areas for improvement. Given the short time frame for spending these funds, Education's new SFSF monitoring approach prioritized helping states resolve monitoring issues and allowed Education to target technical assistance to some states. However, some states did not receive monitoring feedback promptly and this feedback was not communicated consistently because Education's monitoring protocol lacked internal time frames for following up with states. Education and state officials reported using a variety of methods to ensure recipient reported data are accurate. They also use recipient reported data to enhance their oversight and monitoring efforts. According to Recovery.gov, the Recovery Act funded approximately 286,000 full-time equivalents (FTE) during the eighth round of reporting, which ended June 30, 2011, for the education programs GAO reviewed. Despite the limitations associated with FTE data, Education found these data to be useful in assessing the impact of grant programs on saving and creating jobs. GAO recommends that the Secretary of Education establish mechanisms to improve the consistency of communicating SFSF monitoring feedback to states. Education agreed with our recommendation. |
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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. | 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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The public faces a risk that critical services could be severely disrupted by the Year 2000 computing crisis. Financial transactions could be delayed, airline flights grounded, and national defense affected. The many interdependencies that exist among governments and within key economic sectors could cause a single failure to have adverse repercussions. While managers in the government and the private sector are taking many actions to mitigate these risks, a significant amount of work remains, and time frames are unrelenting. The federal government is extremely vulnerable to the Year 2000 issue due to its widespread dependence on computer systems to process financial transactions, deliver vital public services, and carry out its operations. This challenge is made more difficult by the age and poor documentation of the government’s existing systems and its lackluster track record in modernizing systems to deliver expected improvements and meet promised deadlines. Unless this issue is successfully addressed, serious consequences could ensue. For example: Unless the Federal Aviation Administration (FAA) takes much more decisive action, there could be grounded or delayed flights, degraded safety, customer inconvenience, and increased airline costs. Payments to veterans with service-connected disabilities could be severely delayed if the system that issues them either halts or produces checks so erroneous that it must be shut down and checks processed manually. The military services could find it extremely difficult to efficiently and effectively equip and sustain its forces around the world. Federal systems used to track student loans could produce erroneous information on loan status, such as indicating that a paid loan was in default. Internal Revenue Service tax systems could be unable to process returns, thereby jeopardizing revenue collection and delaying refunds. The Social Security Administration process that provides benefits to disabled persons could be disrupted if interfaces with state systems fail. In addition, the year 2000 also could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years that contain embedded computer systems to control, monitor, or assist in operations. For example, heating and air conditioning units could stop functioning properly and card-entry security systems could cease to operate. Year 2000-related problems have already been identified. For example, an automated Defense Logistics Agency system erroneously deactivated 90,000 inventoried items as the result of an incorrect date calculation. According to the agency, if the problem had not been corrected (which took 400 work hours), the impact would have seriously hampered its mission to deliver materiel in a timely manner. In another case, the Department of Defense’s Global Command Control System, which is used to generate a common operating picture of the battlefield for planning, executing, and managing military operations, failed testing when the date was rolled over to the year 2000. Our reviews of federal agency Year 2000 programs have found uneven progress. Some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time. Other agencies have made progress, although risks remain and a great deal more work is needed. Our reports contained numerous recommendations, which the agencies have almost universally agreed to implement. Among them were the need to complete inventories of systems, document data exchange agreements, and develop contingency plans. Audit offices of some states also have identified significant Year 2000 concerns. Risks include the potential that systems supporting benefits programs, motor vehicle records, and criminal records (i.e., prisoner release or parole eligibility determinations) may be adversely affected. These audit offices have made recommendations including the need for increased oversight, Year 2000 project plans, contingency plans, and personnel recruitment and retention strategies. Data exchanges between the federal government and the states are also critical to ensuring that billions of dollars in benefits payments are made to millions of recipients. Consequently, in October 1997 the Commonwealth of Pennsylvania hosted the first State/Federal Chief Information Officer (CIO) Summit. Participants agreed to (1) use a 4-digit contiguous computer standard for data exchanges, (2) establish a national policy group, and (3) create a joint state/federal technical group. America’s infrastructures are a complex array of public and private enterprises with many interdependencies at all levels. Key economic sectors that could be seriously impacted if their systems are not Year 2000 compliant are information and telecommunications; banking and finance; health, safety, and emergency services; transportation; utilities; and manufacturing and small business. The information and telecommunications infrastructure is especially important because it (1) enables the electronic transfer of funds, (2) is essential to the service economy, manufacturing, and efficient delivery of raw materials and finished goods, and (3) is basic to responsive emergency services. Illustrations of Year 2000 risks follow. According to the Basle Committee on Banking Supervision—an international committee of banking supervisory authorities—failure to address the Year 2000 issue would cause banking institutions to experience operational problems or even bankruptcy. Moreover, the Chair of the Federal Financial Institutions Examination Council, a U.S. interagency council composed of federal bank, credit union, and thrift institution regulators, stated that banking is one of America’s most information-intensive businesses and that any malfunctions caused by the century date change could affect a bank’s ability to meet its obligations. He also stated that of equal concern are problems that customers may experience that could prevent them from meeting their obligations to banks and that these problems, if not addressed, could have repercussions throughout the nation’s economy. According to the International Organization of Securities Commissions, the year 2000 presents a serious challenge to the world’s financial markets. Because they are highly interconnected, a disruption in one segment can spread quickly to others. FAA recently met with representatives of airlines, aircraft manufacturers, airports, fuel suppliers, telecommunications providers, and industry associations to discuss the Year 2000 issue. Participants raised the concern that their own Year 2000 compliance would be irrelevant if FAA were not compliant because of the many system interdependencies. Representatives went on to say that unless FAA were substantially Year 2000 compliant on January 1, 2000, flights would not get off the ground and that extended delays would be an economic disaster. Another risk associated with the transportation sector was described by the Federal Highway Administration, which stated that highway safety could be severely compromised because of potential Year 2000 problems in operational transportation systems. For example, date-dependent signal timing patterns could be incorrectly implemented at highway intersections if traffic signal systems run by state and local governments do not process four-digit years correctly. One risk associated with the utility sector is the potential loss of electrical power. For example, Nuclear Regulatory Commission staff believe that safety-related safe shutdown systems will function but that a worst-case scenario could occur in which Year 2000 failures in several nonsafety-related systems could cause a plant to shut down, resulting in the loss of off-site power and complications in tracking post-shutdown plant status and recovery. With respect to the health, safety, and emergency services sector, according to the Department of Health and Human Services, the Year 2000 issue holds serious implications for the nation’s health care providers and researchers. Medical devices and scientific laboratory equipment may experience problems beginning January 1, 2000, if the computer systems, software applications, or embedded chips used in these devices contain two-digit fields for year representation. In addition, according to the Gartner Group, health care is substantially behind other industries in Year 2000 compliance, and it predicts that at least 10 percent of mission-critical systems in this industry will fail because of noncompliance. One of the largest, and largely unknown, risks relates to the global nature of the problem. With the advent of electronic communication and international commerce, the United States and the rest of the world have become critically dependent on computers. However, there are indications of Year 2000 readiness problems in the international arena. In September 1997, the Gartner Group, a private research firm acknowledged for its expertise in Year 2000 issues, surveyed 2,400 companies in 17 countries and concluded that “hirty percent of all companies have not started dealing with the year 2000 problem.” Based on its survey, the Gartner Group also ranked certain countries and areas of the world. According to the Gartner Group, countries/areas at level I on its scale of compliance—just getting started—include Eastern Europe, many African countries, many South American countries, and several Asian countries, including China. Those at level II—completed the inventory process and have begun the assessment process—include Japan, Brazil, South Africa, Taiwan, and Western Europe. Finally, some companies in the United States, the United Kingdom, Canada, and Australia are at levels II while others are at level III. Level III indicates that a program plan has been completed and dedicated resources are committed and in place. Although there are many national and international risks related to the year 2000, our limited review of these key sectors found a number of private-sector organizations that have raised awareness and provided advice. For example: The Securities Industry Association established a Year 2000 committee in 1995 to promote awareness and since then has established other committees to address key issues, such as testing. The Electric Power Research Institute sponsored a conference in 1997 with utility professionals to explore the Year 2000 issue in embedded systems. Representatives of several oil and gas companies formed a Year 2000 energy industry group, which meets regularly to discuss the problem. The International Air Transport Association organized seminars and briefings for many segments of the airline industry. In addition, information technology industry associations, such as the Information Technology Association of America, have published newsletters, issued guidance, and held seminars to focus information technology users on the Year 2000 problem. As 2000 approaches and the scope of the problems has become clearer, the federal government’s actions have intensified, at the urging of the Congress and others. The amount of attention devoted to this issue has increased in the last year, culminating with the issuance of a February 4, 1998, executive order establishing the President’s Council on Year 2000 Conversion. The Council Chair is to oversee federal agency Year 2000 efforts as well as act as spokesman in national and international forums, coordinate with state and local governments, promote appropriate federal roles with respect to private- sector activities, and report to the President on a quarterly basis. This increased attention could help minimize the disruption to the nation as the millennium approaches. In particular, the President’s Council on Year 2000 Conversion can initiate additional actions needed to mitigate risks and uncertainties. These include ensuring that the government’s highest priority systems are corrected and that contingency plans are developed across government. Agencies have taken longer to complete the awareness and assessment phases of their Year 2000 programs than is recommended. This leaves less time for critical renovation, validation, and implementation phases. For example, the Air Force has used over 45 percent of its available time completing the awareness and assessment phases, while the Gartner Group recommends that no more than about a quarter of an organization’s Year 2000 effort should be spent on these phases. Consequently, priority-setting is essential. According to OMB’s latest report, as of February 15, 1998, only about 35 percent of federal agencies’ mission-critical systems were considered to be Year 2000 compliant. This leaves over 3,500 mission-critical systems, as well as thousands of nonmission-critical systems, still to be repaired, and over 1,100 systems to be replaced. It is unlikely that agencies can complete this vast amount of work in time. Accordingly, it is critical that the executive branch identify those systems that are of the highest priority. These include those that, if not corrected, could most seriously threaten health and safety, the financial well-being of American citizens, national security, or the economy. Agencies must also ensure that their mission-critical systems can properly exchange data with other systems and are protected from errors that can be introduced by external systems. For example, agencies that administer key federal benefits payment programs, such as the Department of Veterans Affairs, must exchange data with the Department of the Treasury, which, in turn, interfaces with financial institutions, to ensure that beneficiary checks are issued. As a result, completing end-to-end testing for mission-critical systems is essential. OMB’s reports on agency progress do not fully and accurately reflect the federal government’s progress toward achieving Year 2000 compliance because not all agencies are required to report and OMB’s reporting requirements are incomplete. For example: OMB had not, until recently, required independent agencies to submit quarterly reports. Accordingly, the status of these agencies’ Year 2000 programs has not been monitored centrally. On March 9, 1998, OMB asked 31 independent agencies, including the Securities and Exchange Commission and the Pension Benefit Guaranty Corporation, to report on their progress in fixing the Year 2000 problem by April 30, 1998. OMB plans to include a summary of those responses in its next quarterly report to the Congress. However, unlike its quarterly reporting requirement for the major departments and agencies, OMB does not plan to request that the independent agencies report again until next year. Since the independent agencies will not be reporting again until April 1999, it will be difficult for OMB to be in a position to address any major problems. Agencies are required to report their progress in repairing noncompliant systems but are not required to report on their progress in implementing systems to replace noncompliant systems, unless the replacement effort is behind schedule by 2 months or more. Because federal agencies have a poor history of delivering new system capabilities on time, it is essential to know agencies’ progress in implementing replacement systems. OMB’s guidance does not specify what steps must be taken to complete each phase of a Year 2000 program (i.e., assessment, renovation, validation, and implementation). Without such guidance, agencies may report that they have completed a phase when they have not. Our enterprise guide provides information on the key tasks that should be performed within each phase. In January 1998, OMB asked agencies to describe their contingency planning activities in their February 1998 quarterly reports. These instructions stated that contingency plans should be established for mission-critical systems that are not expected to be implemented by March 1999, or for mission-critical systems that have been reported as 2 months or more behind schedule. Accordingly, in their February 1998 quarterly reports, several agencies reported that they planned to develop contingency plans only if they fall behind schedule in completing their Year 2000 fixes. Agencies that develop contingency plans only for systems currently behind schedule, however, are not addressing the need to ensure the continuity of a minimal level of core business operations in the event of unforeseen failures. As a result, when unpredicted failures occur, agencies will not have well-defined responses and may not have enough time to develop and test effective contingency plans. Contingency plans should be formulated to respond to two types of failures: those that can be predicted (e.g., system renovations that are already far behind schedule) and those that are unforeseen (e.g., a system that fails despite having been certified as Year 2000 compliant or a system that cannot be corrected by January 1, 2000, despite appearing to be on schedule today). Moreover, contingency plans that focus only on agency systems are inadequate. Federal agencies depend on data provided by their business partners as well as on services provided by the public infrastructure. One weak link anywhere in the chain of critical dependencies can cause major disruptions. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. In its latest governmentwide Year 2000 progress report, issued March 10, 1998, OMB clarified its contingency plan instructions. OMB stated that contingency plans should be developed for all core business functions. On March 18, 1998, we issued an exposure draft of a guide to help agencies ensure the continuity of operations through contingency planning. The CIO Council worked with us in developing this guide and intends to adopt it for federal agency use. OMB’s assessment of the current status of federal Year 2000 progress has been predominantly based on agency reports that have not been consistently verified or independently reviewed. Without such independent reviews, OMB and others, such as the President’s Council on Year 2000 Conversion, have no assurance that they are receiving accurate information. OMB has acknowledged the need for independent verification and asked agencies to report on such activities in their February 1998 quarterly reports. While this has helped provide assurance that some verification is taking place through internal checks, reviews by Inspectors General, or contractors, the full scope of verification activities required by OMB has not been articulated. It is important that the executive branch set standards for the types of reviews that are needed to provide assurance regarding the agencies’ Year 2000 actions. Such standards could encompass independent assessments of (1) whether the agency has developed and is implementing a comprehensive and effective Year 2000 program, (2) the accuracy and completeness of the agency’s quarterly report to OMB, including verification of the status of systems reported as compliant, (3) whether the agency has a reasonable and comprehensive testing approach, and (4) the completeness and reasonableness of the agency’s business continuity and contingency planning. The CIO Council’s Year 2000 Committee has been useful in addressing governmentwide issues. For example, the Year 2000 Committee worked with the Federal Acquisition Regulation Council and industry to develop a rule that (1) establishes a single definition of Year 2000 compliance in executive branch procurement and (2) generally requires agencies to acquire only Year-2000 compliant products and services or products and services that can be made Year 2000 compliant. The committee has also established subcommittees on (1) best practices, (2) state issues and data exchanges, (3) industry issues, (4) telecommunications, (5) buildings, (6) biomedical and laboratory equipment, (7) General Services Administration support and commercial off-the-shelf products, and (8) international issues. The committee’s effectiveness could be further enhanced. For example, currently agencies are not required to participate in the Year 2000 Committee. Without such full participation, it is less likely that appropriate governmentwide solutions can be implemented. Further, while most of the committee’s subcommittees are currently working on plans, they have not yet published these with associated milestones. It is important that this be done and publicized quickly so that agencies can use this information in their Year 2000 programs. It is equally important that implementation of agency activities resulting from these plans be monitored closely and that the subcommittees’ decisions be enforced. Another governmentwide issue that needs to be addressed is the availability of information technology personnel. In their February 1998 quarterly reports, several agencies reported that they or their contractors had problems obtaining and/or retaining information technology personnel. Currently, no governmentwide strategy exists to address recruiting and retaining information technology personnel with the appropriate skills for Year 2000-related work. However, at the March 18, 1998, meeting of the CIO Council, the Office of Personnel Management (OPM) provided the council with information on the tools that are currently available to help agencies obtain and retain staff. In addition, OPM announced that its Director had agreed in principle that the Year 2000 problem was an “emergency or unusual circumstance” that would allow the Director to grant agencies waivers to allow them to rehire former federal personnel without financial penalty on a temporary basis to address the Year 2000 problem. Further, the council agreed that OPM and the Human Resources Technology Council would form a working group to look at any additional tools that could be made available to help agencies obtain and retain staff for the year 2000. This working group is tasked with providing recommendations by May 1998. Given the sweeping ramifications of the Year 2000 issue, other countries have set up mechanisms to solve the Year 2000 problem on a nationwide basis. Several countries, such as the United Kingdom, Canada, and Australia, have appointed central organizations to coordinate and oversee their governments’ responses to the Year 2000 crisis. In the case of the United Kingdom, for example, a ministerial group is being established, under the leadership of the President of the Board of Trade, to tackle the Year 2000 problem across the public and private sectors. These countries have also established public/private forums to address the Year 2000 problem. For example, in September 1997, Canada’s Minister of Industry established a government/industry Year 2000 task force of representatives from banking, insurance, transportation, manufacturing, telecommunications, information technology, small and medium-sized businesses, agriculture, and the retail and service sectors. The Canadian Chief Information Officer is an ex-officio member of the task force. It has been charged with providing (1) an assessment of the nature and scope of the Year 2000 problem, (2) the state of industry preparedness, and (3) leadership and advice on how risks could be reduced. This task force issued a report in February 1998 with 18 recommendations that are intended to promote public/private-sector cooperation and prompt remedial action. In the United States, the President’s recent executive order could serve as the linchpin that bridges the nation’s and the federal government’s various Year 2000 initiatives. While the Year 2000 problem could have serious consequences, there is no comprehensive picture of the nation’s readiness. As one of its first tasks, the President’s Council on Year 2000 Conversion could formulate such a comprehensive picture in partnership with the private sector and state and local governments. Many organizational and managerial models exist that the Conversion Council could use to build effective partnerships to solve the nation’s Year 2000 problem. Because of the need to move swiftly, one viable alternative would be to consider using the sector-based approach recommended recently by the President’s Commission on Critical Infrastructure Protection as a starting point. This approach could involve federal agency focal points working with sector infrastructure coordinators. These coordinators would be created or selected from existing associations and would facilitate sharing information among providers and the government. Using this model, the President’s Council on Year 2000 Conversion could establish public/private partnership forums composed of representatives of each major sector that, in turn, could rely on task forces organized along economic-sector lines. Such groups would help (1) gauge the nation’s preparedness for the year 2000, (2) periodically report on the status and remaining actions of each sector’s Year 2000 remediation efforts, and (3) ensure the development of contingency plans to ensure the continuing delivery of critical public and private services. As requested, we are providing preliminary information on the status of Year 2000 activities at HUD. As the principal federal agency responsible for housing, community development, and fair housing opportunity programs, HUD provides rental assistance to more than 4 million lower income households, insures mortgages for about 7 million homeowners, and helps revitalize communities and ensure equal housing access. The department had reported expenses of about $35.9 billion in fiscal year 1997, most of it for assisted and public housing. HUD also manages more than $400 billion in mortgage insurance and $460 billion in guarantees of mortgage-backed securities. HUD relies extensively on information and financial management systems to manage its programs. HUD officials recognize the importance of ensuring that its systems are Year 2000 compliant; system failures could interrupt the processing of applications for mortgage insurance, the payment of mortgage insurance claims, and the payment of rental assistance. This would place a serious strain on individuals and on the nation’s financial and banking community. The department has more than 200 separate systems, with a total of over 65 million lines of software code. Its assessment revealed that over 31 million lines of code will need to be repaired, costing an estimated $48 million and 570,000 staff hours. It recognizes that making its systems Year 2000 compliant will take aggressive action. HUD established a Year 2000 project office in June 1996. In May 1997 this office issued a readiness guide for HUD staff and contractors, dealing with all phases of a Year 2000 program. The project office also developed a strategy, endorsed by senior HUD officials, with schedules for the completion of all tasks for each system and a tracking mechanism to monitor progress. Central to this strategy was inventorying its automated systems and performing risk assessments of them. On the basis of these risk assessments, HUD officials decided what actions to take on its automated information systems; the following table summarizes the reported status of this work. Although HUD is relying on its plans to replace twelve of its mission-critical systems, its tracking and management systems do not contain information on the status of these systems replacements. Consequently, it does not know about and cannot respond quickly to development delays that could affect Year 2000 readiness. According to the department’s Year 2000 project officials, they will modify their tracking systems to provide this capability. According to HUD’s schedule for the 30 mission-critical systems undergoing renovation, testing, and certification or where renovation has not yet begun, all of these actions will be completed—and the systems implemented—by December 31 of this year. It is already, however, behind schedule on 20 of these 30 mission-critical systems. While the delays on some of these systems are of only a few days, 13 of the 20 are experiencing delays of 2 months or more. This is significant because HUD is reporting that 5 of these 13 have “failure dates”—the first date that a system will fail to recognize and process dates correctly—between August 1, 1998, and January 1, 1999. One example illustrates this point: HUD’s system for processing claims made by lenders on defaulted single family-home loans is 75 days behind schedule for renovation. The system is now scheduled to be implemented on November 4—only 58 days shy of January 1, 1999, the date that HUD has determined the current system will fail. In fiscal year 1997, this system processed, on average, a reported $354 million of lenders’ claims each month for defaulted guaranteed loans. If this system fails, these lenders will not be paid on a timely basis; the economic repercussions could be widespread. To better ensure completion of work on mission-critical systems, HUD officials have recently decided to halt routine maintenance on five of its largest systems, beginning April 1 of this year. Further, according to Year 2000 project officials, if more delays threaten key implementation deadlines for mission-critical systems, they will stop work on nonmission-critical systems in order to focus all resources on the most important ones. We concur with HUD’s plans to devote additional attention to its mission-critical systems. In conclusion, the change of century will initially present many difficult challenges in information technology and has the potential to cause serious disruption to the nation; however, these risks can be mitigated and disruptions minimized with proper attention and management. While HUD has attempted to mitigate its Year 2000 risks, several systems are behind schedule and actions must be taken to avoid widespread economic repercussions. Continued congressional oversight through hearings such as this and those that have been held by other committees in both the House and the Senate can help ensure that such attention continues and that appropriate actions are taken to address this crisis. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Committee may have at this time. Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, Exposure Draft, March 1998). Year 2000 Computing Crisis: Office of Thrift Supervision’s Efforts to Ensure Thrift Systems Are Year 2000 Compliant (GAO/T-AIMD-98-102, March 18, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998). Post-Hearing Questions on the Federal Deposit Insurance Corporation’s Year 2000 (Y2K) Preparedness (AIMD-98-108R, March 18, 1998). SEC Year 2000 Report: Future Reports Could Provide More Detailed Information (GAO/GGD/AIMD-98-51, March 6, 1998). Year 2000 Readiness: NRC’s Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation’s Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems’ Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration’s Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computers Systems: Risks of VBA’s Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the nation's year 2000 computing crisis as well as the year 2000 program being implemented at the Department of Housing and Urban Development (HUD). GAO noted that: (1) the public faces a risk that critical services could be severely disrupted by the year 2000 computing crisis; (2) the federal government is extremely vulnerable to the year 2000 issue due to its widespread dependence on computer systems to process financial transactions, deliver vital public services, and carry out its operations; (3) in addition, the year 2000 also could cause problems for many of the facilities used by the federal government that were built or renovated within the last 20 years that contain embedded computer systems, to control, monitor, or assist in operations; (4) key economic sectors that could be seriously impacted if their systems are not year 2000 compliant are: information and telecommunications, banking and finance, health, safety, and emergency services, transportation, utilities, and manufacturing and small business; (5) agencies have taken longer to complete the awareness and assessment phases of their year 2000 programs than is recommended; (6) this leaves less time for critical renovation, validation, and implementation phases; (7) the Office of Management and Budget's (OMB) reports on agency progress do not fully and accurately reflect the federal government's progress toward achieving year 2000 compliance because not all agencies are required to report and OMB's reporting requirements are incomplete; (8) in January 1998, OMB asked agencies to describe their contingency planning activities in their February 1998 quarterly reports; (9) accordingly, in their 1998 quarterly reports, several agencies reported that they planned to develop contingency plans only if they fall behind schedule in completing their year 2000 fixes; (10) OMB's assessment of the current status of federal year 2000 progress has been predominantly based on agency reports that have not been consistently verified or independently reviewed; (11) given the sweeping ramifications of the year 2000 issues, other countries have set up mechanisms to solve the year 2000 problem on a nationwide basis; (12) HUD officials recognize the importance of ensuring that its systems are year 2000 compliant; systems failures could interrupt the processing of applicants for mortgage insurance, the payment of mortgage insurance claims, and the payment of rental assistance; (13) HUD established a year 2000 project office in June 1996; and (14) to better insure completion of work on mission-critical systems, HUD officials have recently decided to halt routine maintenance of five of its largest systems, beginning April 1 of this year. |
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ATSA applied the personnel management system of the Federal Aviation Administration (FAA) to TSA employees, and further authorized TSA to make any modifications to the system it considered necessary. Therefore, similar to FAA, TSA is exempt from many of the requirement s imposed and enforced by OPM—the agency responsible for establishinghuman capital policies and regulations for the federal government—and, thus, has more flexibility in managing its executive workforce than ma ny other federal agencies. For example, compared to agencies operating under OPM’s regulations, TSA is not limited in the number of permanent TSES appointments and limited term TSES appointments it may make an the types of positions limited term TSES appointments may be used for. Also, TSA has more discretion in granting recruitment, relocation, or retention incentives to TSES staff than other agencies have for SES staff (see table 1). One benefit available to career-appointed SES in OPM-regulated agencies is that once they are accepted into the SES of their agency, they can apply for and obtain SES positions in other OPM-regulated executive branch agencies without undergoing the merit staffing process. DHS and OPM signed an agreement in February 2004 which also allows career-appointed TSES staff the benefit of applying to SES positions without being subject to the merit staffing process. Under the provisions of the agreement, TSA must ensure that all TSES staff selected for their first career TSES appointment (1) are hired using a process that encompasses merit staffing principles and (2) undergo the ECQ-evaluation process. Consistent with OPM regulations, a hiring process that encompasses federal merit staffing requirements should include: public notice of position availability, identification of all minimally eligible candidates, identification of position qualifications, rating and ranking of all eligible candidates using position qualifications, determination of the best qualified candidates (a “best qualified list”), selection of a candidate for the position from among those best qualified, certification of a candidate’s executive and technical qualifications. TSES Positions within TSA TSA has consistently employed more senior executives than any other DHS component agency; however, as shown in table 2, from fiscal years 2005 through 2008, TSA went from being one of the DHS components with the highest numbers of executive staff per nonexecutive staff, to one of the components with the fewest executive staff per nonexecutive staff. Specifically, out of eight DHS components, TSA had the third highest number of executives per nonexecutive staff in 2005; however, by fiscal year 2008, TSA had the third lowest number of executives per nonexecutive staff. Compared with DHS overall, TSA had the same number of executive per nonexecutive staff as DHS in 2005, but over the 4- year period, the number of TSA executive to nonexecutive staff declined, while that of DHS increased. Moreover, the number of TSA executive staff per nonexecutive staff was consistently lower than that of all cabinet-level departments for fiscal years 2005 through 2008 (see table 2). TSA has employed approximately equal numbers of TSES staff in both headquarters and in the field, where its operational mission of securing the nation’s transportation system is carried out (see table 3). TSES positions in the field include federal security directors (FSDs) who are responsible for implementing and overseeing security operations, including passenger and baggage screening, at TSA-regulated airports; area directors, who supervise and provide support and coordination of federal security directors in the field; special agents in charge, who are part of the Federal Air Marshal Service and generally located at airports to carry out investigative activities; and senior field executives, who work with FSDs and other federal, state, and local officials to manage operational requirements across transportation modes. Headquarters executive positions generally include officials responsible for managing TSA divisions dedicated to internal agency operations, such as the Office of Human Capital or the Office of Legislative Affairs, and external agency operations, such as the Office of Security Operations and the Office of Global Strategies. TSES attrition for fiscal years 2004 through 2008 was at its highest (20 percent) in fiscal year 2005, due to a surge in resignations for that fiscal year. The rate of attrition among TSES staff for fiscal years 2004 through 2008 was consistently lower than the rate of attrition among all DHS SES, but, until 2008, higher than the SES attrition rate for all other cabinet-level departments. TSA human capital officials acknowledge that attrition among TSES staff has been high in the past—which they attribute to the frequent turnover in administrators the agency experienced from its formation in fiscal year 2002 through mid-2005—and noted that since TSA has had more stable leadership, attrition has declined. CPDF data for fiscal years 2004 through 2008 show that attrition among TSES staff rose from fiscal year 2004 to fiscal year 2005—peaking at 20 percent in fiscal year 2005—and has declined each year thereafter, measuring 10 percent in 2008. Attrition includes separations due to resignations, retirements, expiration of a limited term appointment, terminations, or transfers to another cabinet-level department. The rate of attrition among TSES headquarters staff was generally more than double that of TSES staff in the field. Specifically, in fiscal years 2004, 2005, 2006, and 2008, TSES attrition in headquarters was 26, 28, 28, and 14 percent respectively, compared to TSES attrition in the field, which was 8, 13, 10, and 6 percent respectively (see fig. 1). With regard to the manner in which TSES separated (through resignation, retirement, expiration of a limited term appointment, termination, or transfer to another cabinet-level department), our analysis of CPDF data shows that resignations were the most frequent type of TSES separation, accounting for almost half of total separations over the 5-year period and about two thirds of all separations during fiscal years 2005 and 2006 (see table 4). Also, over the 5-year period, transfers and retirements tied for the second-most frequent type of TSES separation, while expiration of a limited term appointment and “other” were the least common separation types for TSES. TSA human capital officials acknowledged that attrition among TSES staff has been high at certain points in TSA’s history. They noted that frequent turnover in administrators since TSA’s creation in 2002 through mid-2005 was the likely catalyst for much TSES attrition, and that once Administrator Hawley, who served the longest term of any TSA Administrator, was appointed, attrition among TSES staff declined. As shown in figure 2, the rate of attrition among TSES staff for fiscal years 2004 through 2008 was consistently lower than the rate of attrition among all DHS SES. On the other hand, from fiscal years 2004 through 2006, the TSES rate of attrition was higher than the overall SES attrition rate for all other cabinet-level departments, but in 2008, the rate was slightly lower than the rate for other cabinet-level departments. When comparing attrition among types of separations, we found that TSA had higher rates of executive resignations than DHS in 2005 and 2006; in particular, the rate of TSES resignations in 2005 (13 percent) was almost twice that of DHS SES (7 percent). TSA also had consistently higher rates of executive resignations than other cabinet-level departments for fiscal years 2004 through 2008 (see fig. 3). TSA human capital officials reiterated that many of these resignations were likely influenced by frequent turnover among TSA administrators, and that it is natural to expect that some executive staff would choose to leave the agency after a change in top agency leadership. They also explained that TSA’s high number of resignations could, in part, reflect TSES staff who opted to resign in lieu of being subject to disciplinary action or having a termination on their permanent record. Regarding other separation types, TSA’s TSES had lower rates of retirements for fiscal years 2004 through 2008 than SES in DHS and all cabinet-level departments. However, rates of transfers among TSES were about the same as those among SES in DHS and cabinet-level departments. For the same time period, TSA’s attrition rate for TSES terminations and expiration of term appointments was 3 percent or less, whereas the rate for DHS and all other cabinet-level departments was 1 percent or less. In interviews with 46 of 95 TSES who separated from TSA from fiscal years 2005 through 2008, most reported adverse reasons for leaving the agency—that is, a reason related to dissatisfaction with some aspect of their TSA experience, as opposed to a nonadverse reason, such as to spend more time with family or pursue another professional opportunity. Perceptions regarding the impact of TSES separations on TSA operations varied among TSA staff who directly reported to separated TSES staff members, TSES supervisors, and stakeholder groups representing industries that collaborate with TSA on security initiatives. Some of these reported that TSES attrition had little or no impact on the agency’s ability to implement transportation security initiatives, while others identified negative effects on agency operations, such as a lack of program direction and uncertainty and stress among employees. In addition to obtaining information on the manner by which TSES staff separated from the agency, such as through resignation or retirement, we also sought more detailed information on the factors that led staff members to separate. For example, for TSES staff members who left the agency through retirement, we sought information on any factors, beyond basic eligibility, that compelled them to leave the agency. According to TSA officials, one of the primary reasons for attrition among TSES has been the large number of TSES term appointees employed by the agency, who, by the very nature of their appointment, are expected to leave TSA, generally within 3 years. However, as shown earlier in table 4, only 4 TSES appointees separated from TSA due to the expiration of their appointments for fiscal years 2004 through 2008, and TSA reported hiring a total of 76 limited term appointees over this period. TSA human capital officials later explained that when the time period for a limited term appointments concludes, the reason for the staff member’s separation is recorded on his or her personnel file as a type of “termination.” For this reason, TSES on limited term appointments often leave the agency before their terms expire in order to avoid having “termination” on their personnel record, among other reasons. To better understand the reasons for TSES separations, and the extent to which they may have been influenced by TSES limited term appointments, we requested TSA exit interview data that would provide more in-depth explanations as to why the former TSES staff members left the agency. Since TSA had documented exit interviews for only 5 of 95 TSES staff members who separated from TSA from fiscal years 2005 through 2008, we interviewed 46 of these former TSES staff to better understand the reasons why they left the agency. As stated previously, because we selected these individuals based on a nonprobability sampling method, we cannot generalize about the reasons for all TSES separations from fiscal years 2005 through 2008. However, these interviews provided us with perspectives on why nearly half of these TSES staff left TSA. Of the 46 former TSES staff members we interviewed, 33 cited more than one reason for leaving TSA. Specifically, these individuals gave between one and six reasons for separating, with an average of two reasons identified per interviewee. Ten of 46 interviewees identified only nonadverse reasons for leaving TSA, 24 identified only adverse reasons, and 12 cited both adverse and nonadverse reasons. Nonadverse reasons were those not related to dissatisfaction with TSA, such as leaving the agency for another professional opportunity or to spend more time with family. Adverse reasons were those related to dissatisfaction with some aspect of the TSES staff member’s experience at TSA. As shown in table 5, we identified three categories of nonadverse reasons and nine categories of adverse reasons for why TSES staff left TSA. By discussing only the perspectives of former TSES, we may not be presenting complete information regarding the circumstances surrounding their separation from TSA. However, as we agreed not to identify to TSA the identities of respondents we spoke with, we did not obtain TSA’s viewpoint on these separations because doing so would risk revealing the interviewee’s identity. Of the TSES staff we interviewed who reported leaving TSA for nonadverse reasons, 14 of the 46 reported leaving for another professional opportunity, such as a position in a security consulting firm. Seven of 46 reported separating from TSA because of personal reasons, such as the desire to spend quality time with family, and 4 of the 46 TSES told us they separated from the agency because they were employed on re-employed annuitant waivers, which expired after 5 years. Of the TSES staff we interviewed who reported leaving TSA for adverse reasons, 14 of the 46 cited dissatisfaction with the leadership style of top management as a reason they left the agency. These interviewees defined top leadership as the TSA Administrator or those reporting directly to him, such as Assistant Administrators. In addition to issues with management style, 10 of the 14 responses focused specifically on top leadership’s communication style and cited instances in which top management had not communicated with other TSES staff and, in some cases, with lower- level staff. For example, one former FSD reported that new policies and procedures were implemented by headquarters with little or no notice to the field. He explained that in some cases, he learned that headquarters had issued new policies or procedures when the media called to ask questions about them. Another TSES interviewee reported that communication occurred between the administrator and a core group, but all other staff received only “bits and pieces of information.” Other examples provided in this category were more general. For example, 3 interviewees reported they were compelled to leave the agency due to a specific TSA Administrator’s more hierarchical management style. Thirteen of the 46 former TSES staff we interviewed stated that some of their colleagues lacked executive-level skills or were selected for positions based on personal relationships with administrators or other TSES staff. Specifically, 12 of the 13 interviewees in this category stated their colleagues lacked the necessary qualifications for the position. For example, one interviewee mentioned that an individual with a rail background was put in charge of a TSA division that focused on aviation policy. In addition, 6 of the 13 TSES staff in this category stated that many in the TSES were hired based on personal relationships, as opposed to executive qualifications. As discussed previously, unlike many other federal agencies, TSA is not required to adhere to merit staffing principles when hiring for limited term TSES positions. However, TSA has agreed to adhere to merit staffing principles when hiring for career TSES positions in accordance with the OPM-DHS interchange agreement. The former TSES staff we interviewed did not always provide us with the names of their colleagues whom they believed were not hired in accordance with merit staffing principles. Additionally, documentation related to the hiring of TSES staff who joined the agency prior to March 2006 was not generally available. Therefore, we were not able to conduct an independent assessment of whether the TSES in question should have been hired, and subsequently were hired, in accordance with merit staffing principles. However, later in this report, we discuss the extent to which TSA documented its adherence to merit staffing principles when hiring for TSES career positions in 2006 and 2008, such that an independent third party could make this type of assessment in the future. Thirteen of the 46 TSES staff we interviewed cited dissatisfaction with the authority and responsibilities of their position as a reason for leaving. Specifically, 7 TSES staff members reported being dissatisfied with the limited authority associated with their position. For example, during a period when contractors, as opposed to FSDs, were responsible for hiring TSA airport employees, one former FSD explained that he arrived at the interview site to observe the interview and testing process for the transportation security officer candidates, but was not allowed to enter the facility, even though he would be supervising many of the individuals who were hired. The remaining 6 TSES reported that they were either dissatisfied with the duties and responsibilities of their position, or they became dissatisfied with their position after (1) they were reassigned to a less desirable position or (2) they believed their position lost authority over the course of their employment. For example, regarding the latter, one former TSES staff member reported that after his division was subsumed within another, he became dissatisfied with no longer having the ability to report directly to the administrator or implement policies across the agency, and subsequently left the agency. Twelve of the 46 TSES staff we interviewed cited disagreement with top leadership’s priorities or decisions as a reason for separation. Seven of the 12 TSES staff in this category disagreed with a specific management decision. For example, one former TSES staff member reported leaving the agency when top leadership decided to discontinue a process for evaluating candidates for a certain TSA position, which the former TSES staff member believed was critical to selecting appropriate individuals for the position. The other 5 staff in this category questioned agency priorities. For example, one TSES staff member believed that TSA focused on aviation security at the expense of security for other modes of transportation, while another commented that agency priorities had shifted from a security focus to one that was centered on customer service. Eleven of the 46 TSES staff we interviewed reported that they were frustrated with numerous agency reorganizations and frequent changes in TSA administrators. For example, one TSES staff member reported that during her tenure she experienced six physical office changes along with multiple changes to duties and responsibilities, making it difficult to lead a cohesive program in the division. We conducted an analysis of TSA organization charts from calendar years 2002 through 2008, and found that TSA underwent at least 10 reorganizations over this period. Furthermore, the charts reflected 149 changes in the TSES staff in charge of TSA divisions. Also, TSA was headed by several different administrators from 2002 through mid-2005—specifically, a total of 4 within its first 5 years of existence. TSA human capital officials acknowledged that the many reorganizations and changes in agency leadership the agency has experienced since its formation have led to many TSES staff separations. With regard to some of the remaining adverse reasons, Nine of the 46 TSES staff told us they separated from the agency because they believed that TSA executives and employees were treated in an unprofessional or disrespectful manner. For example, one TSES staff member reported that upon completion of a detail at another federal agency, he returned to TSA and learned that his TSES position had been backfilled without his knowledge. Nine of the 46 TSES staff reported they were either terminated or pressured to leave the agency. We reviewed TSA-provided data on separations, and found that 3 of the 9 TSES in this category were actually terminated. The 6 who were not terminated reported that they were pressured to leave the agency. Specifically, 4 of the 6 reported that they were forced out of the agency after being offered positions that TSA leadership knew would be undesirable to them due to the location, duties, or supervisor associated with the position. Finally, 2 of the 6 TSES reported they were compelled to resign after being wrongly accused of misconduct or poor performance. Five of the 46 TSES staff we spoke with reported either insufficient or inequitable pay as a reason for separating from the agency. In one case, a TSES staff member told us that, unlike his peers, he did not receive any bonuses or pay increases even though he was given excellent performance reviews. TSA provided us with data on the total amount of bonuses awarded to each TSES staff person employed with the agency during fiscal years 2005 through 2008. Agency documentation reflects that these bonuses were awarded to recognize performance. Of the 95 TSES who separated during this 4-year period, 55 were awarded performance bonuses, and the total amount of these awards ranged from $1,000 to $44,000. Of 141 TSES who were employed with TSA during fiscal years 2005 through 2008, 92 were awarded performance bonuses, and the total amount of these awards ranged from at least $4,800 to $85,000. Another interviewee told us that he left TSA due, in part, to his perception that TSES staff doing aviation security work were paid more than TSES staff such as himself who worked in other nonaviation transportation modes. While some attrition impacts agency operations negatively, such as the loss of historical knowledge or expertise, the separation of other staff can have a positive impact on agency operations—such as when an executive is not meeting performance expectations. To identify the potential impact of TSES separations on agency operations, we conducted interviews with TSA staff who were direct reports to and immediate supervisors of TSES staff members who left the agency. We also interviewed representatives of seven transportation security associations. While we would not expect any of these individuals to have a full understanding of the impact that TSES attrition had on the agency, we believe that presenting the perspectives of superiors and subordinates and external agency stakeholders enables us to offer additional perspective on this issue. We found that the direct reports, supervisors, and external stakeholders had varying views regarding the impact that TSES attrition has had on TSA. Specifically, of the 22 direct reports we interviewed, 13 stated that TSES attrition had little or no impact on TSA’s programs and policies, whereas 8 others cited negative effects, such as delays in the development and implementation of agency programs. Two programs direct reports identified as being negatively affected by TSES attrition were Secure Flight and the Transportation Worker Identification Credential (TWIC) programs. In addition, 12 of the direct reports stated that TSES attrition had little or no impact on the functioning of their particular division, although 10 cited negative effects such as a lack of communication regarding the direction of the division and its goals; difficulties in building relationships with ever-changing supervisors; and decreased morale. Regarding our interviews with the 7 supervisors of TSES staff who since left the agency, 6 reported that TSES attrition had little or no impact on TSA’s programs and policies, but one stated that TSES separations caused a lack of vision and direction for program development. Additionally, 4 supervisors did not believe that TSES attrition had negative impacts on the functioning of a specific division, but 3 supervisors stated that TSES attrition did have negative impacts, stating that separations cause uncertainty and stress among employees, which negatively impacts morale. With regard to our interviews with seven industry associations representing the various stakeholders affected by TSA programs and policies (for example, airports, mass transit systems, and maritime industries), four industry associations could not identify a negative impact attributable to turnover among TSES staff. The remaining three stakeholders reported delayed program implementation and a lack of communication from TSA associated with TSES turnover. TSA human capital officials noted that they were generally pleased that many of the supervisors, direct reports, and stakeholders we interviewed stated that the impact of TSES turnover on agency operations was minimal. In particular, they interpreted this as evidence that their succession planning efforts—to identify, develop, and select successors who are the right people with the right skills for leadership and other key positions—are working as intended, and minimizing the impact of turnover on agency operations. By affording separating TSES the opportunity to complete an exit survey, TSA has taken steps to address attrition that are consistent with internal control standards and effective human capital management practices. Nevertheless, the current survey instrument does not allow TSES staff leaving the agency to identify themselves as executive-level staff, hence preventing the agency from isolating the responses of TSES staff and using the data to address reasons for TSES attrition. In addition, the agency has implemented other measures to improve overall management of its TSES corps that are consistent with effective human capital management practices and internal control standards, such as issuing an official handbook that delineates human capital policies applying to the TSES, implementing a succession plan, and incorporating merit-based staffing requirements (which are intended to ensure fair and open competition for positions) into its process for hiring executive staff. However, inconsistent with internal control standards, TSA did not always clearly document its implementation of merit staffing requirements. According to TSA officials, in January 2008, TSA began collecting data on the reasons for TSES separation through an exit interview process, asking questions specifically designed to capture the experiences of executive- level staff. The interview was administered by TSA human capital officials. According to a TSA official, after we requested access to this information in September 2008, TSA ceased conducting these exit interviews due to concerns that the format would not provide for anonymity of former TSES staff members’ responses. According to standards for internal control in the federal government, as part of its human capital planning, management should consider how best to retain valuable employees to ensure the continuity of needed skills and abilities. Also, we have reported that collecting and analyzing data on the reasons for attrition through exit interviews is important for strategic workforce planning. Such planning entails developing and implementing long-term strategies for acquiring, developing, and retaining employees, so that an agency has a workforce in place capable of accomplishing its mission. In March 2009, TSA, recognizing the importance of such a process to its management of TSES resources, announced it was affording separating TSES staff the opportunity to complete an exit survey. Specifically, TSA officials reported that they would use the agency’s National Exit Survey instrument, which has been in use for non-TSES staff since November 2005. We reviewed the survey instrument, which consists of 21 questions (20 closed ended and one open ended) concerning the staff member’s experience at TSA and the specific reasons for separation, and found that it generally covered all the reasons for separation identified by 46 separated TSES staff we interviewed. Although TSA’s National Exit Survey responses are submitted anonymously (thereby allaying TSA’s concerns with the previous TSES exit interview process), respondents are given the opportunity to identify what position they held at TSA, such as “Transportation Security Officer (TSO),” by selecting from a pre-set list of position titles. However, TSA does not list “TSES” among the answer choices, which precludes TSES staff who fill out the survey from identifying their position rank. TSA officials explained that they do not allow TSES staff to self-identify because, given the small number of TSES staff who leave the agency in a given year, it may be possible to determine the identity of a particular TSES respondent. However, according to TSA’s documented policy for analyzing exit survey data, survey responses will not be analyzed by position if the total number of respondents in that position is fewer than five. We discussed this issue with TSA human capital officials and the TSA officials stated that, in light of this policy, they may consider allowing TSES staff members to identify themselves as such when filling out the survey. Without the ability to isolate the responses of TSES staff from those of other staff, it will be difficult for TSA to use the results of the exit survey to identify reasons for attrition specific to TSES staff, thus hindering TSA’s ability to use exit survey data to develop a strategy for retaining talented TSES staff with specialized skills and knowledge, and ensuring continuity among the agency’s leadership. TSA has also sought to manage attrition among TSES by decreasing its use of limited term TSES appointments. TSA officials believe that the agency’s use of limited term appointments has contributed to higher attrition among TSES staff. TSA’s Chief Human Capital Officer stated that during the agency’s formation and transition to DHS, TSA made more liberal use of limited term appointments, as it was necessary to quickly hire those individuals with the executive and subject area expertise to establish the agency. The official explained that as the agency has matured, and since it now has a regular executive candidate development program, the agency has hired fewer limited term appointments. TSA data on the number of limited term TSES appointed (hired) per fiscal year from 2004 through 2008 show that the agency’s use of limited term appointments has generally been decreasing, both in number and as a proportion of all new TSES appointments. Specifically, the number of new limited term appointments was highest in fiscal year 2004, representing over half of all TSES appointments for that fiscal year; in fiscal year 2008, TSES made six TSES limited term appointments, representing a sixth of all new appointments for that fiscal year (see table 6). TSA has implemented a number of steps to help attract and retain TSES staff. In November 2008, TSA issued a TSES handbook delineating human capital policies and procedures applicable to TSES staff. Prior to this, a comprehensive policy document did not exist. According to standards for internal control in the federal government, management should establish good human capital policies and practices for hiring, training, evaluating, counseling, promoting, compensating, and disciplining personnel in order to maintain an environment throughout the organization that sets a positive and supportive attitude toward internal control and conscientious management. Moreover, these policies and practices should be clearly documented and readily available for examination. TSA has had documented policies and procedures in place for such things as reassignments, transfers, and terminations since December 2003, and for the performance assessment of its TSES staff since July 2003. However, in November 2008, TSA issued a more comprehensive management directive delineating the agency’s human capital policies and procedures for TSES that, in addition to the areas listed above, also covers details to other agencies, reinstatements, compensation, work schedules, leave, awards and recognition, disciplinary actions, and workforce reductions. TSA stated that its goal is to ensure that all current TSES staff members are aware and have copies of the management directive. The directive, along with TSA’s stated commitment to increasing TSES access to this information, should help provide TSES staff with a more accurate and complete understanding of the applicable human capital management authorities, flexibilities, policies, and procedures. TSA also developed a succession plan in 2006 to improve its overall human capital management of TSES staff. TSA’s succession planning efforts provide for a more systematic assessment of position needs and staff capabilities. Specifically, the plan targets 81 positions (both TSES and pay- band) and identifies the leadership and technical competencies required for all. The program is designed to recruit talented TSA staff in lower- level positions as possible candidates for these positions and encourage them to apply for entrance into a Senior Leadership Development Program (SLDP) where, upon acceptance, program participants are to receive special access to training and development experiences. Moreover, program participants are to have their executive core qualifications approved by OPM upon completion of the program, making them eligible for noncompetitive placement into vacant TSES positions. We have previously reported that succession planning can enable an agency to remain aware of and be prepared for its current and future needs as an organization, including having a workforce with the knowledge, skills, and abilities needed for the agency to pursue its mission. To better manage its TSES program, TSA also established in 2006 a hiring process for TSES staff that incorporates merit staffing requirements; however, TSA lacked documentation that would demonstrate whether TSA is consistently following these requirements. Although TSA has more human capital flexibilities with regard to hiring than most federal agencies, the agency, on its own initiative, sought to incorporate various merit staffing requirements into its hiring process. Merit staffing requirements help to ensure that competition for executive positions is fair and transparent, and that individuals with the necessary technical skills and abilities are selected for positions—which was a concern for 13 of the 46 former TSES we interviewed. While TSA human capital officials asserted that TSA has always hired qualified TSES staff in accordance with merit staffing requirements, these officials also acknowledged that for most of TSA’s existence, the agency did not have a documented process for doing so. In January 2006, TSA established an Executive Resources Council (ERC), which was chartered to advise the TSA Administrator and Deputy Administrator on the recruitment, assessment, and selection of executives, among other things. TSA’s ERC charter requires that merit staffing be used when hiring for TSES positions by encompassing certain merit staffing requirements into its procedures, namely public notice of position availability; identification, rating, and ranking of eligible candidates against position qualifications; determination of a list of best qualified candidates with the final selection coming from among those best qualified; and the agency’s certification of the final candidate’s qualifications. According to internal control standards, internal controls and other significant events—which could include the hiring of TSES staff—need to be clearly documented, and the documentation should be properly managed and maintained. To determine the extent to which TSA documented its implementation of the merit staffing procedures, we reviewed case files for evidence that merit staffing procedures were followed for the selection of 25 career TSES appointments for calendar year 2006 (the year the TSES staffing process was established) and 16 TSES staff for calendar year 2008 (the most recent full calendar year for which documentation was available). We could not review documentation prior to this period because TSA explained that its hiring decisions were not consistently documented prior to the establishment of its ERC process in March 2006. Based upon our review, we found that for 20 of the 25 career TSES who were hired competitively in calendar year 2006 and for 8 of the 16 TSES who were hired competitively in calendar year 2008, documentation identifying how TSA implemented at least one of the merit staffing procedures was either missing or unclear. For example, in our review of one 2008 case file, we found that the person selected for the position had not previously held a career executive-level position, but we did not find documentation indicating on what basis the person had been rated and ranked against other candidates applying for the position. Absent such documentation, it is uncertain whether the appointment comported with TSA’s hiring process. Moreover, OPM regulations establishing merit staffing requirements, upon which TSA based its staffing process, provide that agencies operating under merit staffing requirements must retain such documentation for 2 years to permit reconstruction of merit staffing actions. Table 7 identifies the specific merit staffing procedures required by TSA’s hiring process for which documentation was either missing or unclear. TSA human capital officials told us that a lack of documentation within case files does not necessarily indicate that merit staffing procedures were not followed for a particular staffing decision. Specifically, TSA stated that because the TSES staffing process consists of multiple levels of review, including review by both the TSA and DHS Executive Resources Councils, regardless of the lack of documentation, the agency has reasonable assurance that merit staffing principles have been followed. While TSA officials may believe that the agency has these assurances internally, by ensuring that there is complete and consistent documentation of its TSES staffing decisions, TSA can better demonstrate to an independent third party, the Congress, and the public that the way in which it hires for TSES positions is fair and open, that candidates are evaluated on the same basis, that selection for the position is not based on political or other non-job related factors, and that executives with the appropriate skills sets are selected for positions. Given the broad visibility of its mission to secure our nation’s transportation system, it is important that TSA maintain a skilled workforce led by well-qualified executives. As TSA prepares to bring on a new administrator, it would be beneficial to address some of the circumstances which led the former TSES staff members we interviewed to separate. TSA has taken steps to address attrition among TSES staff and to improve overall management of its TSES workforce. However, some modifications to these efforts could be beneficial. For example, TSA’s planned effort to conduct exit surveys of TSES staff—consistent with human capital best practices—is intended to provide TSA with more comprehensive data on the reasons why TSES staff decided to leave the agency. However, the method by which TSA has chosen to collect these data—anonymous surveys in which the separating TSES do not disclose their level of employment—will not provide TSA reasons why TSES staff, in particular, left the agency, thereby rendering the data less useful for addressing TSES attrition. TSA has also implemented a process to hire TSES staff, which incorporates procedures based upon merit staffing requirements in order to ensure that candidates for career TSES appointments are evaluated and hired on the basis of their skills and abilities as opposed to personal relationships—which was a concern among some former TSES staff we interviewed. By more consistently documenting whether and how it has applied merit staffing procedures when filling career TSES positions, TSA can better demonstrate that its hiring of TSES is fair and merit-based, as intended. To address attrition among TSES staff and improve management of TSES resources, we recommend that the TSA Administrator take the following two actions: Ensure that the National Exit Survey, or any other exit survey instrument TSA may adopt, can be used to distinguish between responses provided by TSES staff and other staff, so that the agency can determine why TSES staff, in particular, are separating from TSA. Require that TSA officials involved in the staffing process for TSES staff fully document how they applied each of the merit staffing principles required by TSA when evaluating, qualifying, and selecting individuals to fill career TSES positions. On October 7, 2009, we received written comments on the draft report, which are reproduced in full in appendix IV. TSA concurred with our recommendations and has taken action to implement them. In addition, TSA, as well as OPM, provided technical comments on the draft report, which we incorporated as appropriate. With regard to our recommendation that TSA allow TSES staff to identify themselves as such when filling out the National Exit Survey, TSA stated that it has revised Question 27 of the National Exit Survey—”What is your pay band?”—to include “TSES” as a response option. Regarding our second recommendation that TSA fully document how it applied merit staffing principles when evaluating, qualifying, and selecting individuals to fill career TSES positions, TSA stated that it has established a checklist for proper documentation and will conduct an internal audit of TSES selection files on a quarterly basis. While TSA agrees that it should document its adherence to merit staffing principles, it raised a question about our analysis by stating that that we regarded documentation of TSA’s certification of the candidate’s executive and technical qualifications as deficient if there was not both a signed letter from the selecting official and a signed Executive Resources Council recommendation, even when contemporaneous records existed. However, TSA’s statement is not accurate. To clarify, we considered documentation of this merit staffing principle complete if there was both a signed letter from the selecting official as well as a description of the candidate’s executive and technical qualifications. Therefore, even if the signed ERC recommendation was not present, if other contemporaneous records were provided to us attesting to the candidate’s executive and technical qualifications, we would have given TSA credit for this. We found that for 2006, of the 11 staffing folders that we determined had incomplete documentation of TSA’s adherence to the agency certification principle, 4 were only missing the signed certification by the selecting official, 5 were only missing the description of the candidate’s qualifications, and 2 of the folders were missing both the signed letter from the selecting official as well as a description of the candidate’s executive and technical qualifications. The one folder we identified from 2008 as having incomplete documentation of TSA’s certification of the candidate was missing a description of the candidate’s qualifications. The absence of critical documentation makes it difficult to support TSA’s statement that it has implemented a rigorous process for executive resources management consistent with effective human capital management practices and standards for internal control. TSA also stated that it was unable to respond to the reasons we reported for why former TSES staff left the agency, because the responses were anonymous. It is the case that we did not provide TSA with the names of the former TSES staff with whom we spoke. However, we chose not to do so because we believe that if the former TSES staff we interviewed knew that we were going to share their names with TSA, they would have been less candid and forthcoming in their responses. We would also like to note that TSA would not have had to rely on the information we obtained from former TSES staff regarding their reasons for leaving if TSA had consistently been conducting exit interviews or exit surveys between 2005 and 2008, which is the period of time during which those we interviewed left the agency. We will send copies of this report to the appropriate congressional committees and the Acting Assistant Secretary for TSA. The report will also be available at no charge on our Web site at http://www.gao.gov. If you have any further questions about this report, please contact me at (202) 512-4379 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Most executive branch agencies—including most Department of Homeland Security (DHS) agencies—have a Senior Executive Service (SES), which is comprised of individuals selected for their executive leadership experience and subject area expertise who serve in key agency positions just below presidential appointees. However, due to its exemption from many of the requirements imposed and enforced by the Office of Personnel Management (OPM)—the agency responsible for establishing human capital policies and regulations for the federal government—the Transportation Security Administration’s (TSA) executives are part of the Transportation Security Executive Service (TSES), which is distinct from the SES of other agencies. The explanatory statement accompanying the DHS Appropriations Act, 2008, directed GAO to “report on the history of senior executive service-level career turnover since the formation of TSA.” Accordingly, we addressed the following questions regarding TSA’s TSES staff: 1. What has been the attrition rate among TSES staff for fiscal years 2004 through 2008, and how does it compare to attrition among SES staff in other DHS components and cabinet-level departments? 2. What reasons did former TSES staff provide for leaving TSA, and how do current TSA officials and stakeholders view the impact of TSES attrition on TSA’s operations? 3. To what extent are current TSA efforts to manage TSES attrition consistent with effective human capital practices and standards for internal control in the federal government? More details about the scope and methodology of our work to address each of these principal questions are presented below. To calculate attrition for TSES staff and SES staff in DHS overall (excluding TSA) as well as other cabinet-level departments, we analyzed fiscal year 2004 through 2008 data from OPM’s Central Personnel Data File (CPDF), a repository of selected human capital data for most Executive Branch employees, including separations data. We selected this time period because 2004 was the first full fiscal year during which TSA was a part of DHS after transferring from the Department of Transportation in March 2003, and thus a more meaningful starting point for comparing TSES attrition to SES attrition at other federal agencies. Also, at the time of our review, 2008 was the most recently completed fiscal year for which attrition data were available in CPDF. The individuals who we classified as senior executive staff who attrited, or separated, from their agencies were those with CPDF codes that: identified them as senior executive staff, specifically TSES, SES, or SES equivalent staff and indicated that they had separated from their agency of employment through resignation, transfer to another cabinet-level department, retirement, termination, expiration of term appointment, or “other” separation type. We did not include TSES or SES staff who made intradepartmental transfers (such as transferring from TSA to U.S. Customs and Border Protection (CBP), which is another DHS agency) when calculating attrition because these data were not readily available in CPDF. We calculated the executive attrition rates (both SES and TSES) for each fiscal year by dividing the total number of executive separations for a given fiscal year by the average of (1) the number of senior executive staff in the CPDF as of the last pay period of the fiscal year prior to the fiscal year for which the attrition rate was calculated and (2) the number of senior executive staff in CPDF as of the last pay period of the fiscal year in which the attrition occurred. To place the TSA’s senior executive attrition rate in context, we compared it to the overall DHS SES attrition rate (excluding TSA) and the overall SES attrition rate for all other cabinet- level departments (excluding DHS). We did not calculate senior executive attrition rates for individual component agencies within DHS (such as for U.S. Secret Service) because the total number of senior executive staff for most of these components for a given fiscal year was fewer than 50. We generally do not to calculate rates or percentages when the total population for any unit is less than 50. Given that we could not provide rates for all DHS components, we decided not to compare TSES attrition to SES attrition for individual DHS components; however we do provide data on the number and type of executive separations for each DHS component in appendix II. For additional context, we compared the attrition rate for TSES staff who worked in TSA headquarters to those who worked in field locations for fiscal years 2004 through 2008. The CPDF does not identify whether a TSES staff person is considered headquarters or field staff, but does include codes that identify the physical location of each TSES position, including the location of TSA’s headquarters building. As such, we considered headquarters TSES staff to be all TSES staff assigned location codes for TSA’s headquarters building. In addition, using CPDF location codes, we identified all TSES staff working in the Washington D.C. area (Washington, D.C., and nearby counties in Virginia and Maryland) who were not assigned location codes for TSA headquarters, and asked TSA to identify which of these individuals were considered headquarters staff. All TSES staff not identified as headquarters staff were considered field staff. We believe that the CPDF data are sufficiently reliable for the purposes of this study. Regarding the CPDF, we have previously reported that governmentwide data from the CPDF were 97 percent or more accurate. To identify the reasons for TSES staff attrition, we selected a nonprobability sample of 46 former TSES staff members to interview from a TSA-provided list of 95 TSES staff members who separated from the agency during fiscal years 2005 through 2008. TSA provided us with the last-known contact information for each of these individuals. We searched electronic databases, such as LexisNexis, or used Internet search engines to obtain current contact information for these individuals if the information TSA provided was outdated. We determined that the TSA- provided list of 95 former TSES staff was sufficiently reliable for the purposes of this study. To make this determination, we compared TSA data on TSES staff separations with the number of TSES separations identified in CPDF and found that both sources reported sufficiently similar numbers of TSES staff separations per fiscal year. We attempted to select former TSES staff based on a probability sample in order to generalize about the reasons for TSES separation. Of the 46 interviewees, 31 were selected based upon a randomized list of the 95 separated TSES created to select a probability sample. We were unable to obtain an acceptable response rate for our sample, thus we determined we would continue interviewing until we had obtained responses from about half of the 95 separated TSES staff. We selected the remaining 15 interviewees in our sample of 46 in such a way that the proportion of interviewees with the following three characteristics—fiscal year of separation (2005 through 2008), manner of separation (resignations, retirements, etc.), and job location (headquarters or field)—would be about the same as the proportion of the 95 TSES staff members who separated during fiscal year 2005 through 2008 who had those characteristics. For example, if one-third of the 95 former TSES staff TSA identified left the agency in fiscal year 2005, then our goal was to ensure that approximately one-third of the 46 former TSES we interviewed left in 2005. We were not always successful in obtaining interviews with staff possessing some of the characteristics required to make our sample population resemble the larger population; however, for most characteristics, our sample of 46 generally had the same proportions as the larger population of TSES (see table 8). To obtain our sample of 46 TSES, we contacted a total of 70 of the 95 separated TSES, and of these 70, 24 did not respond to our request for an interview. Specifically, 16 of these nonresponses were from our attempt to select a probability sample. After we began selecting TSES for interviews based on the three characteristics—fiscal year of separation (2005 through 2008), manner of separation (resignations, retirements, etc.), and job location (headquarters or field)—we encountered an additional 8 nonresponses. Since we determined which former TSES staff to interview based on a nonprobability sample, we cannot generalize the interview results to all TSES staff who separated from TSA from fiscal years 2005 through 2008. However, these results provided us with an indication of the range of reasons why nearly half of the TSES staff who separated from TSA during this time period left the agency. To ensure consistency in conducting our interviews with separated TSES staff members, we developed a structured interview guide of 24 questions that focused on senior-level executives’ reasons for separation and their opinions on how TSA could better manage attrition. We conducted 3 of the 46 interviews in person at GAO headquarters and the remainder via telephone. Our question on the reasons for separation was open-ended; therefore, to analyze the responses to this question, we performed a systematic content analysis. To do so, our team of analysts reviewed all responses to this question, proposed various descriptive categories in which TSES reasons for leaving TSA could be grouped based upon themes that emerged from the interview responses, and ultimately reached consensus on the 12 categories listed in table 9 below. To determine which categories applied to a particular response provided by the former TSES staff members we interviewed, two analysts independently reviewed interview responses and assigned categories to the data; there was no limit to the number of categories the analysts could assign to each response. If the two analysts assigned the same categories, we considered the reasons for separation agreed upon. If they determined different categories applied, a third analyst reviewed the interview data and independently assigned categories. If the third analyst assigned the same category as one of the other reviewers, we considered the reason for separation the agreed upon category. If all three analysts assigned different categories, we coded the reason for separation as “unclassified.” Of the 46 responses we received to our question regarding reasons why the former TSES we interviewed separated from TSA, the initial two analysts agreed upon the categories for 37 TSES staff members’ responses. For all 9 responses in which there was disagreement, a third analyst who reviewed the data agreed with the category assigned by one of the other two other analysts. One of the general categories we established for why TSES separated from TSA was dissatisfaction with numerous agency reorganizations. To identify the number of reorganizations TSA experienced since its creation, and the movement of TSES staff associated with these reorganizations, we analyzed 10 organization charts provided to us by TSA covering calendar years 2002 through 2008. These charts identified only high-level TSA organizational divisions and the TSES staff member (usually an Assistant Administrator) who headed each division. To identify movement of TSES staff, we compared the charts in chronological order and counted the number of changes in the TSES staff person heading the division from one chart to the next. In conducting our analysis, we did not determine whether changes in TSES staff from one chart to the next were directly attributable to TSA’s reorganizations because we did not have the resources to investigate the specific circumstances surrounding each of the 149 changes. Another of the general categories we established for why TSES staff separated from TSA was dissatisfaction due to their perception of receiving insufficient or inequitable pay. TSA provided us data on the total amount of bonuses received by TSES staff employed with TSA during fiscal years 2005 through 2008. We analyzed these data to identify the number of TSES staff who received bonuses and the range of these cumulative payments for staff who separated and for those who did not separate during this period. For TSES staff who received, in addition to bonuses, relocation, retention, and recruitment payments, TSA provided us with a single sum for all these payments. For these TSES staff, we could not identify the amount of the bonus from other payments made for recruitment, retention, or relocation purposes. Thus, we excluded from our analysis any individual receiving payments for recruitment, retention, or relocation, in addition to bonuses. Specifically, we excluded data for 4 TSES staff who separated during fiscal years 2005 through 2008, and 34 TSES staff who were employed throughout the 4-year period. Although we assessed TSA data on the number of TSES staff separations for fiscal years 2005 through 2008 and found them reliable, we were not able to assess the reliability of the specific amounts of supplemental pay TSA reported giving to TSES over this time period because some of these data were not recorded within the CPDF for comparison. However, we confirmed with TSA that the data provided were applicable to all TSES employed over the fiscal year 2005 through 2008 time period. To address the impact of TSES attrition, we interviewed supervisors of separated TSES, employees who were direct reports to—that is, employees who were directly supervised by—separated TSES staff, and industry associations representing some of the various transportation sectors (aviation, surface, and maritime) that collaborate with TSA on transportation security initiatives. To conduct interviews with supervisors, we asked TSA to identify TSES supervisors who were still with TSA and who supervised any TSES who separated during fiscal years 2005 through 2008. TSA identified nine TSES staff still at the agency who had supervised other TSES staff; we requested interviews with eight of these supervisors and conducted seven interviews. We asked the supervisors to identify the impact, if any, of the TSES separation(s) on 1) development or implementation of TSA programs or initiatives and 2) external stakeholder relations. Two analysts then performed a systematic content analysis to determine if the responses to our interview questions portrayed a positive impact, negative impact, or little to no impact. The analysts agreed in their determinations for all seven interviews. To identify direct reports for interviews, we asked the former TSES we interviewed to provide us with names of employees who reported directly to them when they were in TSES positions and who they believed were still TSA employees; among the 25 former TSES staff who responded to our inquiry, we were given names of 52 TSA employees who had reported directly to these TSES staff during their tenure at TSA. Though this selection method relied upon the recommendations of separated TSES staff, we attempted to adjust for any bias the TSES staff may have had when recommending these individuals by ensuring that the direct reports we interviewed were evenly distributed across the following three categories: 1) reported to TSES staff who left TSA for only nonadverse reasons; 2) reported to TSES staff who left TSA for a combination of nonadverse and adverse reasons; and 3) reported to TSES staff who left TSA for adverse reasons only. We then selected 26 direct reports for interviews from among the three groups. We were able to conduct a total of 22 interviews: 5 from the nonadverse category; 4 from the nonadverse/adverse category; and 13 from the adverse only category. We conducted 9 of the 22 interviews in person at TSA headquarters with only ourselves—and no other TSA employee—present in the room; we conducted the remainder of direct report interviews via telephone, with a TSA staff person online throughout the call. This staff person was the TSA liaison, whose responsibility is to ensure that GAO receives access to requested documentation and interviews for a given engagement. Though the TSA liaison had no supervisory authority over the direct report staff we interviewed, the presence of this individual during the phone call could have inhibited the responses of the direct report interviewees we spoke with via telephone. We asked the direct reports to describe the impact, if any, of a TSES supervisor’s separation on their individual responsibilities and the efforts underway in their particular division. We then performed a systematic content analysis of their responses in the same manner as our content analysis of separated TSES interviews. The two analysts reviewing the direct report interviews agreed in their determinations for all 22 interviews. Finally, to obtain perspectives from industry stakeholders, we interviewed seven TSA transportation industry groups. We identified these industry groups based on our experience in the field of transportation security and by canvassing GAO analysts working in the area of transportation security for other contacts. We requested interviews with 13 industry stakeholder groups and either received written responses or obtained interviews with 7—specifically 3 aviation associations, 1 surface transportation association; and 3 maritime transport associations. We asked the stakeholders to identify whether they were aware of turnover among TSES staff, how they knew turnover had occurred, and how it impacted a specific policy or program they were working with TSA to implement. Two analysts then performed a systematic content analysis on the responses, and there was no disagreement between their determinations. Although the direct report, supervisor, and industry stakeholder interviews provided important perspectives on impact of executive attrition, the results could not be generalized, and therefore, do not represent the views of the entire population of each group. To gather information on TSA efforts to address attrition, we interviewed the Assistant Administrator and the Deputy Assistant Administrator of TSA’s Human Capital Office to learn about the various initiatives they have underway to address attrition and to improve management of their executive resources. These officials identified several initiatives, which we assessed, including a reinstated exit interview process, decreased use of limited term appointments, and recent release of a comprehensive handbook delineating TSES human capital policies, succession planning, and the establishment of a merit-based staffing process. To assess the exit survey process, we consulted prior GAO reports that address the use of exit interview data in workforce planning. We reviewed exit interviews TSA conducted under its previous process (specifically, five interviews dating from January 2008 through September 2008), and examined TSA’s data collection tool for conducting these interviews. We also reviewed the National Exit Survey instrument that TSA is presently using to conduct exit interviews of TSES staff, and conducted interviews with TSA human capital officials on the agency’s plans for implementing this process. To determine whether TSA has decreased its use of TSES limited term appointments, we reviewed TSA-provided data on the number of limited term appointments the agency made for fiscal years 2004 through 2008, and reviewed CPDF data on the total number of TSES staff hired for fiscal years 2004 through 2008. We were not able to determine the reliability of these data because some TSA data on limited term appointments were not recorded within CPDF. To determine the extent to which TSA’s handbook for TSES human capital policies and its succession plan were consistent with effective human capital practices and internal control standards, we reviewed criteria in prior GAO reports, as well as the standards for internal control in the federal government. We reviewed TSA management directives for TSES staff from fiscal year 2003 through fiscal year 2008 (one of which is the November 2008 handbook), as well as TSA’s succession plan (both the 2006 and 2008 versions). To identify the extent to which TSA has implemented its succession plan, we also reviewed TSA data on the number of staff who completed executive-level training identified within its succession plan and spoke with human capital officials responsible for compiling these data. Finally, to determine the extent to which TSA has been following merit- based staffing requirements for hiring TSES staff, we first reviewed documentation delineating TSA’s hiring process, specifically its Executive Resource Council (ERC) charter. To determine the merit staffing requirements TSA’s ERC process should encompass, we reviewed applicable OPM regulations addressing merit staffing. We identified seven merit staffing requirements that should have been reflected within TSA’s hiring process, and therefore, within its documentation of hiring decisions (see table 7). To ensure that the seven requirements we identified were an appropriate standard for assessing TSA’s performance of merit staffing, we reviewed OPM’s audit procedures for merit staffing and found that OPM requires agencies operating under its jurisd iction to document performance of these seven requirements. In addition, TSA officials also confirmed that these were the key merit staffing requirements they followed and agreed that these should be reflected within documentation for TSES hiring decisions. To determine whether TSA was documenting its performance of the seven merit staffing requirements, we reviewed all case files for competitively filled, career appointments to TSES positions for calendar years 2006 and 2008—a total of 41 case files. We reviewed case files for competitively filled, career appointments specifically because TSA has committed to using merit staffing for these hiring decisions; thus, we could expect to find documentation of TSA’s performance of merit staffing procedures within these files. We did not review case files from 2007, because we were interested in comparing how TSA followed merit staffing requirements when it initially established its ERC process in 2006, with how it followed them more recently in 2008—the most recent full calendar year when we undertook our review. After we provided the draft report to DHS for comment on July 27, 2009, TSA officials informed us that the they had additional documentation to demonstrate that the agency had adhered to the merit staffing principle of agency certification of the candidate’s executive and technical qualifications for more TSES career positions than the number identified in our draft report. TSA provided this additional documentation to us on September 4, 2009. Although this documentation had not been kept in the files we reviewed, we assessed the additional documentation and revised our report accordingly. We conducted this performance audit from April 2008 through October 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 objectives. The following tables provide data for fiscal years 2004 through 2008 on the number of senior executive staff who attrited—or separated—from the Transportation Security Administration (TSA); other selected Department of Homeland Security (DHS) agencies; and all cabinet-level departments, excluding DHS. In this report, we define attrition as separation from an agency by means of resignation, termination, retirement, expiration of appointment, or transfer to another cabinet-level department. Senior executive staff members in TSA are those individuals who are part of the Transportation Security Executive Service (TSES), and senior executives for other DHS agencies and cabinet-level departments are those individuals who are part of the Senior Executive Service (SES) or who hold SES-equivalent positions (for those agencies within cabinet-level departments that, like TSA, do not have SES). The DHS agencies for which we provide SES attrition data are those with operational missions, namely the Federal Emergency Management Agency (FEMA), U.S. Customs and Border Protection (CBP), U.S. Coast Guard (USCG), U.S. Citizenship and Immigration Services (USCIS), U.S. Immigration and Customs Enforcement (ICE), and U.S. Secret Service (USSS). We also provided SES attrition data for “DHS Headquarters,” which includes all DHS executive staff in positions serving departmentwide functions, such as those involving financial or human capital management. We do not report rates and percentages for populations under 50. Although the executive populations of TSA and some DHS components for fiscal years 2004 through 2008 numbered more than 50 individuals (namely CBP, DHS Headquarters, and Rest of DHS), most DHS components had less than 50 executives during this period. So that the presentation of our data would be uniform, we chose to present the attrition data in tables 11, 13, 15, 17, and 19 in total figures for all DHS components. In addition to the contact named above, Kristy Brown (Assistant Director) and Mona Blake (Analyst-in-Charge) managed this assignment. Maria Soriano, Kim Perteet, and Janet Lee made significant contributions to the work. Gregory Wilmoth, Catherine Hurley, and Christine San assisted with design, methodology, and data analysis. Tom Lombardi and Jeff McDermott provided legal support. Adam Vogt provided assistance with report preparation. | The Transportation Security Administration's (TSA) Transportation Security Executive Service (TSES) consists of executive-level staff serving in key agency positions just below political appointees. Committees of Congress have raise questions about the frequency of turnover within the TSES and have directed GAO to examine turnover among TSES staff. Accordingly, this report examines: (1) TSES attrition and how it compares with that of Senior Executive Service (SES) staff in other DHS components and cabinet-level departments, (2) the reasons TSES staff separated from TSA, and (3) TSA efforts to mange TSES attrition consistent with effective management practices. To answer these objectives, GAO analyzed data within the Office of Personnel Management's Central Personnel Data File, reviewed TSA human capital policies and procedures, and interviewed former TSES staff. The results of these interviews are not generalizable, but represent the views of about half the TSES staff who separated from fiscal years 2005 through 2008. Separation data from fiscal years 2004 through 2008 show that attrition among TSA's TSES staff was consistently lower than the rate of attrition among all DHS SES staff and, through 2007, higher than SES attrition for all other cabinet-level departments. Separations among TSES staff peaked at 20 percent in fiscal years 2005, but declined each year thereafter, and resignations (as opposed to retirements, terminations, transfers to other cabinet level departments, or expirations of a term appointment) were the most frequent type of TSES separations over this period. In interviews with 46 former TSES staff, the majority (36 of 46) identified at least one adverse reason (that is, a reason related to dissatisfaction with some aspect of their experience at TSA) for leaving, as opposed to a nonadverse reason (such as leaving the agency for another professional opportunity). The two most frequently cited reasons for separation were dissatisfaction with the leadership style of the TSA administrator or those reporting directly to him (14 of 46) and to pursue another professional opportunity (14 of 46). To better address TSES attrition and manage executive resources, TSA has implemented measures consistent with effective human capital management practices and standards for internal control in the federal government. These measures include, among other things, reinstating an exit survey and establishing a process for hiring TSES staff that encompasses merit staffing requirements. However, TSA could improve upon these measures. For example, due to TSA officials' concerns about respondents' anonymity, TSA's new exit survey precludes TSES staff from identifying their position. Without such information, it will be difficult for TSA to identify reasons for attrition specific for TSES staff. Moreover, inconsistent with internal control standards, TSA did not document its adherence with at least one merit staffing procedure for 20 of 25 TSES hired in calendar year 2006 and 8 of 16 TSES hired in calendar year 2008. Although there are internal mechanisms that provide TSA officials reasonable assurance that merit staffing principles are followed, better documentation could also help TSA demonstrate to an independent third party, the Congress, and the public that its process for hiring TSES staff is fair and open. |
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One of DOD’s goals is to prepare its combat units for wartime operations by providing units with the most realistic training possible. DOD operates and maintains hundreds of training ranges located throughout the country. Its combat units use training areas located in a wide variety of climates and include the full scale of training terrains, such as ocean areas, desert and mountainous regions, and jungle-like environments, which provide DOD combat units the opportunity to train in environments they will most likely operate in once deployed for wartime operations. These training areas also encompass critical habitat and are home to a variety of endangered species. Like other federal, state, local, and private facilities, DOD installations are generally required to comply with environmental and other laws that are intended to protect human health and the environment from harm. However, several environmental statutes include a national security exemption that DOD may invoke to ensure the requirements of those statutes would not restrict military training needs that are in the paramount interest of the United States. These exemptions require a case- by-case determination by an authorized decision maker and provide authority for suspending compliance requirements for actions at federal facilities, including military installations. To date, DOD has received or invoked exemptions under the Coastal Zone Management Act (CZMA), Endangered Species Act, Marine Mammal Protection Act, and RCRA. Although seldom made, DOD’s requests for exemption have been approved in every case. Table 1 presents the environmental statutes that authorize case-by-case exemptions and the approval standards. In 2002, DOD submitted to Congress an eight-provision legislative package, referred to as the Readiness and Range Preservation Initiative, proposing revisions to six environmental statutes on the basis of DOD’s concerns that restrictions in these statutes could limit realistic preparations for combat and negatively affect military readiness. DOD also requested two additional provisions that would allow DOD to cooperate more effectively with third parties on land transfers for conservation purposes. To date, Congress has enacted five of the Readiness and Range Preservation Initiative provisions. The fiscal year 2003 defense authorization act directed the Secretary of the Interior to prescribe regulations for issuing permits for the “incidental takings” of migratory birds during military training exercises authorized by the Secretary of Defense and provided an interim exemption from the Migratory Bird Treaty Act’s prohibition against taking, killing, or possessing any migratory birds except as permitted by regulation, until the implementation of new regulations. DOD had been concerned about the effects of a court decision holding that certain military readiness activities resulting in migratory bird takings violated the Migratory Bird Treaty Act. Interior department regulations published in February 2007 allow for the Armed Forces to take migratory birds incidental to military readiness activities, provided that for those activities the Armed Forces determine may result in a significant, adverse effect on a population of migratory bird species, they must confer with the FWS to develop and implement appropriate conservation measures to minimize or mitigate those effects. The Secretary of the Interior retains the power to withdraw or suspend the authority for incidental takings of migratory birds for particular activities under certain circumstances. Two additional provisions enacted in the fiscal year 2003 defense authorization act authorized the Secretary of a military department to enter into an agreement with a state or local government or any private organization committed to the conservation, restoration, or preservation of land and natural resources to address encroachment issues and to convey any surplus real property under the Secretary’s administrative control that is suitable and desirable for conservation purposes to any state or local government or nonprofit organization committed to conservation of natural resources on real property. The fiscal year 2004 defense authorization act enacted two of the five remaining Readiness and Range Preservation Initiative provisions by authorizing DOD exemptions from the Endangered Species Act and the Marine Mammal Protection Act. One of the revisions to the Endangered Species Act precluded the Secretary of the Interior from designating as critical habitat DOD lands that are subject to an approved integrated natural resources management plan, if the Secretary makes a written determination that such a plan provides a benefit to the species being designated. DOD, like other federal agencies, is still required to consult with the FWS and the National Marine Fisheries Service, as appropriate, to ensure that actions it performs, authorizes, funds, or permits are not likely to jeopardize the continued existence of a listed species or adversely modify its critical habitat. In DOD’s view, this statutory revision was needed to avoid the potential of any future critical habitat designations that could restrict the use of military lands for training. The other revision to the Endangered Species Act requires the Secretary of the Interior to consider effects on national security when deciding whether to designate critical habitat, but does not remove DOD from being subject to all other protections provided under the act. The revision to the Marine Mammal Protection Act authorized the Secretary of Defense to exempt for a specific period, not to exceed 2 years, any action or category of actions undertaken by DOD or its components from compliance with the act’s prohibition against illegal takings of marine mammals, if the Secretary determines it is necessary for national defense. The revision also amended the definition of “harassment” of marine mammals, as it applies to military readiness activity, to require evidence of harm or a higher threshold of potential harm, and required the Secretary of the Interior to consider the impact on the effectiveness of the military readiness activity in the issuance of permits for incidental takings. In DOD’s view these amendments were needed to prevent restrictions on the use of the Navy’s sonar systems. Similar to previous years since fiscal year 2003, DOD included in its proposed National Defense Authorization Act for Fiscal Year 2008 the three remaining Readiness and Range Preservation Initiative provisions which provide exemptions from certain requirements of the Clean Air Act, RCRA, and CERCLA. As with previous Congresses, the 110th Congress did not include these provisions in the version of the bill that went before both houses for final vote. Descriptions of the three remaining proposals follow: First, the proposed revision to the Clean Air Act would have deferred emissions generated by military readiness activities from conforming to applicable state clean air implementation plans for achieving federal air quality standards and allowed DOD up to 3 years to satisfy these requirements. To be in conformity, a federal action must not contribute to new violations of the standards for ambient air quality, increase the frequency or severity of existing violations, or delay timely attainment of standards in the area of concern. DOD proposed this revision to provide flexibility for transferring training operations to areas with poor air quality without restrictions on these operations due to generated emissions. In addition, the revision would have required EPA to approve a state plan even if emissions from military readiness activities would prevent a given area within the state from achieving clean air standards. Second, DOD’s proposed revision to RCRA would have amended the definition of “solid waste” to exclude munitions that are on an operational range incident to their normal use, thereby excluding such munitions from regulation under RCRA. RCRA governs, among other things, the management of hazardous wastes, including establishing standards for treatment, storage, and disposal facilities. Third, the proposed revision to CERCLA, under which entities responsible for releases of hazardous substances are liable for associated cleanup costs, would have similarly amended the definition of “release.” CERCLA defines release as any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment (including the abandonment or discarding of barrels, containers, and other closed receptacles containing any hazardous substance or pollutant or contaminant). DOD’s view is that the proposed revisions to RCRA and CERCLA would clarify existing regulations EPA finalized in its 1997 Military Munitions Rule, pursuant to which “used” or “fired” munitions on a range are considered solid waste, subject to disposal requirements, only when they are removed from their landing spot. DOD sought this revision to eliminate the possibility of legal challenges to the rule, which might have resulted in an active range being closed to require the removal of accumulating munitions and cleanup of related contamination, thus restricting training. To the extent that encroachment adversely affects training readiness, opportunities exist for the problems to be reported in departmental and military service readiness reports. DOD defines readiness as the ability of U.S. military forces to fight and meet the demands of the national military strategy. Readiness is the synthesis of two distinct but interrelated levels: unit readiness (the ability of each unit to provide capabilities required by the combatant commanders to execute their assigned missions) and joint readiness (the combatant commander’s ability to integrate and synchronize ready combat and support forces to execute his or her assigned missions). DOD has stated that the goal of any readiness reporting or assessment system is to reveal whether forces can perform their assigned missions. Historically, DOD has inferred this ability from the status of unit resources via the Global Status of Resources and Training System. This system is the primary means for units to report readiness against designed operational goals. The system’s database indicates, at selected points in time, the extent to which units possess the required resources and training to undertake their wartime missions. DOD found, however, that these input- based assessments do not yield direct information on whether a force can actually perform an assigned mission despite potential resource shortfalls. In the spring of 2002, DOD announced plans to create a new Defense Readiness Reporting System that would provide commanders with a comprehensive assessment of the ability of capable entities to conduct operations without the command having to research and examine numerous databases throughout DOD, such as the Global Status of Resources and Training System and the service-specific readiness reporting systems. According to DOD, this new system is expected to be able to seamlessly integrate readiness data with planning and execution tools, providing a powerful means for rapidly assessing, planning, and executing operations. This system expands the readiness reporting process from simple resource-based reporting to the use of near real-time readiness information and dynamic analysis tools to determine the capability of an organization to execute tasks and missions. Specifically, the system represents a shift from (1) resources to capabilities—inputs to outputs; (2) deficiencies to their implications; (3) units to the combined forces; and (4) frontline units to all units contributing to front line operations. This report is a continuation of a series of reports that we have issued on matters related to training constraints as a result of encroachment factors on DOD’s training ranges. The following summarizes key issues from these reports: In June 2002, we reported that DOD’s readiness reports did not indicate the extent to which environmental requirements restricted training activities, and that these reports indicated a high level of military readiness overall. We also noted individual instances of environmental requirements at some military installations and recommended that DOD’s readiness reporting system be improved to more accurately identify problems for training that might be attributed to the need to comply with statutory environmental requirements. We found that (1) despite the loss of some capabilities, service readiness data did not indicate the extent to which encroachment has significantly affected reported training readiness; (2) though encroachment workarounds may affect costs, the services had not documented the overall impact of encroachment on training costs; and (3) the services faced difficulties in fully assessing the impact of training ranges on readiness because they had not fully defined their training range requirements and lacked information on the training resources available to support those requirements. In April 2003, we testified that environmental requirements were only one of several factors that affected DOD’s ability to carry out training activities, but that DOD was still unable to broadly measure the effects of encroachment on readiness. We found that (1) encroachment affected some training range capabilities, required workarounds, and sometimes limited training, at all stateside installations and major commands that we visited; (2) service readiness data in 2002 did not show the impact of encroachment on training readiness or costs, and though individual services were making some assessment of training requirements and limitations imposed by encroachment, comprehensive assessments had yet to be done; and (3) although some services reported higher costs because of encroachment-related workarounds for training, service data systems did not capture the costs comprehensively. We recommended a more comprehensive plan that clearly identified steps to be taken, goals and milestones to track progress, and required funding. In June 2005, we found that DOD continued to face various difficulties in carrying out realistic training at its ranges. We reported that deteriorating conditions and a lack of modernization adversely affected training activities and jeopardized the safety of military personnel. We observed various degraded conditions at each training range visited, such as malfunctioning communication systems, impassable tank trails, overgrown areas, and outdated training areas and targets. DOD’s limited progress in improving training range conditions was partially attributable to a lack of a comprehensive approach. We found that (1) while the services had individually taken a varying number of key management improvement actions, such as developing range sustainment policies, these actions lacked consistency across DOD or focused primarily on encroachment without including commensurate efforts on other issues, such as maintenance and modernization; (2) though the services could not precisely identify the funding required and used for their ranges, range requirements had historically been inadequately funded; and (3) although DOD policy, reports, and plans had either recommended or required specific actions, DOD had not fully implemented these actions. The requirement to comply with environmental laws has affected some training activities and how they are conducted, but our review of DOD’s readiness data does not confirm that compliance with these laws hampers overall military readiness. During our visits to training ranges, we found some instances where training activities were cancelled, postponed, or modified in order to address environmental requirements. However, DOD officials responsible for planning and facilitating training events may implement adjustments to training events, referred to as “workarounds,” to ensure training requirements are still accomplished. Our discussions with officials responsible for readiness data and our review of these data did not confirm that military readiness has been hindered because of restrictions imposed by environmental laws. OSD and each of the military services are currently in the process of developing systems that will provide DOD leadership and outside stakeholders a better understanding of how external factors, such as environmental laws, affect the department’s training and readiness. Compliance with various environmental laws has created restrictions on how DOD manages, plans, and conducts training exercises on its installations. Military training areas are subject to environmental laws which are intended to help the survival and preservation of the natural resources located on these training lands. Many of these training areas are home to endangered species; thus, areas that could be used for training or had been used for training on DOD installations are restricted and blocked off to prevent units from disturbing or harming the habitat of the endangered species, as the following examples illustrate. Marine Corps Base Camp Pendleton, California Because of competing land use and various environmental restrictions, officials at the base have reported that Marine combat units can use only about 6 percent (less than 1 mile) of its 17 miles of sandy beaches along the coast of the Pacific Ocean for major amphibious landing training exercises. Two of the environmental restrictions cited were for the threatened San Diego fairy shrimp, the endangered Coastal California gnatcatcher and its habitat. Another restriction involved the nesting season for the endangered bird called the California least tern (see fig. 1). Camp Pendleton officials said closing one beach during the nesting season introduces some artificiality into its training events because commanders would be limited in the number of landing areas available to them during offensive operational exercises. Barry M. Goldwater Range, Luke Air Force Base, Arizona Training officials stated that in calendar year 2004, about 8 percent (72 cases out of 878) of the F-16 training exercises were cancelled due to the presence of the endangered Sonoran pronghorn species present on the training range impact area. Aberdeen Proving Ground, Maryland Installation officials told us that on eight different occasions between April 2003 and June 2006, training exercises for the Naval Special Warfare Combatant Command were cancelled unexpectedly, due to the presence of new bald eagle nests in the training area and concerns that harm to the eagle population could have legal repercussions. In order to accomplish the required training requirements, the Navy official responsible for scheduling these exercises told us that the expeditionary force teams had to reschedule their training exercises for later dates or alternate locations, which were not as beneficial as the training area provided at Aberdeen Proving Ground. Naval Base Coronado, San Clemente Island, California Training officials told us that during the fire season the Navy is prohibited from firing illumination rounds on the shore bombardment area at San Clemente Island, which is used by the Navy for surface ship live-fire exercises. The exact dates for fire season vary from year to year, depending on the weather, but are generally for 8 months. According to Navy officials, some sailors do not receive this type of training until after they are deployed. Army National Training Center, Fort Irwin, California Installation officials said the presence of the threatened desert tortoise caused trainers and commanders to plan training activities around areas designated and blocked off for the protection of this protected species. Some military commanders believe that compliance with environmental laws protecting the natural resources may cause them to design training programs and scenarios that differ from what units would face once deployed for wartime operations. However, we found no evidence that combat units are unable to accomplish their training requirements despite the requirement to comply with various environmental laws. Furthermore, some officials we spoke with at these installations indicated that training areas available after protected zones had been established for these endangered species are sufficient to train units. Some OSD officials and other officials within DOD expressed the view that, although combat units can satisfy training requirements and may be deemed ready for combat deployments, compliance with environmental laws can significantly degrade the intended “realistic training” these units receive. According to those officials, when commanders and trainers are required to deviate from original training plans and procedures in order to comply with various environmental laws, combat units may not receive training experiences that mirror situations they might experience in a wartime scenario. These officials acknowledged the difficulty in measuring the impact environmental restrictions have on training, but they said constant deviation from realistic training scenarios has the potential to create an ill-prepared force and could possibly leave combat units vulnerable once deployed for combat missions. Despite having to comply with environmental restrictions, DOD is able to meet its readiness and training requirements through adjustments or modifications to training activities, known as workarounds. Usually trainers and planners know in advance the environmental restrictions they are faced with prior to a training event and plan accordingly to ensure required training tasks are completed. For example, at Camp Pendleton, California, officials said that to protect San Diego fairy shrimp habitat and archaeological cultural sites, Marines plant flags to represent foxholes instead of digging foxholes on the beach. Marine Corps officials said this workaround allows them to meet its training requirement, but limits their ability to conduct realistic training. Similarly, to accomplish training requirements and to protect aquatic and bank-side habitat for an endangered salmon species, officials at the Yakima Training Center, Washington, said vehicle traffic is limited to the use of bridges instead of allowing units to drive through creeks which would better approximate actual battlefield conditions. Officials acknowledged that complying with environmental laws can make it difficult at times to plan and conduct training events; however, these officials also acknowledged that military operations will always be subject to external restrictions whether units operate within the United States or abroad. For example, DOD officials said when units are deployed they may be restricted from damaging religious sites, such as churches or mosques, or may have to avoid dangerous operating areas like mine fields, so learning to deal with restrictions is standard operating procedure and the military has adapted to dealing with these requirements. In many cases, officials responsible for scheduling and facilitating training events incorporate environmental restrictions into planned training scenarios. For example, Fort Stewart, Fort Lewis, and Marine Corps Base Camp Pendleton officials said trainers instruct units to pretend restricted training areas are holy grounds, mine fields, or any other restricted area in theatre and advise them to avoid these areas. According to DOD officials, implementing these types of workarounds allows the department to accomplish its training requirements while ensuring natural resources are sustained and protected and offers an element of realism in terms of the need to avoid certain venues when units are actually deployed. Readiness data we reviewed for active duty combat units did not confirm that military readiness was hindered because of restrictions imposed by various environmental laws. In order to determine whether combat units are capable and ready to deploy for wartime missions, DOD and the military services use their unit readiness reporting systems to, among other things, report on whether a unit has received an adequate amount of training to perform its assigned mission prior to deployment. Two of the systems used to track unit readiness reporting are the Status of Resources and Training System, which is a DOD-wide readiness rating system, and the Army Readiness Management System. In the Status of Resources and Training System, if a unit is not adequately trained and is unable to perform its assigned mission, commanders record a less than satisfactory assessment score into the system and may include a brief summary in the “commanders comments” section within the system that explains why the unit is unable to perform its assigned mission. Our review of these reports for fiscal year 2006 and fiscal year 2007, including a review of the written commanders comments for Army, Navy, and Marine Corps active duty combat units, revealed that when units had not received an adequate amount of training, it was for a variety of reasons, such as not having enough assigned personnel or equipment. However, environmental restrictions did not appear as reasons why units were not adequately trained. Although we did not independently review readiness data for Air Force units due to data availability and time constraints, officials responsible for managing and maintaining these data told us that environmental restrictions generally did not appear as reasons why units were not adequately trained. DOD officials responsible for planning and facilitating DOD unit combat training at the installations we visited stated that a unit’s readiness is generally not affected by environmental restrictions imposed on the installations. According to some officials, environmental restrictions may in fact hinder a unit from receiving adequate training, but DOD’s readiness reporting system does not capture the ability of individual ranges to support training or the effects of endangered species and their habitat, wetlands, air quality, water quality, and other encroachment factors on range availability. According to one official responsible for managing data reported in the readiness system, there is no requirement to report environmental restrictions in the system, even though commanders have the option to do so. DOD officials said many commanders do not record environmental restrictions as a barrier to training because they use workarounds to ensure training tasks are accomplished, even if the environmental restriction caused them to alter or delay a training event. OSD and the services currently have efforts underway to develop systems to measure the effects encroachment factors, including environmental restrictions, have on an installation’s ability to meet its training mission. For example, the Office of the Secretary of Defense for Personnel and Readiness has begun to develop a new functionality within its Defense Readiness Reporting System that would provide DOD leadership and outside stakeholders, such as Congress, a better understanding of how external factors, such as environmental laws, affect training activities and readiness. Additionally, over the last few years, the services have spearheaded separate initiatives to track and report the encroachment factors that are affecting training on their installations. OSD officials said they will use these systems as data feeds into the new functionality within the Defense Readiness Reporting System. DOD is currently working to update and improve its Defense Readiness Reporting System that will assess constraints a military range faces when facilitating training for combat units. According to DOD officials we met with who are responsible for the development, update, and implementation of the Defense Readiness Reporting System, this system is expected to soon have the capability to identify the extent to which encroachment factors affect a range’s ability to support various operational capabilities, such as combat, combat support, and combat service support. Although this system is in early stages of development, DOD plans to pilot test this new functionality during calendar year 2008. According to DOD officials, there are still ongoing discussions with the services to solidify and agree on all the factors that will be measured. These officials told us they expect decisions to be finalized in the early part of fiscal year 2008, but at the time of this review OSD and the services had not come to a final agreement. Over the last few years, the Army has been working to introduce systems to report and track factors affecting training on its installations. The Army’s Installation Status Report (Natural Infrastructure) is a new decision-support tool used by Army leadership to assess the capability of an installation’s natural infrastructure to support mission requirements. In addition, the Army has developed an Encroachment Condition Module that quantitatively evaluates the impact of eight encroachment factors— threatened and endangered species, critical habitat, cultural resource sites, wetlands, air quality regulations, Federal Aviation Administration regulations, noise restrictions, and frequency spectrum—in order to assess measurable impact to training and testing at the installation and range level. Although the Army has made progress developing these systems, at the time of this review the Army was still in the process of field-testing these systems and thus had not finalized and released these systems throughout the Army. During discussions with multiple officials at the Army installations that we visited, concerns were expressed that some of the reports generated by the Installation Status Report (Natural Infrastructure) appear to exaggerate the factors affecting the installations’ ability to support training requirements. In addition, these officials were also concerned that the data generated from the Encroachment Condition Module do not reflect the actual environmental restrictions placed on the installations, which appear to significantly limit the installations’ ability to provide unit-level training. Some of these installation officials have also written memorandums expressing their concerns that the installation status report does not provide an accurate picture of the mission readiness of installations and suggested steps Army headquarters should take to ensure this system is more useful. On the basis of our review of summary data from the encroachment conditions module, we believe that discrepancies exist between the data on encroachment restrictions and the actual areas available for training at Fort Lewis, Washington, and Fort Stewart, Georgia. According to Army officials, at the time of our visits to these installations, the Army was in the process of working with installation officials to ensure that these data were accurate and current enough to enable decision makers to plan training events. The Navy has an effort underway to develop a web-oriented installation and range encroachment database that will assist it in identifying how encroachment factors affect unit training on its training ranges across the United States. For example, in August 2006 the Navy completed the initial development of a Navy-wide encroachment database to include encroachment issues identified by installations, ranges, and commands throughout the Navy. The Navy intends to finalize database development and link this information to its established repositories in order to begin generating reports for Congress. The Navy expects to have a user-friendly database available for use on its installations and ranges by June 2008. The Marine Corp’s Training and Range Encroachment Information System was developed as a part of an encroachment quantification study done at Marine Corps Base Camp Pendleton in 2003. This system is a tool intended to assess an installation’s ability to support required training, rather than assess the readiness of an individual Marine or Marine unit going through the training. According to Marine Corps officials, this system represents a prototype solution for collecting and quantifying encroachment effects that has the potential to be applied to other Marine Corps ranges and bases. However, according to these officials, this system has not been fielded and implemented across the Marine Corps because of questions about the amount of resources that would be required. As a result, Marine Corps officials have stated that more work needs to be done before this system will be released. In January 2008 the Air Force completed the development of its Natural Infrastructure Assessment Guide, which will provide Air Force leadership with a tool to manage the encroachment factors affecting its training ranges. This assessment tool will assist installation commanders in effectively managing their natural infrastructure, such as air space, through the identification of deficiencies and opportunities, correlated to affected operation, to enhance operational sustainability. This tool will also establish baseline information using a set of quantitative and qualitative measures that provide a comparison of needed resources to available resources, and will identify the incompatibilities and constraints on air, space, land, and water resources resulting from environmental encroachment pressures such as environmental restrictions. DOD has used the exemptions from the Marine Mammal Protection Act and Migratory Bird Treaty Act to continue to conduct training activities that might otherwise have been prohibited, delayed, or canceled, and the Endangered Species Act exemptions have enabled DOD to avoid potential training delays by providing it greater autonomy in managing its training lands. The Navy has twice invoked exemptions from the Marine Mammal Protection Act to continue using mid-frequency active sonar in its training exercises that would otherwise have been prevented. DOD’s exemption to the Migratory Bird Treaty Act eliminated the possibility of having to cancel military training exercises, such as Navy live-fire training exercises at the Farallon de Medinilla Target Range in the Pacific Ocean. The Endangered Species Act revisions provide that FWS consider the impact to national security when designating critical habitat on DOD lands and provide alternatives to critical habitat designation. Since 2006, the Navy has twice invoked its exemption from the Marine Mammal Protection Act to continue using mid-frequency active sonar technology in military training exercises, which would have otherwise been prevented by the law’s protection of marine mammals, such as whales and dolphins that may be affected by the technology. In both cases, DOD granted the exemption after conferring with the Secretary of Commerce, upon a determination that the use of mid-frequency active sonar was necessary for national defense. Mid-frequency active sonar is used by the Navy to detect hostile diesel- powered submarines used by the nation’s adversaries. According to Navy officials, the use of mid-frequency active sonar is a vital component of its underwater submarine warfare training program. Without these exemptions the Navy would have been prevented from using sonar technology during its training exercises, potentially causing a readiness issue within the Navy. For example, during the 2006 multinational Rim of the Pacific training exercise, which was conducted near the Hawaiian Islands, the Navy was prohibited from using mid-frequency active sonar for 3 days because of an injunction imposed concerning the effects the sonar could have on the marine mammals. In June 2006, DOD granted the Navy a six-month exemption from the Marine Mammal Protection Act for all military readiness activities that use mid-frequency active sonar during major training exercises or within established DOD maritime ranges or operating areas. In January 2007, DOD granted a two-year exemption for these same activities. However, during both exemption periods, DOD was and is required to employ mitigation measures developed with and supported by the National Marine Fisheries Service. According to DOD officials, the two-year period provides the Navy the time needed to develop its environmental impact statements for ranges where mid- frequency sonar is used. Although DOD granted the Navy an exemption to the Marine Mammal Protection Act to continue its training exercises, Navy officials told us that the primary reason it would have been prevented from using sonar technology was because it had not prepared an environmental impact statement for its training locations that use mid-frequency active sonar during training exercises. Under the National Environmental Policy Act of 1969 (NEPA), agencies evaluate the likely environmental effects of projects they are proposing using an environmental assessment or, if the projects likely would significantly affect the environment, a more detailed environmental impact statement. In addition, the Marine Mammal Protection Act requires consultation between DOD and the National Marine Fisheries Service to determine the impact on marine mammals when conducting military readiness activities. According to NRDC, an NGO that filed suit against the Navy to prevent it from using its sonar technology, the Navy failed to prepare an environmental impact statement and proper mitigation strategies in advance of using its sonar technology. NRDC is concerned that the use of mid-frequency active sonar has had a detrimental effect on marine mammals in the nation’s oceans and waterways. Thus, it is the NRDC’s view that until the Navy prepares the required environmental documentation and implements appropriate mitigation measures, these sonar activities should be stopped. The Navy has prepared notices of intent to prepare environmental impact statements for 12 ranges and operational areas. According to Navy officials, all 12 environmental impact statements will be completed, and the Navy is expected to be in compliance with the Marine Mammal Protection Act by the end of calendar year 2009. DOD’s exemption to the Migratory Bird Treaty Act authorizing the incidental taking of migratory birds during military readiness activities eliminated the possibility of having to delay or cancel military training exercises. In response to litigation in 2000 and 2002, DOD became concerned that environmental advocates could initiate further litigation against the department, causing delays or cancellation of future training activities. For example, in March 2002, in response to a lawsuit brought by the Center for Biological Diversity, a federal district court ruled that Navy training exercises at the Farallon de Medinilla Target Range within the Mariana Islands in the Pacific Ocean, which resulted in the incidental taking of migratory birds, violated the Migratory Bird Treaty Act. The 2003 enactment of DOD’s exemption changed the Migratory Bird Treaty Act to allow DOD to conduct military readiness exercises that may result in incidental takings of migratory birds without violating the act. DOD officials we spoke to told us that the exemption has not affected how training activities are conducted; rather, it codified and clarified how the act would be applied to military training missions, and it enabled DOD to avoid potential legal action that could have significantly affected training and readiness exercises at Farallon de Medinilla and other DOD installations. According to officials we met with during our visits to other installations with migratory bird populations, training activities at those locations generally do not affect migratory birds. The Endangered Species Act exemption has enabled DOD to avoid potential training delays by providing it greater autonomy in managing its training lands. The exemption, enacted in the fiscal year 2004 defense authorization act, provides DOD two means of avoiding critical habitat for threatened or endangered species designated on its lands by the FWS. One method of avoiding critical habitat designation for the endangered or threatened species found on its land is through the use of an approved integrated natural resources management plan, which the FWS or the National Marines Fisheries Service agrees provides a benefit to the species. According to DOD officials, these management plans provide it with the flexibility needed to perform readiness activities while simultaneously protecting the natural resources located on its installations. Secondly, in a case where critical habitat designation is proposed on a military installation, DOD can request the Secretary of the Interior take into consideration whether national security concerns outweigh the benefits of the designation. Although FWS officials stated that these exemptions codified their practice of generally not designating critical habitat on military lands when the lands were managed under appropriate conservation plan, DOD officials believed the department needed these them to avoid future designations that could restrict its training lands and cause potential delays in training while the required administrative consultations with FWS are completed. According to DOD officials, not having critical habitat designated for endangered or threatened species found on military lands gives DOD more flexibility and greater autonomy over the management of its lands used for its training activities. However, according to FWS officials, critical habitat designations would only require an additional level of consultation, which would have had very minimal, if any, effect on DOD’s ability to use its lands for training purposes. DOD officials said that the increased level of consultation required between the department and outside stakeholders, such as the FWS, would take away the time and resources required to plan and execute its training activities. Furthermore, according to DOD officials, growth in endangered species populations on some installations has increased the challenges they face in completing their required training activities while simultaneously protecting the species and their habitats. In addition, some range managers and trainers at installations we visited said that they believe that designating critical habitat on military lands could require them to avoid using critical habitat areas, which would take away potentially valuable training areas. However, now that DOD has the authority to use its approved integrated natural resources management plans, which are ultimately approved by the FWS, in lieu of critical habitat designation, trainers and range managers feel less restricted from using their training ranges. On the basis of meetings with officials within and outside DOD and visits to 17 training ranges, we found no instances where DOD’s use of exemptions from the Endangered Species Act or Migratory Bird Treaty Act has adversely affected the environment; however, the impact of the Marine Mammal Protection Act exemption has not yet been determined. We found no instances where DOD’s use of the Endangered Species Act exemption has negatively affected populations of endangered or threatened species. Moreover, the services employ a variety of measures and conservation activities to mitigate the effects of training activities on endangered species, some of which have helped to increase the populations of certain endangered species. However, NGO officials we spoke with were concerned that DOD’s use of its integrated natural resources management plans in lieu of critical habitat designations may weaken oversight of endangered species found on military lands. Similarly, we found no instances where DOD’s use of the Migratory Bird Treaty Act exemption has significantly affected the populations of migratory birds. However, the overall effect of the Navy’s use of mid-frequency active sonar on marine mammals protected under the Marine Mammal Protection Act is unclear and is still being studied. DOD, federal regulatory agency, and NGO officials, and officials at the military training ranges we visited said that there were no instances where DOD’s use of the Endangered Species Act exemptions have adversely affected the populations of endangered or threatened species. Moreover, the services employ a variety of measures and conservation activities to mitigate the effects of their training activities on endangered species populations on their lands. We also found instances where DOD environmental stewardship of its natural resources have achieved some positive results with regard to increases in the population of certain endangered species. In addition, FWS officials told us that DOD has taken positive steps to manage and preserve its natural resources and provided several examples of DOD’s proactive steps to manage threatened or candidate species. The services have taken steps on their installations to minimize the effects of their training activities on their endangered species populations, as the following examples illustrate. At Camp Lejeune, North Carolina, nests for the threatened green sea turtle and Atlantic loggerhead turtle are relocated away from training beaches by Camp Lejeune environmental management personnel. At Yakima Training Center, Washington, endangered fish species are protected by the installation declaring aquatic and riparian habitat off limits to all but foot traffic except at hardened crossings, such as bridges. At the Barry M. Goldwater Range, Arizona, range officials employ spotters to ensure that resident endangered Sonoran pronghorn are not present in munitions impact areas prior to exercises. DOD’s management of its natural resources has achieved some positive results with increases in the population of certain endangered species. At five of the installations we visited, we were provided data that showed an increase in the populations of three endangered species, as the following examples illustrate. Red-Cockaded Woodpecker Since the mid-1990s, the red-cockaded woodpecker populations at Fort Stewart, Georgia, and Eglin Air Force Base, Florida, have increased. In addition, Fort Stewart has served as a source of red-cockaded woodpeckers for repopulation efforts on nonmilitary lands. Figure 2 shows trend data and projected increases in red-cockaded woodpecker potential breeding groups from calendar year 1994 through calendar year 2016 for Fort Stewart and Eglin Air Force Base. On the basis of the data, Fort Stewart and Eglin Air Force Base are both projected to meet their recovery goals of 350 potential breeding groups by 2011. Loggerhead Shrike At Naval Base Coronado, San Clemente Island, California, the Navy, in partnership with FWS and the San Diego Zoo, has developed a captive breeding program that has increased the population of the Loggerhead Shrike, an endangered bird species, on San Clemente Island. This endangered bird population has increased from approximately 18 in 2000 to more than 88 in 2007 due partly to this conservation measure. According to the environmental planner for San Clemente Island, approximately 60 birds are retained for breeding purposes, while all other birds are released once it is determined that they can survive in the wild. Figure 3 shows a Loggerhead Shrike captive breeding facility. Sonoran Pronghorn According to data from the Arizona Game and Fish Department provided to us by Air Force officials, there were 68 Sonoran pronghorn, an endangered species, on the Barry M. Goldwater Range as of December 2006, up from an estimated 58 pronghorn in 2004. Air Force officials also provided us with information on pronghorn recovery efforts, which include a semicaptive breeding program located at the Cabeza Prieta National Wildlife Refuge. Air Force officials told us that semicaptive breeding is an important component of their recovery effort. Officials said they plan to release up to 20 captivity-bred animals annually beginning in 2008. Air Force officials told us that the creation of artificial forage enhancement plots are a key component in enhancing pronghorn survivability during periods of drought. Additionally, these officials said they locate these plots away from target areas to minimize the impact of training activities on the pronghorn population. FWS officials told us that DOD has taken positive steps to manage and preserve its natural resources and has been proactive in the management of its threatened species and species being considered for protection under the Endangered Species Act, as the following examples illustrate. Fort Carson, Colorado, provided a dedicated area for the threatened Greenback Cutthroat Trout that affords eggs for restoration efforts, opportunities for research, and recreational fishing opportunities for soldiers. In addition, Fort Carson participated in and funded research on American peregrine falcons (a recovered species) and threatened Mexican spotted owls that seasonally use the installation. Fort Wainwright, Alaska, worked to identify areas where the installation lacked natural resource data (e.g. fish species abundance and diversity in streams and spawning areas), and with assistance from the FWS, then linked projects to achieve its goal of collecting the needed resource data. The U.S. Air Force Academy, Colorado, holds most of the remaining Arkansas River drainage population of the threatened Preble’s Meadow Jumping Mouse. The Academy is represented on the recovery team, has funded tasks identified in the recovery team draft plan, and has conducted and funded research on the monitoring of habitat and populations. Although the NGOs we spoke with varied in their opinions about the effectiveness of DOD’s use of integrated natural resources management plans in lieu of critical habitat designations, all of the officials we spoke with were concerned about the extent to which the FWS would be able to exercise its regulatory authority under the Endangered Species Act, thus weakening its oversight of the management, protection, and preservation of endangered species found on military lands. Furthermore, officials from these organizations expressed concerns that the exemption could safeguard DOD from potential litigation involving critical habitat designation and lessens the public’s ability to comment on how DOD plans to manage the endangered species located on its installations. DOD installation officials responsible for developing the department’s natural resources management plans acknowledged changes in the public comment process from the one traditionally used when a critical habitat designation is proposed. These officials also stated that they publicly announce the development or revision of these management plans, notify local conservation groups of the development or revision of the management plans to ensure their views are taken into consideration during the process, and take all public comments under consideration when finalizing the management plans. Officials from various NGOs had differing opinions on DOD’s use of its integrated natural resources management plans to protect and preserve endangered species on military land, and some were concerned that DOD’s use of these plans in lieu of critical habitat designation may weaken the oversight FWS has under the Endangered Species Act, as the following examples illustrate. Officials of the Public Employees for Environmental Responsibility (PEER)—a national nonprofit alliance of federal, state, and resource employees—and the Endangered Species Coalition—a nonpartisan organization focused on endangered species issues—were generally satisfied with DOD’s efforts to protect endangered species on its installations, and stated that DOD’s implementation of its integrated natural resources management plans appeared to be an effective tool for managing its natural resources. Officials of the Center for Biological Diversity—a nonprofit organization focusing on species and habitat conservation—questioned whether allowing DOD to take the lead on endangered species management on its own lands was the best strategy. One official from the Center for Biological Diversity stated that, unlike critical habitat designation, integrated natural resources management plans would only provide a limited benefit to endangered species and implementation of these plans vary by installation. Additionally, this official stated that the formal process of designating critical habitat provides more comprehensive protection and benefit to endangered species. Officials of NRDC stated that DOD’s management plans are not an adequate substitute for critical habitat designation because the quality of the plans varies, the successful implementation of the plan is largely dependent on an installation’s leadership, and there are no quantifiable, measurable goals that can be enforced. DOD officials told us that they view integrated natural resources management plans as a tool focused on the management of an ecosystem as opposed to a tool for managing individual species. In addition, according to DOD officials, these management plans are a more cost effective way to manage an installation’s natural resources and reduce the likelihood of a significant adverse impact on species. None of the NGO officials we interviewed could provide us with data to illustrate that DOD’s use of an integrated natural resources management plan has caused an endangered species population to decline or harmed their habitat. DOD, federal regulatory agencies, and NGO officials, and officials at the military training ranges we visited all said that there were no instances where DOD’s use of the Migratory Bird Treaty Act exemption has significantly affected the populations of migratory birds. Since February 2007, when FWS issued the final rule authorizing incidental takings of migratory birds during military readiness activities, officials from DOD nor FWS were not able to provide instances where a military training activity was assessed and determined to have a significant adverse effect on a migratory bird population. In addition, DOD employs various measures to mitigate the potential impact of its training activities on migratory bird populations. For example, Navy officials told us that an additional zone was established in which only inert munitions may be used, which is located directly below a no bomb zone at Farallon de Medinilla Target Range within the Mariana Islands, as an additional mitigation measure for the island’s migratory bird population. In addition, at Naval Air Station Fallon, Nevada, aircraft maintain a minimum altitude of 3,000 feet when flying above the Stillwater National Wildlife Refuge to avoid migratory bird populations. The effects of the Navy’s use of mid-frequency active sonar on marine mammals protected under the Marine Mammal Protection Act are unclear and are still being studied. The Navy, in conjunction with external researchers, is conducting studies in an attempt to determine the effects mid-frequency active sonar has on marine mammals. According to documents provided to us by Navy officials, differing interpretations of scientific studies on behavioral changes among marine mammal populations have complicated compliance with the Marine Mammal Protection Act. Thus, additional coordination between the Navy and the National Marine Fisheries Service is required to resolve the regulatory uncertainty as to the “biological significance” of the effects of mid- frequency active sonar on marine mammals. The Navy employs mitigation measures, such as establishing marine mammal lookouts, ensuring there are no marine mammals within a certain radius of ships using sonar, and reducing the power of the ships’ sonar systems to lessen the possible impact mid-frequency active sonar may have on the marine mammal populations. The Navy has also begun reporting stranded marine mammals to the National Marine Fisheries Service. National Marine Fisheries Service officials have characterized their working relationship with the Navy as collaborative and constructive in that they have the opportunity to review and comment on the effectiveness of the Navy’s mitigation measures, such as the adequacy of the training that marine mammal lookouts receive. These measures are in effect during the 2-year period beginning in January 2007 in which mid-frequency active sonar activities are exempt from the Marine Mammal Protection Act. In its February 2008 report to Congress, the Navy stated that in 2007 it had completed 12 major training exercises employing mid-frequency active sonar and found no marine animals within the range of injury (10 meters) of any transmitting vessel during these exercises. The Navy requires that units participating in these major exercises report the number of marine mammals sighted while these exercises are conducted. If a marine mammal is sighted, participating ships, submarines, and aircraft are required to report the date, time, distance from unit, and action taken by the unit, if any. On the basis of the results of the after-action reports for these exercises, the Navy concluded that the various training activities did not kill or injure any marine mammals. Although the Navy acknowledges that it is not possible to account for the mammals that were not observed, it also noted that the low number of marine mammal sightings qualitatively indicates that the likelihood of an effect on the population level of any marine mammal species is further reduced. However, NGO officials have told us they believe that the Navy’s mitigation measures are insufficient, and they do not believe that the Navy has adequately quantified the impact of prohibitions on sonar on its ability to train. Additionally, according to NRDC representatives, a report completed in 2004 by a scientific committee of leading whale biologists established by the International Whaling Commission, has convincing and overwhelming results linking mid-frequency active sonar with the deaths of beaked whales. These officials are also uncertain whether the Navy would be in compliance with the Marine Mammal Protection Act when the exemption expires in January 2009. Further, these NGO representatives acknowledged that the nature of certain marine mammal populations creates difficulties in establishing a scientific basis for the effects of mid- frequency active sonar on marine mammals. DOD acknowledges that, under certain circumstances and conditions, exposure to mid-frequency active sonar may have an effect upon certain species, but the causal connection between whale strandings and exposure to mid-frequency active sonar is not known. DOD has not presented a sound business case demonstrating a need for the proposed exemptions from the Clean Air Act, RCRA, and CERCLA to help achieve its training and readiness requirements. DOD has outlined some anticipated benefits of the proposed exemptions and has provided Congress with a description of the features and scope of its Readiness and Range Preservation Initiative, but the department has not made a sound business case testing these assertions or provided any specific instances in which the movement of forces or equipment, training on an operational range, or its use of munitions on an operational range has been hindered by the requirements of the Clean Air Act, RCRA, or CERCLA, respectively. Therefore, Congress lacks a sound basis for assessing the need to enact the three remaining proposed exemptions. DOD has not presented a sound business case demonstrating a need for the remaining three exemptions proposed in its Readiness and Range Preservation Initiative. In order to advise decision makers on a proposed project, policy or program, best practices and our prior work recommend that agencies develop a business case whereby they can assess and demonstrate the viability of proposed initiatives. A business case is a substantiated argument that includes, among other things, the problem or situation addressed by the proposal, the features and scope of the proposed initiative, the anticipated outcomes and benefits, the options considered and the rationale for choosing the solution proposed, the expected costs, and the expected risks associated with the proposal’s implementation. DOD presented the features and scope of the three remaining Readiness and Range Preservation Initiative provisions in proposed language for the fiscal year 2008 defense authorization bill. DOD officials also outlined some possible benefits of the proposed exemptions. For example, in its 2006 annual sustainable ranges report, DOD stated that without these additional exemptions the department was vulnerable to legal challenges that could threaten its ability to use operational ranges for readiness training and testing. DOD officials also stated that some possible benefits of the proposed exemptions include facilitating (1) the movement of forces and equipment, (2) training on an operational range, and (3) the use of munitions on an operational range. However, DOD has not provided any of the other elements of a sound business case. According to DOD officials, the proposed exemption from requirements of the Clean Air Act would provide the department flexibility in replacing or realigning forces and equipment in nonattainment areas, which do not meet certain EPA air quality standards, but they have not provided evidence to support the need for the exemption. Moreover, DOD could not cite any case where Clean Air Act requirements prohibited the movement of troops or equipment into nonattainment areas. OSD’s Office of General Counsel officials told us that the Clean Air Act provision grew out of the 1995 base realignment and closure round, when the movement of aircraft into these areas became a problem. For the 2005 base closure round, OSD asked the services if moving activities into nonattainment areas would be an issue, and the answer was that it would not be. In its 2006 report on sustainable ranges, DOD stated that, while the Clean Air Act’s general conformity requirement had the potential to threaten the deployment of new weapon systems, the requirement had not yet prevented any military readiness activities. Officials of state and local agencies, and NGOs, such as the Center for Public Environmental Oversight (CPEO), NRDC, and PEER, have expressed concern that the proposed exemptions could increase air pollution and potentially result in greater contamination, higher cleanup costs, and a threat to human health. Opponents of DOD’s proposed exemptions from the Clean Air Act include state and local air pollution control program officials, state environmental commissioners, state attorneys general, county and municipal governments, and environmental advocates. They contended that granting the exemption could increase air pollution, posing a threat to human health. Opponents also claimed that the proposed exemption is unnecessary as the Clean Air Act already contains a provision that would allow DOD to request a case-by-case exemption if necessary, which DOD has never invoked. In addition, an EPA official we spoke with expressed similar concerns about the proposed Clean Air Act exemption. He also stated that because DOD has an extensive planning process, and readiness activities are generally planned ahead, DOD should have time to mitigate the emissions, or work with the states to establish a budget within the states’ implementation plans so that an exemption to the Clean Air Act would not be needed. According to DOD’s 2006 sustainable ranges report, existing ambiguity over whether the RCRA definition of “solid waste” is applicable to military munitions located on operational ranges had generated litigation by private plaintiffs seeking to curtail or terminate munitions-related training at operational ranges. The report also asserted that future litigation of this nature, if successful, could force remediation at operational ranges, effectively precluding live-fire training. However, DOD was not able to provide any examples of where a private citizen’s RCRA lawsuit had affected training on an operational range. Although live-fire training restrictions have been imposed at the Eagle River Flats Impact Area at Fort Richardson, Alaska, the restrictions were not the result of any litigation. The Army imposed the firing restrictions in 1991 following completion of an environmental assessment that established a link between firing munitions containing white phosphorus and waterfowl mortality at Eagle River Flats. We discussed DOD’s concerns about RCRA and the definition of “solid waste” with officials of EPA’s Office of Federal Facilities Enforcement and Office of Federal Facilities and Restoration. These officials told us that, to address DOD’s concerns, EPA developed the 1997 Military Munitions Rule, which states that military munitions are not considered to be solid waste when they are used for their intended purpose on an operational range. The EPA officials also said that to date they have never required DOD to clean up an operational range, unless contamination is migrating off the range, which could occur through polluted groundwater. With regard to the proposed exemption from RCRA, opponents have included state attorneys general and NGOs such as CPEO, NRDC, and PEER. They have asserted that granting DOD the exemptions could weaken federal and state oversight. Specifically, in written comments to the Office of Management and Budget on DOD’s 2004 legislative proposals for the National Defense Authorization Act, EPA stated that it was concerned that the exemptions would result in states’ oversight agencies having to wait for human health and environmental effects to occur beyond the boundaries of the operational range before taking action. This delay could increase the costs and time to respond. Other organizations expressed similar concerns about the exemptions preempting federal or state authority. The opponents also noted that the exemptions were not needed, as RCRA contains national security provisions allowing the President to exempt DOD facilities from any statutory or regulatory authority on a case-by-case basis. However, DOD has not invoked this case-by-case exemption for training or readiness-related activities. DOD officials said the department is concerned that the firing of munitions on operational ranges could be considered a “release” under CERCLA, which could then trigger CERCLA requirements that would require removal or remedial actions on operational ranges. However, DOD officials could not provide any examples of when this had actually occurred. On the contrary, DOD officials told us that EPA and the states generally do not seek to regulate the use of munitions on operational ranges under RCRA or CERCLA. Cognizant EPA officials also told us that EPA generally did not impose regulatory requirements on operational ranges. Further, EPA, in written comments to the Office of Management and Budget on DOD’s 2004 legislative proposals for the National Defense Authorization Act, stated that it had been judicious in the use of the various authorities it has over operational ranges. Opponents from states and NGOs such as CPEO, NRDC, and PEER, have similar concerns with DOD’s proposed exemption from CERCLA as they do with the RCRA exemption discussed previously. They contend that granting DOD the exemptions could weaken federal and state oversight and may delay any remediation action. They also note that the proposed exemption is not needed, as CERCLA contains a case-by-case exemption, which has not been invoked by DOD. In addition, similar concerns were expressed by EPA in its written comments to the Office of Management and Budget on DOD’s 2004 legislative proposals for the National Defense Authorization Act. Because DOD has not provided any specific examples to support assertions that its training activities have been hindered by the requirements of the Clean Air Act, RCRA, or CERCLA, Congress lacks a sound basis for assessing the need to enact these three remaining exemptions. Also, DOD has not demonstrated that it considered any other options that could provide the benefits it desires. Nor has the department provided any data related to the expected costs and risks—financial, environmental, or otherwise—of the proposed exemptions. Similarly, DOD has not demonstrated the cost of any workarounds necessitated by the need to comply with the Clean Air Act, RCRA, or CERCLA, and it has thus far not been able to show any risks to military readiness or national security if the exemptions are not granted. Until DOD develops a substantiated argument in support of its proposed exemptions from the Clean Air Act, RCRA, and CERCLA, it will have little on which to base these requests. DOD’s commitment to being a good neighbor to the communities where many servicemembers and their families live, the desire to avoid litigation, and the need to maintain its training areas in good condition provide DOD with incentives to be a good environmental steward. In addition, there is little evidence to suggest that the exemptions to environmental laws that DOD has already been granted have had adverse consequences for animal species or their habitat on military installations. Nevertheless, there is also little evidence to support the position that providing DOD additional environmental exemptions, such as those that have been proposed from provisions of the Clean Air Act, RCRA, and CERCLA, would benefit DOD training activities or improve military readiness. Without a sound business case that demonstrates the benefits and adverse effects on training and readiness, costs, and risk associated with the proposed exemptions, DOD will have little on which to base any further requests, and Congress will have difficulty determining whether additional exemptions from environmental laws are warranted. Should DOD plan to pursue exemptions from the Clean Air Act, RCRA, CERCLA, or other environmental laws in the future, we recommend that the Secretary of Defense direct the Deputy Under Secretary of Defense for Installations and Environment and the Deputy Under Secretary of Defense for Readiness to jointly develop a sound business case that includes detailed qualitative and quantitative analyses assessing the associated benefits, costs, and risks of the proposed exemptions from environmental laws. In written comments on a draft of this report, the Principal Deputy within the Office of the Under Secretary of Defense for Personnel and Readiness partially concurred with our recommendation, agreeing that a sound business case with good qualitative and quantitative analysis should be developed in association with future environmental provisions. However, DOD believes that past provisions involving clarifications to environmental laws were largely supported with the rationale and supporting information necessary to constitute a sound business case and does not accept the premise that the readiness and training imperatives or associated risks were not conveyed to the extent feasible for the Clean Air Act, RCRA, and CERCLA provisions. As our report clearly stated, DOD has not provided any specific examples to support its assertions that its training activities have been hindered by the requirements of the Clean Air Act, RCRA, or CERCLA. Also, DOD has not demonstrated that it considered any other options that could provide the benefits it desires. Nor has the department provided any data related to the expected costs and risks—financial, environmental, or otherwise—of the proposed exemptions. Our report does not discuss the rationale and information used to support past provisions. We continue to believe that DOD has not provided adequate support for its assertion that its training activities have been hindered by the requirements of the Clean Air Act, RCRA, and CERCLA. We stand by our recommendation that DOD needs to present a sound business case, including associated benefits, costs, and risks should it pursue future exemptions from these or other environmental laws. DOD strongly disagreed with our use of the term “exemptions” as applied to its Readiness and Range Preservation Initiative, which it believes unnecessarily reinforces the perception that DOD has sought to avoid its environmental stewardship responsibilities. First, the term “exemption” is not defined in the body of environmental law relevant to this report. Our intent is to use a single term throughout the report for consistency and readability, although we recognize that each of the Readiness and Range Preservation Initiative provisions affect change by various means in various environmental laws. We describe each of those provisions on pages 2 and 3, pages 13 through 17, and in footnotes 6 through 12. Second, our report acknowledges that DOD’s environmental stewardship of its natural resources has achieved positive results and that it has been proactive in its management of endangered and threatened species. DOD’s comments are reprinted in appendix II. DOD also provided technical comments, which we have incorporated into the report as appropriate. We are sending copies of this report to the appropriate congressional committees. We are also sending copies to the Secretaries of Defense, Commerce, and the Interior; the Administrator of the Environmental Protection Agency; the Secretaries of the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. Copies will be made available to others upon request. In addition, this report will be available at no charge on our Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-4523 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To determine the effects, if any, of environmental laws and the Department of Defense’s (DOD) use of exemptions to the Migratory Bird Treaty Act, the Marine Mammal Protection Act, and the Endangered Species Acton training activities and military readiness, we judgmentally selected and visited 17 military training locations throughout the continental United States, which included training sites from each military service component, to directly observe the effects of environmental laws and DOD’s use of exemptions on training activities, military readiness, and the environment. These locations included Aberdeen Proving Ground, Maryland; Fort Lewis, Washington; Fort Stewart, Georgia; Naval Station Norfolk, Naval Air Station Oceana, and Dam Neck Annex, Virginia; Naval Air Station Fallon, Nevada; Fort Irwin, Naval Base Coronado, Naval Air Station North Island, Naval Auxiliary Landing Field San Clemente Island, and Marine Corps Base Camp Pendleton, California; Marine Corps Base Camp Lejeune, North Carolina; Avon Park Air Force Range and Eglin Air Force Base, Florida; and Luke Air Force Base and Barry M. Goldwater Range, Arizona. These installations were identified and selected based on our previous work involving some installations experiencing encroachment and sustainable training range issues. DOD concurred that the installations we selected continue to have problems in this area and stated that these locations would provide an important perspective of some of the challenges DOD faces to comply with environmental laws. Because the installations were judgmentally selected, the specific challenges faced at these selected locations can not be generalized across all of DOD. We obtained documents and reports describing the effects of environmental laws and exemptions on training and readiness and the need for workarounds to meet training requirements from DOD officials responsible for managing military training. We compared and contrasted data on training requirements with actual training activities to identify examples—in terms of the number of training days, types of training activities, unit readiness ratings, and costs—where training was affected by environmental requirements and DOD’s use of environmental exemptions. We also met with service officials responsible for managing readiness data for each service. These officials provided us with unit readiness data for fiscal years 2006 and 2007, which included some commander comment summaries describing, when applicable, why a unit had not met its unit training requirements. Our review of these data allowed us to assess whether environmental restrictions imposed on DOD installations had an impact on unit readiness. Furthermore, we conducted literature searches, and reviewed studies completed by other audit agencies and research companies such as the Congressional Research Service, the Center for Naval Analysis, and the RAND Corporation, to review previous findings and conclusions of how environmental laws may have affected military training and readiness. In addition, we met with officials responsible for planning, managing, and executing unit training to gain an understanding of how these officials assisted military units to meet training requirements while addressing environmental laws. We also met with officials from the Office of the Secretary of Defense (OSD) and headquarters officials from each of the military services to obtain their perspectives on the effects of environmental laws and the use of environmental exemptions on military training activities and readiness. To determine the effects, if any, of DOD’s use of exemptions from the Migratory Bird Treaty Act, the Marine Mammal Protection Act, and the Endangered Species Act on the environment, we visited the 17 installations mentioned, reviewed related reports and studies, and examined some installations’ integrated natural resources management plans to determine how natural resources, such as migratory birds, marine mammals, and endangered species and their habitats are protected on DOD lands during military training exercises. We also met with officials from other federal regulatory agencies, such as the U.S. Fish and Wildlife Service, the National Marine Fisheries Service, and the U.S. Environmental Protection Agency (EPA), to determine how these regulatory agencies were overseeing and managing natural resource conservation activities conducted on military training areas and to obtain their perspective of how well DOD is doing in protecting its natural resources. We also met with officials from OSD and service offices, such as officials from the Office of the Under Secretary of Defense for Personnel and Readiness; the Office of the Deputy Under Secretary of Defense for Installations and Environment; the Office of the General Counsel for Environment and Installations, OSD; the Deputy Assistant Secretary of the Army for Environment, Safety and Occupational Health; the Office of the Assistant Secretary of the Navy for Installations and Environment; the Operational Environmental Readiness and Planning Branch and the Training Ranges and Fleet Readiness Branch, Chief of Naval Operations; the Environmental Management Program Office, Headquarters U.S. Marine Corps; the Deputy Assistant Secretary of the Air Force for Environment, Safety, and Occupational Health; the Air Force Center for Engineering and the Environment; and the Ranges and Air Space Division, Headquarters U.S. Air Force. During these meetings, we discussed the statutory environmental requirements DOD must follow when conducting military training activities at its installations and training areas. To obtain a balanced perspective on the progress DOD has achieved in managing natural resources on its lands, we met with officials from nongovernmental organizations, such as the Natural Resources Defense Council (NRDC), Public Employees for Environmental Responsibility (PEER), the Center for Biological Diversity, the Center for Public Environmental Oversight, the Endangered Species Coalition, and the RAND Corporation. These officials provided us with their perspective on how well DOD has done in protecting the natural resources, such as endangered species and their habitat located on DOD lands, migratory birds, and marine mammals. To assess the extent to which DOD has demonstrated that proposed statutory exemptions from the Clean Air Act; Resource Conservation and Recovery Act; and the Comprehensive Environmental Response, Compensation, and Liability Act would help the department to achieve its training and readiness goals, we reviewed the department’s most recent annual sustainable range reports, its Readiness and Range Preservation Initiative, and other documents for elements of a sound business case. In addition, we reviewed documents that provided the perspective of federal and state regulatory agencies, such as EPA, state and local air pollution control program officials, state environmental commissioners, state attorneys general, county and municipal governments, and nongovernmental organizations, such as the Center for Public Environmental Oversight, NRDC, and PEER, on the potential impact to the environment if these exemptions were granted. We also discussed the topic with officials from OSD, the military services, and EPA. During these meetings, we discussed the potential benefits and problems associated with the proposed statutory exemptions. During our visits to the military installations identified previously, we also obtained military service officials’ perspectives on the potential effects of using the proposed statutory exemptions on training activities, military readiness, and the environment. Additionally, we compared the elements of a sound business case and what DOD provided to Congress to assess whether DOD had demonstrated a need for the three remaining exemptions. On the basis of information obtained from the military services on the reliability of their unit readiness data, our discussions with DOD, military service, and NGO officials, and our review and analysis of documents and reports describing the effects of environmental requirements and statutory exemptions on training activities, military readiness, and the environment, we believe that the data used in this report are sufficiently reliable for our purposes. The time periods encompassed by the data used in this report vary for each of our objectives depending on the date ranges for which each type of data was available. We conducted this performance audit from June 2007 through March 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Mark A. Little, Assistant Director; Vijaykumar Barnabas; Susan Ditto; Jason Jackson; Arthur James; Richard Johnson; Oscar Mardis; Patricia McClure; Jacqueline Snead McColl; Anthony Paras; Charles Perdue; and Karen Thornton made major contributions to this report. | A fundamental principle of military readiness is that the military must train as it intends to fight, and military training ranges allow the Department of Defense (DOD) to accomplish this goal. According to DOD officials, heightened focus on the application of environmental statutes has affected the use of its training areas. Since 2003, DOD has obtained exemptions from three environmental laws and has sought exemptions from three others. This report discusses the impact, if any, of (1) environmental laws on DOD's training activities and military readiness, (2) DOD's use of statutory exemptions from environmental laws on training activities, (3) DOD's use of statutory exemptions on the environment, and (4) the extent to which DOD has demonstrated the need for additional exemptions. To address these objectives, GAO visited 17 training locations; analyzed environmental impact and readiness reports; and met with officials at service headquarters, the Office of the Secretary of Defense, federal regulatory agencies, and nongovernmental environmental groups. Compliance with environmental laws has caused some training activities to be cancelled, postponed, or modified, and DOD has used adjustments to training events, referred to as "workarounds," to accomplish some training objectives while meeting environmental requirements. Some DOD trainers instruct units to pretend restricted training areas are holy grounds, mine fields, or other restricted areas in theater, simulating the need to avoid specific areas and locations when deployed. GAO's review of readiness data for active duty combat units did not confirm that compliance with environmental laws hampers overall military readiness. Since 2006, the Navy has twice invoked the Marine Mammal Protection Act exemption to continue using mid-frequency active sonar in training exercises that would otherwise have been prevented. DOD's exemption from the Migratory Bird Treaty Act, authorizing the taking of migratory birds, eliminated the possibility of having to delay or cancel military training exercises, such as Navy live-fire training at the Farallon de Medinilla Target Range. The exemption to the Endangered Species Act, which precludes critical habitat designation on DOD lands, enables DOD to avoid potential training delays by providing greater autonomy in managing its training lands. On the basis of meetings with officials within and outside DOD and visits to 17 training ranges, GAO found no instances where DOD's use of exemptions from the Endangered Species Act or Migratory Bird Treaty Act has adversely affected the environment, but the impact of the Marine Mammal Protection Act exemption has not yet been determined. The services employ a variety of measures and conservation activities to mitigate the effects of training activities on the natural resources located on DOD lands. Additionally, regulatory officials GAO spoke to said DOD has done an effective job protecting and preserving endangered species and habitats on its installations. However, some nongovernmental organizations have expressed concern that the Endangered Species Act exemption allowing DOD to avoid critical habitat designations may weaken oversight from the U.S. Fish and Wildlife Service. DOD has not presented a sound business case demonstrating the need for the proposed exemptions from the Clean Air Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation, and Liability Act. Best practices and prior GAO work recommend that agencies develop a business case that includes, among other things, expected benefits, costs, and risks associated with a proposal's implementation. However, DOD has not provided any specific examples showing that training and readiness have been hampered by requirements of these laws. Meanwhile some federal, state, and nongovernmental organizations have expressed concern that the proposed exemptions, if granted, could harm the environment. Until DOD develops a business case demonstrating the need for these exemptions, Congress will lack a sound basis for assessing whether to enact requested exemptions. |
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ASR, a disease caused by the fungus Phakopsora pachyrhizi, requires living host cells to survive. It can infect over 90 host species of legumes, such as kidney beans, chickpeas, and kudzu. When ASR infects soybeans, it causes the plants to lose their leaves prematurely, which reduces the size and number of the beans. In areas where the disease commonly occurs, up to 80 percent yield losses have been reported. Environmental factors are critical to the incidence and severity of ASR. Long periods of leaf wetness, high humidity, and temperatures between 60 and 80 degrees Fahrenheit are ideal for spore germination. About 7 days after plants are infected with ASR, small brown spots surrounded by yellow rings appear on the leaf’s upper surface (stage 1). Within 10 days, pustules form in the spots, primarily on the undersides of the leaves (stage 2). These pustules have raised centers that eventually break open to reveal masses of fungal spores, called urediniospores (stage 3). Pustules can produce urediniospores for about 3 weeks. When the wind blows, the spores are dispersed, spreading the infection to other fields. Once windborne, the spores can reportedly travel hundreds of miles within a single day. Figure 1 shows the progression of infection on a soybean plant. ASR was first detected in Japan in 1902. By 1934, the disease was found in several other Asian countries as well as Australia. In 1951, the disease was first reported on soybeans in India. The disease was confirmed, and widespread infestations occurred in several African countries in 1996. In 2001, ASR was found in Paraguay and was detected in Argentina the following year. By 2002 the disease was widespread throughout Paraguay and in some limited areas of Brazil. ASR was first discovered in the continental United States in Louisiana on November 9, 2004. Researchers believe the disease was carried to the United States by tropical storms. Figure 2 shows the pattern of ASR’s spread throughout the world. USDA has been following the path of the disease and planning for its introduction into the United States for several years. In May 2002, three USDA agencies—the Animal and Plant Health Inspection Service (APHIS), the Cooperative State Research, Education, and Extension Service (CSREES), and the Agricultural Research Service—together with the National Plant Board, industry, and several land grant universities formed the ad hoc Soybean Rust Committee. In addition, USDA established the National Plant Diagnostic Network to enable diagnosticians, state regulatory personnel, and first detectors to communicate images and methods of detection for ASR as well as other diseases in a timely manner. USDA determined that once ASR arrived in the United States it could not be eradicated because of its rapid transmission rate and an abundance of host species. Thus, it decided fungicides would be the primary means of managing ASR in the United States and Canada until researchers can develop acceptable soybean cultivars that are resistant to the disease. Although the disease has resulted in significant losses in yield and production in other countries, soybean growers have learned to successfully manage the disease by applying appropriate fungicides. However, the use of such fungicides increases the production costs associated with soybeans, which had typically required relatively little or no management in the United States. For example, during the 2003 to 2004 growing season, Brazilian growers spent close to $1 billion on fungicides to prevent and reduce the spread of the disease. In the United States, the costs of applying fungicides for ASR are estimated to range from $10 to $35 per acre for each application. The total cost of applying fungicides will depend on the number of acres treated. All pesticides, including fungicides, must be registered and labeled in accordance with EPA regulations in order for them to be sold or used in the United States. If emergency conditions exist, however, EPA can grant an emergency exemption to state and federal agencies that allows the unregistered use of the pesticide under section 18 of the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA). EPA regulations require state and federal agencies to submit an application for emergency exemptions and set limits on the duration of those exemptions. Under the Federal Food, Drug, and Cosmetic Act, as amended by the Food Quality Protection Act, EPA sets tolerances for pesticides—the maximum residue levels of pesticides permitted on foods. Unlike its process for registering fungicides, EPA may grant an emergency exemption for the use of a fungicide before it sets a tolerance for that fungicide. Fungicides for ASR are classified as preventative or curative. Preventative fungicides, such as strobilurins, prevent fungi from successfully infecting and/or penetrating the host tissue of the plant, while curative fungicides, such as triazoles, inhibit or stop the development of infections that have already begun. In addition, some fungicides contain both preventative and curative chemicals. To properly manage ASR, growers must apply the right class of fungicides at the appropriate time and with proper equipment. Applying fungicides too early can increase production costs, and the fungicide could wear off by the time an infection actually occurs. However, if growers wait too long to apply the fungicide, the disease could progress to an untreatable stage, and some crop could be lost. In order for fungicides to be optimally effective, they must be applied to the whole plant and be placed as deeply into the canopy as possible because the disease usually begins in the lower canopy before traveling into the middle and upper canopies as the crop matures. Fungicides can be applied by ground sprayers or from the air. Aerial application is a viable alternative when rainfall makes the fields too muddy or when large amounts of soybean acreage need to be sprayed within a short time. In April 2004, USDA’s Economic Research Service (ERS) conducted a study to project the potential economic losses associated with various degrees of ASR infestation in the United States. ERS concluded that the extent of economic impacts from ASR will depend on the timing, location, spread, and severity of the disease as well as the response of growers, livestock producers, and consumers of agricultural commodities. For the first year of ASR’s establishment in the United States, ERS estimated that the expected value of net economic losses could range from $640 million to $1.3 billion, depending on the geographic extent and severity of the disease’s initial entry. When ASR was discovered in Louisiana in November 2004, it was too late in the crop year to damage 2004 soybean production. Since ASR must have a living host to survive the winter, USDA believed the disease could only successfully survive over the winter in the southernmost areas of the United States and would have to be reintroduced each year into more northern soybean-producing areas. Therefore, its arrival provided an early warning to USDA, growers, and industry, allowing them time to prepare strategies for minimizing the impact of the disease before the 2005 crop year. USDA’s development and implementation of a coordinated framework was instrumental in providing an effective response to ASR on soybeans in 2005. The framework includes (1) a surveillance and monitoring network, (2) a Web-based information system, (3) decision criteria for fungicide application, (4) predictive modeling, and (5) outreach for training, education, and information dissemination. The goal of the framework was to provide stakeholders with effective decision support for managing soybean rust during the 2005 growing season, and USDA was generally successful in doing so. However, inconsistencies in how researchers monitor, test, and report on the disease could lead to incomplete or inaccurate data and detract from the value of future prediction models. Furthermore, the success of the 2005 framework was due in part to the leadership of senior USDA officials, who were able to mount a national campaign. The transfer of operational responsibilities to a land grant university, under the direction of USDA, raises concerns about the department’s ability to maintain the level of coordination, cooperation, and national priority that was achieved in 2005 to address ASR. The early detection of ASR through the sentinel plot network—one of the key components of the surveillance and monitoring program—was effective, according to officials in 23 of the 25 states we surveyed. Sentinel plots—typically about 2,500 square feet of soybeans, other host plants, or a combination of the two—are planted a few weeks before the beginning of the growing season and serve as an advance warning of approaching ASR. In total, states monitored more than 1,000 sentinel plots in 2005. USDA and the North Central Soybean Research Program, in affiliation with the United Soybean Board, funded the sentinel plot network established under the framework. USDA provided about $800,000 for a total of 300 plots in the 31 soybean-producing states and an additional 20 plots in 4 other states that produce dry beans, such as navy beans and chick peas. (USDA plans to fund a similar number of sentinel plots in 2006.) The North Central Soybean Research Program and United Soybean Board provided approximately $390,000 for a total of 400 plots in 20 states (20 plots per state). In addition, some states established and monitored other plots during the growing season. Officials of the 31 states we surveyed provided data on the number of sentinel plots sponsored by USDA and others during 2005 (see fig. 3). State personnel monitored these plots throughout the growing season to determine the presence and severity of ASR. Within each state, a designated official entered the monitoring data from the plots into USDA’s ASR Web site, an online, real-time data system. Once the data were entered, growers and others could access the information to determine in which counties ASR-infected plants were found. In addition, state specialists used the Web site to provide guidance to growers about whether and what type of fungicides should be applied. Once ASR was detected and confirmed in a state, the framework specified that mobile monitoring teams—one assigned to each of five regions— would be dispatched to the affected areas to help determine the severity and spread of the disease. During the 2005 growing season, the disease was confined to the southeastern region, and therefore only the team assigned to that region was deployed. Researchers use the information from states on sentinel plot monitoring, including diagnostic testing results, to develop prediction models that estimate where and how severe ASR will be in certain areas of a state or county. These models depend in large part on timely and consistent data from the state observations and diagnostic testing results. Researchers will rely on this information, in part, to validate the predictive models over the next few years, while extension personnel and growers rely on this information to make informed and timely decisions on the need to apply fungicides. USDA asked the states to monitor their sentinel plots at least once a week and report the results on a weekly basis by posting them to a restricted USDA Web site. Monitoring results from the sentinel plots supported by USDA and the North Central Soybean Research Program were to include, for example, the location, host, and severity of the disease. However, state officials did not consistently report weekly updated information to the Web site during the 2005 growing season. Updates from the states ranged from a total of 4 each for two states to 162 for another. USDA also provided states considerable flexibility in how they designated sentinel plots. In some cases, fields were planted as stand-alone surveillance fields while in other cases, sentinel plots were part of commercial fields. Such differences might affect the extent to which crops are accessible for crop monitors. While there is no evidence that this variation in plots affected data reporting in 2005, a lack of consistency in designating sentinel plots could ultimately affect the quality of data that are essential to alerting USDA to the initial presence and spread of ASR in future years. Diagnostic testing was important to confirming suspected cases of ASR because several plant diseases resemble it and because U.S. growers have little experience in identifying ASR. States are to send the first suspected sample of ASR on soybeans and each new host to USDA’s APHIS laboratory in Beltsville, Maryland, for confirmation testing. However, subsequent samples submitted within each state may be tested at either a state or National Plant Diagnostic Network laboratory. According to our survey of officials in the 31 soybean-producing states, state diagnostic laboratories received about 12,100 samples for ASR research and screening. Of these samples, about 9,500 were submitted for routine research or monitoring and about 2,600 were submitted specifically because of suspected ASR. Of the total number of samples tested, only 877, or about 7 percent, tested positive for ASR. For samples suspected of having ASR, states primarily relied on morphological examinations—i.e., examining the spores from lesions on leaf samples, visually or under a microscope—to screen the samples suspected of ASR. However, in selected cases, the states conducted advanced screening using the polymerase chain reaction (PCR) test or an enzyme-linked immunosorbent assay (ELISA) test to detect the presence of ASR. Table 1 summarizes the results of states’ tests performed on samples suspected of having ASR in 2005. The National Plant Diagnostic Network issued standard operating procedures for how to submit samples to a diagnostic laboratory and procedures for initially screening the samples and conducting advanced screening. However, the procedures did not specify how often or under what circumstances, the laboratory should conduct advanced screening to confirm an initial diagnosis of ASR. Advanced screening might be warranted because a morphological examination of a sample in the early stages of the disease may fail to detect ASR. Also, in some cases, diagnosticians may have limited experience in detecting the disease morphologically. Conversely, officials in some states where ASR appeared to be no real threat in 2005 may have believed that advanced screening was not necessary. Officials in 13 of the states that we surveyed reported that a morphological examination was the only type of testing they performed on samples of suspected ASR. Officials in 13 states also indicated that they performed a morphological examination as well as at least one other type of advanced screening test, and officials in 3 states reported that they only performed advanced screening on suspected cases of ASR. The various methods used to diagnose ASR, and hence to report the results to the Web site, could determine the difference between detecting the disease early, when it is most easily treated, or delaying detection until it is well established. As of October 31, 2005, state laboratories had spent an estimated total of $465,800 on screening and testing samples for ASR; about $14,600 of this cost was offset by the fees the state laboratories charged for sample testing. Most of the state officials we surveyed reported that their states had sufficient funding and staffing to perform diagnostic screening and testing for ASR during 2005. For 2006, officials from 30 of the states that we surveyed indicated that they plan to have the same number or more laboratory staff. However, officials from nine of the states indicated that they still lacked sufficient equipment to perform recommended diagnostic testing. In addition to testing field samples, USDA sampled rainwater to help in the early detection of ASR. With these samples, scientists can detect spore concentrations before ASR is apparent on the plant. Positive samples were found in most of the regions tested, including the Midwest and the Northeast, where ASR was not apparent on the plant. USDA is using this information for research and plans to publish its findings in a professional journal. As a means to share information among all interested parties, in March 2005, USDA activated the public ASR information Web site, which provided disease observations, management recommendations, and scouting information, among other things. The site allows growers and other interested parties to go to a single location for real-time, county-level information on the spread of the disease in soybean-producing states. The Web site displays two maps of the United States. One map shows the counties in which researchers scouted for ASR and did not find it (in green) and counties in which ASR was confirmed (in red). Another map allows the public to click on a state and obtain information on ASR management, such as disease management, scouting results, growth stages, and forecast outlook. In addition, the Web site provides a chronology of positive ASR detection by date confirmed, county, and state; information on the spread of ASR nationwide; and links to related Web sites. USDA has also established a restricted Web site that has several access levels for various users, such as state specialists, observers, researchers, and selected industry representatives. Among other things, this site presents information on observed and predicted disease severity and spore deposition. The Web site is restricted to prevent unauthorized users from entering erroneous data and to allow state specialists to share and assess data before distributing information to the public. The information in this restricted Web site then becomes the basis for the information on the public Web site. Officials in the soybean-producing states that we surveyed characterized USDA’s Web sites (public and restricted) as useful to their states. However, several officials provided suggestions for improvement. These suggestions included making the Web sites easier to use, giving multiple officials within each state access to update the Web sites, considering the needs of the colorblind, providing better instructions to users, recognizing the efforts of extension service personnel on the Web site, considering the needs of users without high-speed Internet connections, and publicizing the Web sites to a greater extent. To educate and assist growers and extension personnel in making decisions regarding the use of fungicides to combat ASR, state land grant university extension specialists and USDA developed a fungicide guide. The April 2005 ASR fungicide manual—Using Foliar Fungicides to Manage Soybean Rust—was developed under a USDA grant by state extension and scientists at 22 U.S. universities, USDA, and the Ontario Ministry of Agriculture and Food. It was widely available to state officials, growers, and other stakeholders. The manual provides basic fungicide information, such as the chemistry involved and the brand names of different products, as well as information on factors involved in making fungicide spray decisions, including whether to use a preventative or curative fungicide, and how and when to apply the fungicide. Over 150,000 copies of the manual were distributed during 2005. In addition, extension officials in the states we visited commented that the manual was very useful to growers in deciding when and how to apply fungicides during the 2005 crop season. Using information from USDA’s Web site and the ASR fungicide manual, extension service offices in five states where ASR was confirmed suggested that some growers apply fungicides for ASR at least once during the 2005 growing season. During the 2005 growing season, state specialists could obtain ASR forecast information from various models, synthesize the information, and use it to prepare state forecast outlooks for dissemination on USDA’s public Web site. These models included one supported by USDA that predicted the aerial spread of ASR spores from active source regions in the United States to other soybean-growing areas; the results of this model were published on USDA’s restricted Web site. Other ASR prediction models available during 2005 included one from the North American Disease Forecast Center at North Carolina State University and another developed by researchers at Iowa State University. These models depend in large part on timely and consistent data from the states’ observations and diagnostic testing results. According to researchers who used the models, ASR prediction models tended to overstate the spread of ASR in 2005. However, this was the first full year that ASR was in the United States and it generally takes several years to calibrate and validate models like these. One researcher has proposed that USDA use an “ensemble approach” to predict the spread of ASR in 2006—that is, using forecast information from several ASR models in predicting the spread of ASR. Regardless of which models are used, inconsistencies in defining or designating sentinel plots, in diagnosing ASR, and hence in reporting the results to the Web site could affect the development of predictive models and ultimately could determine the difference between detecting ASR early, when it is most easily treated, or delaying detection until ASR is well established. In preparation for the 2005 growing season, USDA and the 31 soybean-producing states we surveyed sponsored about 1,500 presentations, programs, and workshops on ASR. Officials in these states reported that they planned to offer over 400 presentations, programs, and workshops on ASR between November 1, 2005, and April 30, 2006. According to the state officials we surveyed, the three most important topics to include in these workshops are identification of ASR and “look-alike” diseases, availability and use of fungicides, and observations and results from 2005. During the 2005 growing season, several other outreach efforts were also conducted to help growers. For example: Some states supported telephone hotlines that presented the latest information on ASR, enabling growers using cellular phones to get information when they were out in the fields. The University of Kentucky created two ASR electronic mailing lists—one that facilitated discussion and information sharing about ASR among 137 industry, state, federal, and university officials and another that facilitated communication among 108 individuals regarding the soybean rust sentinel plot and surveillance network. The American Phytopathological Society organized a symposium in November 2005—attended by over 350 participants—to discuss ASR and lessons learned during the past growing season. Several states also displayed ASR information on their state Web sites. The national effort for ASR during the 2005 growing season was directed by senior APHIS headquarters officials, who coordinated the federal, state, and industry effort to develop the framework. Before and during the growing season, they conducted regular meetings with state specialists. According to a representative of the American Soybean Association, soybean growers were pleased with the central, coordinated effort led by APHIS to fight against ASR. In addition, 30 of the officials in the states we surveyed reported that communication was effective between their state and USDA in addressing ASR during 2005. APHIS has been involved in preparing for ASR because of its responsibility to protect the nation from the introduction of foreign plant pests. However, now that ASR is in the United States, CSREES is responsible for managing efforts to minimize its effects. In November 2005, USDA formally announced the transition of operational responsibility for managing ASR in 2006, from APHIS to the Southern Region Integrated Pest Management Center (SRIPMC) at North Carolina State University, under the direction and coordination of CSREES. The current ASR national system will be expanded to provide growers with information about additional legume pests and diseases in 2006. SRIPMC and USDA recently signed a cooperative agreement that will provide about $2.4 million to fund ASR monitoring, diagnostics, and communication efforts in 2006. Total funding includes $1 million for sentinel plots and $800,000 for diagnostic testing. In 2005, USDA provided nearly $1.2 million for these activities. During 2006, selected APHIS personnel will assist with the transition to CSREES. One key APHIS official will serve as the national coleader of the USDA Web site and train SRIPMC personnel, and a contractor will continue to serve as data manager to help ensure that the Web site continues to provide current, useful information. In addition, the contractor will continue to provide meteorology and modeling expertise. However, as of January 25, 2006, USDA lacked a detailed plan describing how it plans to ensure that all elements of the 2005 framework will be effectively implemented in 2006. In commenting on a draft of this report, USDA reported that it was developing, but had not completed, such a plan. Changes to the successful management approach employed by USDA in 2005 raise questions about how the program will perform in 2006. We are concerned that without a detailed action plan in place prior to the 2006 growing season, describing how CSREES will assume and manage important responsibilities, USDA may not be able to ensure that the level of coordination, cooperation, and national priority that was achieved in 2005 to address ASR will continue in 2006. As of December 31, 2005, EPA had approved a total of 20 fungicide products for treating ASR on soybeans, including 12 for which emergency exemptions were granted. Officials in the nine states where ASR was confirmed reported no problems in obtaining access to fungicide application equipment. While officials in three of these states reported that not all fungicide products were available to their growers, they did not indicate that growers experienced fungicide shortages overall. To determine which fungicides are the most effective under given conditions, USDA and private companies also supported research efforts at universities across the United States. For the longer term, USDA, universities, and private companies are conducting research to develop ASR-resistant or -tolerant soybeans but expect that these will not be available commercially for 5 to 9 years. Efforts to ensure that fungicides would be approved for treating ASR on soybeans have been under way for some time. (See app. IV for a complete list of approved fungicides.) Before March 2004, 4 fungicides had been registered for preventing ASR on soybeans. However, between March 2004 and June 2005, EPA approved another 16 fungicides—all in time for application during the 2005 growing season. These fungicides included the following: 4 registered fungicides that are preventative; and 12 fungicides for which emergency exemptions were granted. Nine of these products are curative, and 3 have both preventative and curative properties. As of November 2005, five additional fungicides for ASR were pending approval for emergency exemption, and two others were pending full registration. EPA was able to act expeditiously, in part because, in July 2002, USDA and EPA began discussing preparations for emergency exemptions and working with private industry and state departments of agriculture to prepare for ASR. They identified fungicides with known efficacy against ASR and fungicides that needed additional testing to gain EPA approval. During 2003, USDA’s Office of Pest Management Policy hosted several teleconferences and meetings with researchers, EPA, and state officials to discuss the development of emergency exemptions for soybeans and other legumes. In November 2003, EPA suggested a procedure for states to follow for requesting emergency exemptions. That is, although each state typically submits a unique request to EPA for an emergency exemption, EPA allowed Minnesota and South Dakota to prepare a joint request for treating ASR on soybeans and allowed other states to copy this request. USDA also began contacting states to offer help preparing requests for emergency exemptions. As a result of these preparations, when ASR was first confirmed in the continental United States in November 2004, 26 states, representing 99 percent of the U.S. soybean acreage, had requested emergency exemptions for fungicides to treat ASR, and 25 of these states had received at least one emergency exemption. Furthermore, although emergency exemptions are usually granted for a single year, EPA approved the exemptions for ASR fungicides through November 2007, as quarantine emergency exemptions. These exemptions may be authorized for up to 3 years in an emergency condition to control the introduction or spread of any pest new to or not known to be widely prevalent or distributed within and throughout the United States. Consequently, in 2007, states will have to renew their emergency status, with the support of the manufacturer; work to have these fungicides registered; or use already registered fungicides. In addition to these efforts, in April 2004, USDA met with the American Soyfoods Association of North America to plan efficacy research on chemicals permitted to treat organically grown soybeans and to discuss organic certification of fields treated with conventional chemicals. Furthermore, by August 2005, EPA had established maximum residue levels for the exempted fungicides in time for soybean growers to export their products to foreign markets. At the November 2005 ASR symposium, EPA announced that it remains receptive to receiving future registration and exemption requests for additional fungicides to treat ASR. According to state officials with whom we spoke, the variety of fungicides available as a result of the exemption process helped reduce the risk that ASR would become resistant to fungicides and ensured that a supply of fungicides would be available to growers. In terms of the availability of application equipment and fungicides in 2005, the officials we surveyed in the nine states where ASR was confirmed reported no problems with access to equipment. Although officials in three of these states indicated that their growers did not have access to all fungicide products, none of the states reported that growers encountered any shortages of fungicides to treat their crop. State, EPA, and USDA officials cautioned that actual fungicide inventory and availability depends largely on market forces outside their control. These officials also stated that it is not possible to determine the sufficiency of fungicides and equipment for 2006 because of uncertainties about (1) the timing and potential spread of ASR into northern states, which do not generally apply fungicides on soybeans and therefore may not have supplies and equipment available and (2) the potential need in southern states for growers to use fungicides and equipment for other major crops, such as peanuts, thereby creating a shortage for use on soybeans. USDA began evaluating fungicide efficacy for ASR in 2001, and it supported its own field work in this area from 2003 through 2005 in Africa and South America with funding from private companies and the United Soybean Board. In addition, beginning in 2002, the agency began contacting approximately 20 companies and trade organizations to participate in efficacy trials for the registration of ASR fungicides at several U.S. universities and international locations. Efficacy trials examine the impact fungicides have on factors such as crop yield and disease severity by testing the effectiveness of fungicides under various spray conditions, such as volume, pressure, and application frequency; effectiveness of fungicides under different crop conditions, such as maturity, row spacing, and plant varieties; and impact of various application techniques and equipment on such things as coverage and penetration of the crop canopy. Figure 4 shows the application of fungicides at a trial in 2005. Conducting trials at different locations allows researchers to study the effectiveness of fungicides and application methods in different climates and on different strains of ASR. EPA can use efficacy data from these trials to evaluate fungicides for emergency exemptions. USDA started posting fungicide efficacy data, including some data from private companies, to a USDA research Web site in 2003. According to agency officials, these trials showed that (1) fungicides reduced crop losses, (2) some fungicides were more effective than others, and (3) different fungicides with different active ingredients were necessary to combat ASR because what works best in one region may not be as effective in another. In terms of equipment, the trials showed that better coverage of the plant using higher spray volume is more important for effective spraying than the type of nozzles used. USDA has not taken a position concerning the application of fungicides on soybeans not threatened by ASR, although some private companies have promoted such an approach. Most recently, in 2005, researchers at southern universities conducted efficacy trials on several fungicides approved by EPA and some fungicides only approved for use in Brazil. Many of these trials were conducted in areas infected with ASR. These trials produced mixed results, but researchers concluded that timing the first spray may be the most critical factor when applying fungicides to treat ASR. Fungicide trials were also conducted in 2005 in 13 northern states where ASR has not yet been confirmed. The researchers conducting these trials focused on questions such as whether fungicides improved soybean yields in the absence of ASR. These trials produced inconsistent data, in part because different protocols—for example, plot management and fungicide application techniques—were followed; and the researchers concluded that uniform protocols should be established for future trials to ensure consistent data collection and interpretation. Breeding commercial soybeans with resistance to or tolerance of ASR is generally regarded as the best long-term solution for managing the disease; and USDA, several universities, and private companies are currently working to develop such soybeans. Breeding new varieties of soybeans and making them commercially available takes time—up to 9 years—according to USDA officials. The Agricultural Research Service has approximately 16,000 soybean lines in its soybean germplasm collection. As of June 2005, researchers had finished an initial screening of these lines. Approximately 800 lines were identified as having some form of resistance or tolerance to ASR and are currently being evaluated using more advanced screening tests. Subsets of these 800 lines are also being evaluated in field trials in collaboration with researchers in Africa, Asia, and South America. An intermediate screening of these 800 lines was completed and the results published in a scientific journal in January 2006. Some of these lines are only resistant to a few of the known strains of ASR. USDA researchers hope to eventually find lines that are resistant to all known strains. The United Soybean Board and the Iowa Soybean Association and Promotion Board have provided financial support for this work. In addition to the sheer volume of germplasm that researchers need to examine, other factors have also contributed to the time taken to identify soybean varieties that are resistant or tolerant to ASR. Before USDA removed ASR from the select agents and toxins list under the Agricultural Bioterrorism Protection Act of 2002 in March 2005, USDA’s research in the United States was limited to a few containment facilities. Researchers could not conduct yield loss studies because the available containment facilities did not have enough room to allow soybean plants to reach maturity. The limited space in containment facilities has also slowed USDA’s ability to germinate and study foreign strains of ASR (see fig. 5). ASR’s arrival in the United States should facilitate USDA’s efforts to study the disease because researchers in affected states can now work with ASR and soybean plants under field conditions. The Agricultural Research Service expects to have soybean germplasm with some level of resistance to ASR within 5 years. It intends to work with industry through cooperative research and development agreements and other mechanisms to provide access to this germplasm so that private companies can develop commercial soybeans with resistance or tolerance to ASR. Commercialization may take an additional 2 to 4 years. According to agency researchers, it is difficult to develop germplasm that is completely resistant to all strains of ASR; and therefore, the most effective approach for developing resistance will be to develop tolerant soybeans to provide growers more time each season to prepare for and manage ASR. The Agricultural Research Service is also conducting research to examine the genetic variability among the various strains of ASR. The expected outcomes of this project are to identify genes required for the infection process and disease cycle, as well as the discovery of potential targets for new fungicides. Both the Agricultural Research Service and the United Soybean Board have supported this research, and the agency has also worked with the Department of Energy’s Joint Genome Institute. In April 2005, the Agricultural Research Service issued a National Strategic Plan for the Coordination and Integration of Soybean Rust Research. It began to develop this strategic plan at a meeting held in December 2004, 3 weeks after the disease was confirmed in the continental United States. USDA, together with the United Soybean Board and the North Central Soybean Research Program, held a national workshop with more than 90 soybean experts to set priorities, identify strategic goals for ASR research, and develop a national research plan. This plan is linked to the agency’s overall strategic plan and coordinated with other USDA agencies. The research plan also promises project review and program assessment by independent peers via annual research progress reports. Of the research plan’s six strategic goals, three aim directly at developing ASR resistance or tolerance: develop new, high-yielding germplasm with resistance to soybean rust; determine the genetic basis for ASR’s virulence and determine the genetic basis for soybeans’ resistance to ASR; and improve understanding of ASR’s biology and epidemiology. The Agricultural Research Service has since developed a draft of an action plan intended to measure the progress of the research plan initiative. Effective, timely communication and coordination at the federal, state, and local levels, coupled with favorable weather conditions, were keys to limiting the impact of ASR on U.S. soybean production in 2005. Indeed, in many areas of the country, soybean production exceeded expectations, in part because producers were more attentive to their crop. While the experience in 2005 was favorable, it is unlikely that the fungus will be eliminated. Accordingly, it will still be important for all agricultural stakeholders to remain vigilant and to consistently monitor, test, and report on ASR and to develop models for predicting the spread of the disease. Going forward, however, differences in how researchers monitor, test, and report on the disease could detract from the value of future prediction models. The 2005 ASR experience also highlights the importance of preparing for, coordinating, and monitoring a new agricultural disease. The lessons learned from managing ASR could be valuable in minimizing the effects of other agricultural pests that threaten crops and can cause significant economic losses. In this regard, a clear plan of action and strong leadership in coordinating the actions of all stakeholders was important in 2005 and will continue to be critical to the success of efforts to monitor, report, and manage the spread of ASR in 2006. We are making two recommendations to the Secretary of Agriculture to ensure continued strong leadership and improved efforts to predict and limit the spread of ASR. To ensure reliable, quality reporting on the spread of the disease, USDA should provide additional guidance to state ASR program managers and monitors on the timing and frequency of reporting on the incidence of ASR, the designation of sentinel plots, and when to use advanced diagnostic testing. To ensure that ASR continues to receive national priority and the same level of effective coordination and cooperation evidenced in 2005, USDA should develop a detailed action plan, prior to the beginning of the growing season, describing how it will manage ASR in 2006. We provided a draft of this report to USDA and EPA for their review and comment. In oral comments, EPA told us that the factual information in our draft report is correct and provided technical comments, which we incorporated as appropriate. In written comments, USDA said that the report fairly describes USDA’s preparations related to ASR. In addition, it stated that both of the report’s recommendations reflect its ongoing cooperative efforts with states to combat the disease (see app. VI). USDA also provided a number of technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate committees; the Secretary of Agriculture; the Administrator of EPA; 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 have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII. To determine the U.S. Department of Agriculture’s (USDA) strategy for minimizing the effects of Asian Soybean Rust (ASR) now that the disease has arrived in the continental United States and the lessons learned that could be used to improve future efforts, we interviewed officials from USDA’s Animal and Plant Health Inspection Service (APHIS), the Cooperative State Research, Education, and Extension Service (CSREES), the Agricultural Research Service, the Farm Service Agency (FSA), and the Risk Management Agency (RMA) to identify efforts that have been implemented since November 2004. We also surveyed state officials in the 31 soybean-producing states that were included in USDA’s sentinel plot program to obtain information on their efforts to minimize the effects of ASR through education, training, surveillance, and testing and to obtain information about the lessons learned during the 2005 crop year. The survey included questions about the states’ university extension programs; sentinel plots, monitoring, and scouting; diagnostic screening and testing; fungicide use; and perceptions of USDA’s efforts. Prior to implementing our survey, we pretested the questionnaire with several state officials (university extension faculty) in Florida and Alabama. During these pretests, we interviewed the respondents to ensure that (1) the questions were clear and unambiguous, (2) the terms we used were precise, and (3) the survey did not place an undue burden on the staff completing it. The questionnaire was also reviewed by a GAO survey expert. We made changes to the questionnaire based on these pretests. We received responses from all 31 states surveyed. The state information presented in this report is based on information obtained from this survey and interviews with state officials. Appendix II contains the state questionnaire and aggregated responses. We conducted site visits to Alabama, Georgia, and Florida, where we inspected ASR-infected soybeans while touring sentinel plots, a fungicide efficacy trial, diagnostic facilities, and a commercial soybean field with state extension officials. We interviewed university extension faculty and laboratory diagnosticians in these states, as well as in Indiana and Iowa, to gain more in-depth information about their efforts to mitigate the effects of ASR and test for the disease. We also toured USDA diagnostic facilities in Beltsville, Maryland. In addition, we interviewed industry and trade representatives to discuss the adequacy of available fungicides and application equipment. Finally, we attended the November 2005 National Soybean Rust Symposium in Nashville, Tennessee to determine stakeholders’ assessment of USDA’s efforts. To determine the progress that USDA, the Environmental Protection Agency (EPA), and others have made in developing, testing, and licensing fungicides to treat ASR and in identifying and breeding ASR-resistant or -tolerant soybeans, we interviewed officials from EPA and state departments of agriculture to obtain information about their efforts to license fungicides to treat ASR. In addition, we asked about the adequacy of fungicide supplies and equipment when surveying the 31 soybean- producing states that were included in USDA’s sentinel plot program. We interviewed Agricultural Research Service personnel as well as researchers from academia and industry and reviewed related reports and studies regarding efforts to research fungicide efficacy and identify and breed ASR- resistant or -tolerant soybeans. We also toured USDA research facilities at Ft. Detrick, Maryland. We conducted our work between May 2005 and January 2006 in accordance with generally accepted government auditing standards. Please coordinate with others at your state’s land grant university or in your state’s Department of Agriculture to complete this questionnaire. Please fax your completed questionnaire to: 202-512-2502 (alternate #: 202-512-2514) by November 14. For your convenience, the last page of this questionnaire is a fax cover sheet. Part 1: Extension Programs Someone knowledgeable about your state’s university extension program should answer Questions 1 - 2. 1. Do you plan to offer any Asian Soybean Rust (ASR) presentations, programs, or workshops for growers between November 1, 2005, and April 30, 2006? (For number, enter 0 if none. If you do not know the exact number, please provide an estimate.) Yes How many? Uncertain Go to Q3 N = 30 (Not all respondents answered all parts.) 2a. Which of the following topics will likely be included in upcoming (that is, between November 1, 2005, and April 30, 2006) extension presentations, programs, or workshops on ASR? (Please check ’Will likely be included’ or ’Will likely not be included’ for each topic.) a. b. Identification of ASR and “look-alike” diseases Types and purposes of fungicides c. d. f. Insurance coverage or disaster funding for losses due to ASR g. Observations and results from 2005, “Lessons Learned” 2b. Which three of the above topics do you consider the most critical to include? (In Column 3, please check the three topics you consider the most critical to include.) Part 2: Sentinel Plots, Monitoring, and Scouting Someone knowledgeable about your state’s sentinel plots and monitoring and scouting programs should answer Questions 3 – 14. 3. How many USDA-sponsored sentinel plots were in 3a. How many of these plots used only soybeans as the host? (Enter 0 if none.) 3b. How many of these plots used only other (nonsoybean) plants as hosts? (Enter 0 if 3c. How many of these plots used both soybeans and other (nonsoybean) plants as hosts? (Enter 0 if none.) ) Rows 3a, 3b, and 3c should add up to the total number above. 4. How many other sentinel plots (e.g., funded or sponsored by state government, the North Central Soybean Research Program, the United Soybean Board, or by other grants.) were in your state in 2005? (Enter 0 if none.) 4a. How many of these plots used only soybeans as the host? (Enter 0 if none.) 4b. How many of these plots used only other (nonsoybean) plants as hosts? (Enter 0 if none.) 4c. How many of these plots used both soybeans and other (nonsoybean) plants as hosts? (Enter 0 if none.) Rows 4a, 4b, and 4c should add up to the total number above. Other-sponsored plots are funded or sponsored by state government, the North Central Soybean Research Program, the United Soybean Board, or by other grants. 7. How many individuals in your state worked, on a regular basis, as monitors for 2005 sentinel plots funded or sponsored by USDA or other sources? (Please indicate number of monitors in each category. If none, enter 0.) Hrs./Wk. a. Field-based extension or research personnel b. Campus-based extension or research personnel c. Private, independent crop consultants d. State Department of Agriculture personnel e. Agribusiness employees or consultants h. Other(s) (Please specify below.) Three states listed other responses, including master gardeners, students, retired extension specialists, and temporary employees. 8. Is the number of sentinel plot monitors planned for your state in 2006 the same, more, or less than in 2005? (Please check one.) Same as 2005 More than 2005 9. In your opinion, how effective was the sentinel plot monitoring program as an early warning system in your state? (Please check one.) f. Not applicable 10. In your opinion, which of the following was the most important benefit of your state’s sentinel plot program? (Please check one.) a. Provided an early warning network b. Supported research to quantify spore c. Provided data for epidemiological d. Provided information to guide e. Other (Please describe below.) 11. Did any of the following factors limit your state’s effectiveness in monitoring sentinel plots? (Please check ‘Limited Effectiveness’ or ‘Did Not Limit Effectiveness’ for each factor.) a. Insufficient funds to cover salaries of monitors b. Insufficient funds for travel and travel-related expenses c. Insufficient number of qualified personnel available d. Lack of mobile diagnostic equipment e. Two states listed timeliness of receiving funds and another listed the need to hire a plant pathologist to test samples. 12. Assuming adequate funding, how many sentinel plots are planned in your state for 2006? (Enter 0 if none.) 12a. How many of these plots will be USDA- sponsored sentinel plots? (Enter 0 if none.) 12b. How many of these plots will be sponsored through other sources? (Please enter 0 if none. If not 0, specify source of funding below.) Rows 12a and 12b should add up to the total number above. Two states representing a total of 70 plots did not separate their plots between 12a and 12b so these amounts do not equal the total amount for question 12. Other-sponsored plots include plots funded or sponsored by state government, the North Central Soybean Research Program, the United Soybean Board, or by other grants. N = 31 13. Do you plan to make any major changes in how you will manage your sentinel plots for next year? (Please check one. If ‘Yes,’ please explain below.) Yes What changes do you plan to make? (Please explain below.) Various changes are planned, such as planting different maturity groups, hiring additional monitors, changing the monitoring frequency, and examining more samples in the laboratory. 14. About how often did your state typically update the USDA Soybean Rust Web sites with monitoring data? (Please check one in each column.) (Password Protected) Part 3: Diagnostic Screening Someone knowledgeable about your state’s diagnostic screening for ASR should answer Questions 15 – 23. 15. From January 1, 2005, through October 31, 2005, how many samples were received by your state’s diagnostic lab(s) for ASR research and screening purposes? (Enter 0 if none.) 15a. How many of these samples were submitted for routine research or monitoring purposes? (Enter 0 if none.) 15b. How many of these samples were submitted because of suspected ASR? (Enter 0 if none.) Rows 15a, 15b, and 15c should add up to the total number above. 15c. Rows 15e-1, 15e-2, 15e-3 and 15e-4 should add up to the number of samples in 15b, above. ELISA 16a. Of those samples identified in Question 15b (above), where were the samples collected and what was the host crop? (Please enter number of samples for each type of host for each location. If none, enter 0.) Location Where Screening Samples Were Collected 16b. If you indicated that samples were screened from ‘Other’ hosts or at ‘Other’ locations, please specify host and/or location below. Ten states listed other hosts, such as cowpeas, clover, snap beans, and lima beans, which were screened in roadside mobile plots and field borders where soybeans are commercially grown. N=31 (Not all respondents answered all parts.) 17a. How much did your state’s diagnostic lab(s) spend on screening and testing samples for ASR from January 1, 2005, through October 31, 2005? In your answer include equipment, supplies (e.g., slides), and salaries. (Enter 0 if none. If you do not know the exact amount, please provide an estimate.) 17b. Was any of the cost of screening and testing offset by fees charged for testing samples? (Please check one.) How much was offset? 18. Did your state have sufficient funding to perform diagnostic screening and testing for ASR in 2005? (Please check one.) No 19. How many laboratory staff, including state laboratory staff, performed diagnostic screening and testing for ASR, on a regular basis, during the 2005 season? (Please enter number. Enter 0 if none.) 20. Was the number of laboratory staff sufficient to perform diagnostic testing for ASR in 2005? (Please check one.) 21. Will the number of laboratory staff planned for 2006 be the same as for 2005? (Please check one.) What additional equipment was needed? (Please specify below.) Six states listed PCR equipment and other sample testing equipment and supplies, two listed microscopes, and another listed ELISA. 23. Does your state plan to add laboratory equipment for screening or diagnostic testing for ASR in 2006? (Please check one.) What additional equipment do you plan to obtain? (Please specify below.) Fifteen states responded, and most listed PCR equipment. Other equipment listed includes microscopes, ELISA plate readers, and test kits for screening purposes. No Someone knowledgeable about fungicide application in your state should answer Questions 24 - 28. 24. From January 1, 2005, through October 31, 2005 was ASR confirmed in your state? (Please check one.) No Go to Question 27. 26. Were the suggestion(s) or recommendation(s) for applying fungicides posted on USDA’s Soybean Rust Web sites? (Please check one.) 27. Were there any problems involving equipment availability for ASR fungicide spraying in your state? (Please check one.) Yes 28. Were there any problems involving the availability of fungicides for ASR in your state? (Please check one.) If Yes, please explain problems with fungicide availability. (Please use the space below.) Three states where ASR was detected in 2005 noted that not all fungicides were available to growers in their states. Another state where ASR was not detected made a similar comment, while another state said that the use of fungicides in the south led to a shortage of fungicides for the wheat crop in the north. Part 5: USDA’s 2005 ASR Program Someone knowledgeable about USDA’s efforts to minimize the impact of ASR in 2005 should answer Questions 29 – 33. 29. In your opinion, how effective were USDA’s efforts to minimize the impact of ASR? (Please check one.) f. Uncertain 30. If you have any suggestions for improving USDA’s ASR program, please briefly explain in the space below. We received 13 comments regarding suggestions for improving USDA’s ASR program. For example, some states commented that increased funding is needed or needs to be provided earlier. Another state noted more suspected ASR samples need to be examined by microscope because of look-alike diseases. One state said that USDA needs to determine and specify what sentinel plot monitoring data is essential for modeling purposes, and those monitoring the plots should adhere to a strict methodology in collecting the data. Another state suggested that the program should be reduced in scope until the economic impact is greater. 31. In your opinion, how effective was communication between USDA and your state in addressing ASR during 2005? (Please check one.) c. d. e. f. Uncertain 32. In your opinion, to what extent were USDA’s Soybean Rust Web sites useful to your state? (Please check one in each column.) (Password Protected) a. Very great extent e. Little or no extent 33. If you have specific suggestions for improving USDA’s Soybean Rust Web sites, please note them in the space below. Twelve states provided comments. Several states suggested technical improvements to USDA’s Web site for improved ease of use, and one state suggested that improvements were needed for growers using a dial-up connection to download maps. One state suggested that the USDA Web site should consider using colors other than red and green to aid males who are color blind. One state commented that USDA’s public Web site needs more publicity, and another state suggested that land grant universities and extension educators be given more credit on the Web site. Thank you for taking the time to answer this questionnaire. No questionnaire of this type can cover every relevant topic. If you wish to expand your answer(s) or comment on any other topic related to ASR, please feel free to attach additional pages or to E-mail us. Our report will be available early next spring. We will notify you when it is issued and provide you with a free copy. The yer' firt confirmtion of ASR occrred in Florid. ASR was firt confirmed in Georgi. ASR was firt confirmed in Alaba. ASR was firt confirmed in Missssippi. ASR was firt confirmed in Sth Crolin. The last conty confirmtion of ASR for the month of Septemer occrred in Georgi. ASR was firt confirmed in Lo nd North Crolin. The yer'ast confirmtion of ASR occred in Alaba. Thihow the firt confirmtion of ASR in Texas nd Kentcky, which occrred in Novemer. In addition to the contact named above, Ronald E. Maxon, Jr., Assistant Director; James L. Dishmon, Jr.; Chad M. Gorman; Lynn M. Musser; Deborah S. Ortega; Paul J. Pansini; Carol Herrnstadt Shulman; and Amy E. Webbink made key contributions to this report. Agriculture Production: USDA’s Preparation for Asian Soybean Rust. GAO-05-668R. Washington, D.C.: May 17, 2005. | In 2005, U.S. agriculture faced potentially devastating losses from Asian Soybean Rust (ASR), a fungal disease that spreads airborne spores. Fungicides approved by the Environmental Protection Agency (EPA) can protect against ASR. In 2005, growers in 31 states planted about 72.2 million soybean acres worth about $17 billion. While favorable weather conditions limited losses due to ASR, it still threatens the soybean industry. In May 2005, GAO described the U.S. Department of Agriculture's (USDA) efforts to prepare for ASR's entry, (Agriculture Production: USDA's Preparation for Asian Soybean Rust, GAO-05-668R). This report examines (1) USDA's strategy to minimize ASR's effects in 2005 and the lessons learned to improve future efforts and (2) USDA, EPA, and others' efforts to develop, test, and license fungicides for ASR and to identify and breed soybeans that tolerate it. USDA developed and implemented a framework--with federal and state agencies, land grant universities, and industry--that effectively focused national attention on ASR in 2005 and helped growers make informed fungicide decisions. The framework was effective in several ways. For example, sentinel plots--about 2,500 square feet of soybeans or other host plants planted early in the growing season in the 31 soybean-producing states--provided early warning of ASR. Officials in 23 of 25 states GAO surveyed reported that this effort was effective. Researchers could also promptly identify and report on the incidence and severity of the disease on a USDA Web site, alerting officials and growers to ASR's spread. Going forward, however, differences in how researchers monitor, test, and report on the disease could lead to incomplete or inaccurate data and detract from the value of future prediction models. For example, models to forecast ASR's spread partly rely on states' observations of sentinel plots. USDA asked states to report results weekly, but updates ranged from 4 reports, in total, during the growing season in one state to 162 reports in another state. Inconsistencies also occurred in the designation and placement of plots and in the testing of samples for ASR. Further, changes to the successful management approach employed by USDA in 2005 raise questions about how the program will perform in 2006. For 2006, most operational responsibility for ASR will shift from USDA headquarters to a land grant university. GAO is concerned that USDA's lack of a detailed action plan describing how program responsibilities will be assumed and managed in 2006 could limit the effectiveness of ASR management for this year. EPA, USDA, and others increased the number of fungicides growers can use to combat ASR while efforts continue to develop ASR-tolerant soybeans. As of December 2005, EPA had approved 20 fungicides for treating ASR on soybeans, including 12 that had emergency exemptions. According to officials in the nine states where ASR was confirmed in 2005, growers had access to fungicides. USDA, universities, and private companies are also developing ASR-tolerant soybeans and have identified 800 possible lines of resistant soybeans, out of a total of 16,000 lines. USDA estimates it may take 5 to 9 years to develop commercially available ASR-tolerant soybeans. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
To determine which federal government programs and functions should be added to the High Risk List, we consider whether the program or function is of national significance or is key to government performance and accountability. Further, we consider qualitative factors, such as whether the risk involves public health or safety, service delivery, national security, national defense, economic growth, or privacy or citizens’ rights, or could result in significant impaired service, program failure, injury or loss of life, or significantly reduced economy, efficiency, or effectiveness. In addition, we also review the exposure to loss in quantitative terms such as the value of major assets being impaired, revenue sources not being realized, or major agency assets being lost, stolen, damaged, or wasted. We also consider corrective measures planned or under way to resolve a material control weakness and the status and effectiveness of these actions. This year, we added two new areas, delineated below, to the High Risk List based on those criteria. In response to serious and long-standing problems with veterans’ access to care, which were highlighted in a series of congressional hearings in the spring and summer of 2014, Congress enacted the Veterans Access, Choice, and Accountability Act of 2014 (Pub. L. No. 113-146, 128 Stat. 1754), which provides $15 billion in new funding for Department of Veterans Affairs (VA) health care. Generally, this law requires VA to offer veterans the option to receive hospital care and medical services from a non-VA provider when a VA facility cannot provide an appointment within 30 days, or when veterans reside more than 40 miles from the nearest VA facility. Under the law, VA received $10 billion to cover the expected increase in utilization of non-VA providers to deliver health care services to veterans. The $10 billion is available until expended and is meant to supplement VA’s current budgetary resources for medical care. Further, the law appropriated $5 billion to increase veterans’ access to care by expanding VA’s capacity to deliver care to veterans by hiring additional clinicians and improving the physical infrastructure of VA’s facilities. It is therefore critical that VA ensures its resources are being used in a cost- effective manner to improve veterans’ timely access to health care. We have categorized our concerns about VA’s ability to ensure the timeliness, cost-effectiveness, quality, and safety of the health care the department provides into five broad areas: (1) ambiguous policies and inconsistent processes, (2) inadequate oversight and accountability, (3) information technology challenges, (4) inadequate training for VA staff, and (5) unclear resource needs and allocation priorities. We have made numerous recommendations that aim to address weaknesses in VA’s management of its health care system—more than 100 of which have yet to be fully resolved. For example, to ensure that its facilities are carrying out processes at the local level more consistently—such as scheduling veterans’ medical appointments and collecting data on veteran suicides— VA needs to clarify its existing policies. VA also needs to strengthen oversight and accountability across its facilities by conducting more systematic, independent assessments of processes that are carried out at the local level, including how VA facilities are resolving specialty care consults, processing claims for non-VA care, and establishing performance pay goals for their providers. We also have recommended that VA work with the Department of Defense (DOD) to address the administrative burdens created by the lack of interoperability between their two IT systems. A number of our recommendations aim to improve training for staff at VA facilities, to address issues such as how staff are cleaning, disinfecting, and sterilizing reusable medical equipment, and to more clearly align training on VA’s new nurse staffing methodology with the needs of staff responsible for developing nurse staffing plans. Finally, we have recommended that VA improve its methods for identifying VA facilities’ resource needs and for analyzing the cost-effectiveness of VA health care. The recently enacted Veterans Access, Choice, and Accountability Act included a number of provisions intended to help VA address systemic weaknesses. For example, the law requires VA to contract with an independent entity to (1) assess VA’s capacity to meet the current and projected demographics and needs of veterans who use the VA health care system, (2) examine VA’s clinical staffing levels and productivity, and (3) review VA’s IT strategies and business processes, among other things. The new law also establishes a 15-member commission, to be appointed primarily by bipartisan congressional leadership, which will examine how best to organize the VA health care system, locate health care resources, and deliver health care to veterans. It is critical for VA leaders to act on the findings of this independent contractor and congressional commission, as well as on those of VA’s Office of the Inspector General, GAO, and others, and to fully commit themselves to developing long-term solutions that mitigate risks to the timeliness, cost- effectiveness, quality, and safety of the VA health care system. It is also critical that Congress maintains its focus on oversight of VA health care. In the spring and summer of 2014, congressional committees held more than 20 hearings to address identified weaknesses in the VA health care system. Sustained congressional attention to these issues will help ensure that VA continues to make progress in improving the delivery of health care services to veterans. We plan to continue monitoring VA’s efforts to improve the timeliness, cost-effectiveness, quality, and safety of veterans’ health care. To this end, we have ongoing work focusing on topics such as veterans’ access to primary care and mental health services; primary care productivity; nurse recruitment and retention; monitoring and oversight of VA spending on training programs for health care professionals; mechanisms VA uses to monitor quality of care; and VA and DOD investments in Centers of Excellence—which are intended to produce better health outcomes for veterans and service members. Although the executive branch has undertaken numerous initiatives to better manage the more than $80 billion that is annually invested in information technology (IT), federal IT investments too frequently fail or incur cost overruns and schedule slippages while contributing little to mission-related outcomes. We have previously testified that the federal government has spent billions of dollars on failed IT investments. These and other failed IT projects often suffered from a lack of disciplined and effective management, such as project planning, requirements definition, and program oversight and governance. In many instances, agencies have not consistently applied best practices that are critical to successfully acquiring IT investments. We have identified nine critical factors underlying successful major acquisitions that support the objective of improving the management of large-scale IT acquisitions across the federal government: (1) program officials actively engaging with stakeholders; (2) program staff having the necessary knowledge and skills; (3) senior department and agency executives supporting the programs; (4) end users and stakeholders involved in the development of requirements; (5) end users participating in testing of system functionality prior to end user acceptance testing; (6) government and contractor staff being stable and consistent; (7) program staff prioritizing requirements; (8) program officials maintaining regular communication with the prime contractor; and (9) programs receiving sufficient funding. While there have been numerous executive branch initiatives aimed at addressing these issues, implementation has been inconsistent. Over the past 5 years, we have reported numerous times on shortcomings with IT acquisitions and operations and have made about 737 related recommendations, 361 of which were to the Office of Management and Budget (OMB) and agencies to improve the implementation of the recent initiatives and other government-wide, cross-cutting efforts. As of January 2015, about 23 percent of the 737 recommendations had been fully implemented. Given the federal government’s continued experience with failed and troubled IT projects, coupled with the fact that OMB initiatives to help address such problems have not been fully implemented, the government will likely continue to produce disappointing results and will miss opportunities to improve IT management, reduce costs, and improve services to the public, unless needed actions are taken. Further, it will be more difficult for stakeholders, including Congress and the public, to monitor agencies’ progress and hold them accountable for reducing duplication and achieving cost savings. Recognizing the severity of issues related to government-wide management of IT, in December 2014 the Federal Information Technology Acquisition Reform provisions were enacted as a part of the Carl Levin and Howard P. ‘Buck’ McKeon National Defense Authorization Act for Fiscal Year 2015. I want to acknowledge the leadership of this Committee and the Senate Committee on Homeland Security and Governmental Affairs in leading efforts to enact this important legislation. To help address the management of IT investments, OMB and federal agencies should expeditiously implement the requirements of the December 2014 statutory provisions promoting IT acquisition reform.Doing so should (1) improve the transparency and management of IT acquisitions and operations across the government, and (2) strengthen the authority of chief information officers to provide needed direction and oversight. To help ensure that these improvements are achieved, congressional oversight of agencies’ implementation efforts is essential. Beyond implementing the recently enacted law, OMB and agencies need to continue to implement our previous recommendations in order to improve their ability to effectively and efficiently invest in IT. Several of these are critical, such as conducting TechStat reviews for at-risk investments, updating the public version of the IT Dashboard throughout the year, developing comprehensive inventories of federal agencies’ software licenses. To ensure accountability, OMB and agencies should also demonstrate measurable government-wide progress in the following key areas: OMB and agencies should, within 4 years, implement at least 80 percent of our recommendations related to the management of IT acquisitions and operations. Agencies should ensure that a minimum of 80 percent of the government’s major acquisitions should deliver functionality every 12 months. Agencies should achieve no less than 80 percent of the over $6 billion in planned PortfolioStat savings and 80 percent of the more than $5 billion in savings planned for data center consolidation. In the 2 years since the last high-risk update, two areas have expanded in scope. Enforcement of Tax Laws has been expanded to include IRS’s efforts to address tax refund fraud due to identity theft. Ensuring the Security of Federal Information Systems and Cyber Critical Infrastructure has been expanded to include the federal government’s protection of personally identifiable information and is now called Ensuring the Security of Federal Information Systems and Cyber Critical Infrastructure and Protecting Personally Identifiable Information (PII). Since 1990, we have designated one or more aspects of Enforcement of Tax Laws as high risk. The focus of the Enforcement of Tax Laws high- risk area is on the estimated $385 billion net tax gap—the difference between taxes owed and taxes paid—and IRS’s and Congress’s efforts to address it. Given current and emerging risks, we are expanding the Enforcement of Tax Laws area to include IRS’s efforts to address tax refund fraud due to identity theft (IDT), which occurs when an identity thief files a fraudulent tax return using a legitimate taxpayer’s identifying information and claims a refund. While acknowledging that the numbers are uncertain, IRS estimated paying about $5.8 billion in fraudulent IDT refunds while preventing $24.2 billion during the 2013 tax filing season. While there are no simple solutions to combating IDT refund fraud, we have identified various options that could help, some of which would require legislative action. Because some of these options represent a significant change to the tax system that could likely burden taxpayers and impose significant costs to IRS for systems changes, it is important for IRS to assess the relative costs and benefits of the options. This assessment will help ensure an informed discussion among IRS and relevant stakeholders—including Congress—on the best option (or set of options) for preventing IDT refund fraud. Since 1997, we have designated the security of our federal cyber assets as a high-risk area. In 2003, we expanded this high-risk area to include the protection of critical cyber infrastructure. The White House and federal agencies have taken steps toward improving the protection of our cyber assets. However, advances in technology which have dramatically enhanced the ability of both government and private sector entities to collect and process extensive amounts of Personally Identifiable Information (PII) pose challenges to ensuring the privacy of such information. The number of reported security incidents involving PII at federal agencies has increased dramatically in recent years. In addition, high-profile PII breaches at commercial entities have heightened concerns that personal privacy is not being adequately protected. Finally, both federal agencies and private companies collect detailed information about the activities of individuals–raising concerns about the potential for significant erosion of personal privacy. We have suggested, among other things, that Congress consider amending privacy laws to cover all PII collected, used, and maintained by the federal government and recommended that the federal agencies we reviewed take steps to protect personal privacy and improve their responses to breaches of PII. For these reasons, we added the protection of privacy to this high-risk area this year. Our experience with the high-risk series over the past 25 years has shown that five broad elements are essential to make progress.criteria for removal are as follows: Leadership commitment. Demonstrated strong commitment and top leadership support. Capacity. Agency has the capacity (i.e., people and resources) to resolve the risk(s). Action plan. A corrective action plan exists that defines the root cause and solutions and that provides for substantially completing corrective measures, including steps necessary to implement solutions we recommended. Monitoring. A program has been instituted to monitor and independently validate the effectiveness and sustainability of corrective measures. Demonstrated progress. Ability to demonstrate progress in implementing corrective measures and in resolving the high-risk area. These five criteria form a road map for efforts to improve and ultimately address high-risk issues. Addressing some of the criteria leads to progress, while satisfying all of the criteria is central to removal from the list. Figure 1 shows the five criteria and examples of actions taken by agencies to address the criteria. Throughout my statement and in our high-risk update report, we have detailed many actions taken to address the high-risk areas aligned with the five criteria as well as additional steps that need to be addressed. In each of our high-risk updates, for more than a decade, we have assessed progress to address the five criteria for removing the high-risk areas from the list. In this high-risk update, we are adding additional clarity and specificity to our assessments by rating each high-risk area’s progress on the criteria, using the following definitions: Met. Actions have been taken that meet the criterion. There are no significant actions that need to be taken to further address this criterion. Partially met. Some, but not all, actions necessary to meet the criterion have been taken. Not met. Few, if any, actions towards meeting the criterion have been taken. Figure 2 is a visual representation of varying degrees of progress in each of the five criteria for a high-risk area. Each point of the star represents one of the five criteria for removal from the High Risk List and each ring represents one of the three designations: not met, partially met, or met. The progress ratings used to address the high-risk criteria are an important part of our efforts to provide greater transparency and specificity to agency leaders as they seek to address high-risk areas. Beginning in the spring of 2014 leading up to this high-risk update, we met with agency leaders across government to discuss preliminary progress ratings. These meetings focused on actions taken and on additional actions that need to be taken to address the high-risk issues. Several agency leaders told us that the additional clarity provided by the progress rating helped them better target their improvement efforts. Since our last high-risk update in 2013, there has been solid and steady progress on the vast majority of the 30 high-risk areas from our 2013 list. Progress has been possible through the concerted actions and efforts of Congress and the leadership and staff in agencies and OMB. As shown in table 1, 18 high-risk areas have met or partially met all criteria for removal from the list; 11 of these areas also fully met at least one criterion. Of the 11 areas that have been on the High Risk List since the 1990s, 7 have at least met or partially met all of the criteria for removal and 1 area—DOD Contract Management—is 1 of the 2 areas that has made enough progress to remove subcategories of the high-risk area. Overall, 28 high- risk areas were rated against the five criteria, totaling a possible 140 high- risk area criteria ratings. Of these, 122 (or 87 percent) were rated as met or partially met. On the other hand, 13 of the areas have not met any of the five criteria; 3 of those—DOD Business Systems Modernization, DOD Support Infrastructure Management, and DOD Financial Management— have been on the High Risk List since the 1990’s. Throughout the history of the high-risk program, Congress played an important role through its oversight and (where appropriate) through legislative action targeting both specific problems and the high-risk areas overall. Since our last high-risk report, several high-risk areas have received congressional oversight and legislation needed to make progress in addressing risks. Table 2 provides examples of congressional actions and of high-level administration initiatives—discussed in more detail throughout our report—that have led to progress in addressing high-risk areas. Additional congressional actions and administrative initiatives are also included in the individual high-risk areas discussed in this report. Since our 2013 update, sufficient progress has been made to narrow the scope of the following two areas. Our work has identified the following high-risk issues related to the Food and Drug Administration’s (FDA) efforts to oversee medical products: (1) oversight of medical device recalls, (2) implementation of the Safe Medical Devices Act of 1990, (3) the effects of globalization on medical product safety, and (4) shortages of medically necessary drugs. We added the oversight of medical products to our High Risk List in 2009. Since our 2013 high-risk update, FDA has made substantial progress addressing the first two areas; therefore, we have narrowed this area to remove these issues from our High Risk List. However, the second two issues, globalization and drug shortages, remain pressing concerns. FDA has greatly improved its oversight of medical device recalls by fully implementing all of the recommendations made in our 2011 report on this topic. Recalls provide an important tool to mitigate serious health consequences associated with defective or unsafe medical devices. We found that FDA had not routinely analyzed recall data to determine whether there are systemic problems underlying trends in device recalls. We made specific recommendations to the agency that it enhance its oversight of recalls. FDA is fully implementing our recommendations and has developed a detailed action plan to improve the recall process, analyzed 10 years of medical device recall trend data, and established explicit criteria and set thresholds for determining whether recalling firms have performed effective corrections or removals of defective products. These actions have addressed this high-risk issue. The Safe Medical Devices Act of 1990 requires FDA to determine the appropriate process for reviewing certain high-risk devices—either reclassifying certain high-risk medical device types to a lower-risk class or establishing a schedule for such devices to be reviewed through its most stringent premarket approval process. We found that FDA’s progress was slow and that it had never established a timetable for its reclassification or re-review process. As a result, many high-risk devices—including device types that FDA has identified as implantable, life sustaining, or posing a significant risk to the health, safety, or welfare of a patient—still entered the market through FDA’s less stringent premarket review process. We recommended that FDA expedite its implementation of the act. Since then, FDA has made good progress and began posting the status of its reviews on its website. FDA has developed an action plan with a goal of fully implementing the provisions of the act by the second quarter of calendar year 2015. While FDA has more work to do, it has made sufficient progress to address this high-risk issue. Based on our reviews of DOD’s contract management activities over many years, we placed this area on our High Risk List in 1992. For the past decade, our work and that of others has identified challenges DOD faces within four segments of contract management: (1) the acquisition workforce, (2) contracting techniques and approaches, (3) service acquisitions, and (4) operational contract support. DOD has made sufficient progress in one of the four segments—its management and oversight of contracting techniques and approaches—to warrant its removal as a separate segment within the overall DOD contract management high-risk area. Significant challenges still remain in the other three segments. We made numerous recommendations to address the specific issues we identified. DOD leadership has generally taken actions to address our recommendations. For example, DOD promulgated regulations to better manage its use of time-and-materials contracts and undefinitized contract actions (which authorize contractors to begin work before reaching a final agreement on contract terms). In addition, OMB directed agencies to take action to reduce the use of noncompetitive and time-and-materials contracts. Similarly, Congress has enacted legislation to limit the length of noncompetitive contracts and require DOD to issue guidance to link award fees to acquisition outcomes. Over the past several years, DOD’s top leadership has taken significant steps to plan and monitor progress in the management and oversight of contracting techniques and approaches. For example, through its Better Buying Power initiatives DOD leadership identified a number of actions to promote effective competition and to better utilize specific contracting techniques and approaches. In that regard, in 2010 DOD issued a policy containing new requirements for competed contracts that received only one offer—a situation OMB has noted deprives agencies of the ability to consider alternative solutions in a reasoned and structured manner and which DOD has termed “ineffective competition.” These changes were codified in DOD’s acquisition regulations in 2012. In May 2014, we concluded that DOD’s regulations help decrease some of the risks of one offer awards, but also that DOD needed to take additional steps to continue to enhance competition, such as establishing guidance for when contracting officers should assess and document the reasons only one offer was received. DOD concurred with the two recommendations we made in our report and has since implemented one of them. DOD also has been using its Business Senior Integration Group (BSIG)— an executive-level leadership forum—for providing oversight in the planning, execution, and implementation of these initiatives. In March 2014, the Director of the Office of Defense Procurement and Acquisition Policy presented an assessment of DOD competition trends that provided information on competition rates across DOD and for selected commands within each military department and proposed specific actions to improve competition. The BSIG forum provides a mechanism by which DOD can address ongoing and emerging weaknesses in contracting techniques and approaches and by which DOD can monitor the effectiveness of its efforts. Further, in June 2014, DOD issued its second annual assessment of the performance of the defense acquisition system. The assessment, included data on the system’s competition rate and goals, assessments of the effect of contract type on cost and schedule control, and the impact of competition on the cost of major weapon systems. An institution as large, complex, and diverse as DOD, and one that obligates hundreds of billions of dollars under contracts each year, will continue to face challenges with its contracting techniques and approaches. We will maintain our focus on identifying these challenges and proposing solutions. However, at this point DOD’s continued commitment and demonstrated progress in this area—including the establishment of a framework by which DOD can address ongoing and emerging issues associated with the appropriate use of contracting techniques and approaches—provide a sufficient basis to remove this segment from the DOD contract management high-risk area. In addition to the two areas that we narrowed—Protecting Public Health through Enhanced Oversight of Medical Products and DOD Contract Management—nine other areas met at least one of the criteria for removal from the High Risk List and were rated at least partially met for all four of the remaining criteria. These areas serve as examples of solid progress made to address high-risk issues through implementation of our recommendations and through targeted corrective actions. Further, each example underscores the importance of high-level attention given to high- risk areas within the context of our criteria by the administration and by congressional action. To sustain progress in these areas and to make progress in other high-risk areas—including eventual removal from the High Risk List—focused leadership attention and ongoing oversight will be needed. The National Aeronautics and Space Administration’s (NASA) acquisition management was included on the original High Risk List in 1990. NASA’s continued efforts to strengthen and integrate its acquisition management functions have resulted in the agency meeting three criteria for removal from our High Risk List—leadership commitment, a corrective action plan, and monitoring. For example, NASA has completed the implementation of its corrective action plan, which was managed by the Deputy Administrator, with the Chief Engineer, the Chief Financial Officer, and the agency’s Associate Administrator having led implementation of the The plan identified metrics to assess the progress of individual initiatives.implementation, which NASA continues to track and report semi-annually. These metrics include cost and schedule performance indicators for NASA’s major development projects. We have found that NASA’s performance metrics generally reflect improved performance. For example, average cost and schedule growth for NASA’s major projects has declined since 2011 and most of NASA’s major projects are tracking metrics, which we recommended in 2011 to better assess design stability and decrease risk. In addition, NASA has taken action in response to our recommendations to improve the use of earned value management—a tool designed to help project managers monitor progress—such as by conducting a gap analysis to determine whether each center has the requisite skills to effectively utilize earned value management. These actions have helped NASA to create better baseline estimates and track performance so that NASA has been able to launch more projects on time and within cost estimates. However, we found that NASA needs to continue its efforts to increase agency capacity to address ongoing issues through additional guidance and training of personnel. Such efforts should help maximize improvements and demonstrate that the improved cost and schedule performance will be sustained, even for the agency’s most expensive and complex projects. Recently, a few of NASA’s major projects are rebaselining their cost, schedule, or both in light of management and technical issues, which is tempering the progress of the whole portfolio. In addition, several of NASA’s largest and most complex projects, such as NASA’s human spaceflight projects, are at critical points in implementation. We have reported on several challenges that may further impact NASA’s ability to demonstrate progress in improving acquisition management. The federal government has made significant progress in promoting the sharing of information on terrorist threats since we added this issue to the High Risk List in 2003. As a result, the federal government has met our criteria for leadership commitment and capacity and has partially met the remaining criteria for this high-risk area. Significant progress was made in this area by developing a more structured approach to achieving the Information Sharing Environment (Environment) and by defining the highest priority initiatives to accomplish. In December 2012, the President released the National Strategy for Information Sharing and Safeguarding (Strategy), which provides guidance on the implementation of policies, standards, and technologies that promote secure and responsible national security information sharing. In 2013, in response to the Strategy, the Program Manager for the Environment released the Strategic Implementation Plan for the National Strategy for Information Sharing and Safeguarding (Implementation Plan). The Implementation Plan provides a roadmap for the implementation of the priority objectives in the Strategy. The Implementation Plan also assigns stewards to coordinate each priority objective—in most cases, a senior department official—and provides time frames and milestones for achieving the outcomes in each objective. Adding to this progress is the work the Environment has done to address our previous recommendations. In our 2011 report on the Environment, we recommended that key departments better define incremental costs for information sharing activities and establish an enterprise architecture management plan. Since then, senior officials in each key department reported that any incremental costs related to implementing the Environment are now embedded within each department’s mission activities and operations and do not require separate funding. Further, the 2013 Implementation Plan includes actions for developing aspects of an architecture for the Environment. In 2014, the program manager issued the Information Interoperability Framework, which begins to describe key elements intended to help link systems across departments to enable information sharing. Going forward, in addition to maintaining leadership commitment and capacity, the program manager and key departments will need to continue working to address remaining action items informed by our five high-risk criteria, thereby helping to reduce risks and enhance the sharing and management of terrorism-related information. The Department of Homeland Security (DHS) has continued efforts to strengthen and integrate its management functions since those issues were placed on the High Risk List in 2003. These efforts resulted in the department meeting two criteria for removal from the High Risk List (leadership commitment and a corrective action plan) and partially meeting the remaining three criteria (capacity, a framework to monitor progress, and demonstrated, sustained progress). DHS’s top leadership, including the Secretary and Deputy Secretary of Homeland Security, have continued to demonstrate exemplary commitment and support for addressing the department’s management challenges. For instance, the Department’s Under Secretary for Management and other senior management officials have routinely met with us to discuss the department’s plans and progress, which helps ensure a common understanding of the remaining work needed to address our high-risk designation. In April 2014, the Secretary of Homeland Security issued Strengthening Departmental Unity of Effort, a memorandum committing the agency to, among other things, improving DHS’s planning, programming, budgeting, and execution processes through strengthened departmental structures and increased capability. In addition, DHS has continued to provide updates to the report Integrated Strategy for High Risk Management, demonstrating a continued focus on addressing its high-risk designation. The integrated strategy includes key management initiatives and related corrective action plans for achieving 30 actions and outcomes, which we identified and DHS agreed are critical to addressing the challenges within the department’s management areas and to integrating those functions across the department. Further, DHS has demonstrated progress to fully address nine of these actions and outcomes, five of which it has sustained as fully implemented for at least 2 years. For example, DHS fully addressed two outcomes because it received a clean audit opinion on its financial statements for 2 consecutive fiscal years, 2013 and 2014. In addition, the department strengthened its enterprise architecture program (or technology blueprint) to guide IT acquisitions by, among other things, largely addressing our prior recommendations aimed at adding needed architectural depth and breadth. DOD supply chain management is one of the six issues that has been on the High Risk List since 1990. DOD has made progress in addressing weaknesses in all three dimensions of its supply chain management areas: inventory management, materiel distribution, and asset visibility. With respect to inventory management, DOD has demonstrated considerable progress in implementing its statutorily mandated corrective action plan. This plan is intended to reduce excess inventory and improve inventory management practices. Additionally, DOD has established a performance management framework, including metrics and milestones, to track the implementation and effectiveness of its corrective action plan and has demonstrated considerable progress in reducing its excess inventory and improving its inventory management. For example, DOD reported that its percentage of on-order excess inventory dropped from 9.5 percent in fiscal year 2009 to 7.9 percent in fiscal year 2013. DOD calculates the percentage by dividing the amount of on-order excess inventory by the total amount of on-order inventory. In response to our 2012 recommendations on the implementation of the plan, DOD continues to re-examine its goals for reducing excess inventory, has revised its goal for reducing on-hand excess inventory (it achieved its original goal early), and is in the process of institutionalizing its inventory management metrics in policy. DOD has also made progress in addressing its materiel distribution challenges. Specifically, DOD has implemented, or is implementing, distribution-related initiatives that could serve as a basis for a corrective action plan. For example, DOD developed its Defense Logistics Agency Distribution Effectiveness Initiative, formerly called Strategic Network Optimization, to improve logistics efficiencies in DOD’s distribution network and to reduce transportation costs. This initiative accomplishes these objectives by storing materiel at strategically located Defense Logistics Agency supply sites. Further, DOD has demonstrated significant progress in addressing its asset visibility weaknesses by taking steps to implement our February 2013 recommendation that DOD develop a strategy and execution plans that contain all the elements of a comprehensive strategic plan, including, among other elements, performance measures for gauging results. The National Defense Authorization Act for Fiscal Year 2014 required that DOD’s strategy and implementation plans for asset visibility, which were in development, incorporate, among other things, the missing elements that we identified. DOD’s January 2014 Strategy for Improving DOD Asset Visibility represents a corrective action plan and contains goals and objectives—as well as supporting execution plans—outlining specific objectives intended to improve asset visibility. DOD’s Strategy calls for organizations to identify at least one outcome or key performance indicator for assessing performance in implementing the initiatives intended to improve asset visibility. DOD has also established a structure, including its Asset Visibility Working Group, for monitoring implementation of its asset visibility improvement initiatives. Moving forward, the removal of DOD supply chain management from GAO’s High Risk List will require DOD to take several steps. For inventory management, DOD needs to demonstrate sustained progress by continuing to reduce its on-order and on-hand excess inventory, developing corrective actions to improve demand forecast accuracy, and implementing methodologies to set inventory levels for reparable items (i.e., items that can be repaired) with low or highly variable demand. For materiel distribution, DOD needs to develop a corrective action plan that includes reliable metrics for, among other things, identifying gaps and measuring distribution performance across the entire distribution pipeline. For asset visibility, DOD needs to (1) specify the linkage between the goals and objectives in its Strategy and the initiatives intended to implement it and (2) refine, as appropriate, its metrics to ensure they assess progress towards achievement of those goals and objectives. DOD weapon systems acquisition has also been on the High-Risk List since 1990. Congress and DOD have long sought to improve the acquisition of major weapon systems, yet many DOD programs are still falling short of cost, schedule, and performance expectations. The results are unanticipated cost overruns, reduced buying power, and in some cases delays or reductions in the capability ultimately delivered to the warfighter. Our past work and prior high-risk updates have identified multiple weaknesses in the way DOD acquires the weapon systems it delivers to the warfighter and we have made numerous recommendations on how to address these weaknesses. Recent actions taken by top leadership at DOD indicate a firm commitment to improving the acquisition of weapon systems as demonstrated by the release and implementation of the Under Secretary of Defense for Acquisition, Technology, and Logistics’ “Better Buying Power” initiatives. These initiatives include measures such as setting and enforcing affordability constraints, instituting a long-term investment plan for portfolios of weapon systems, implementing “should cost” management to control contract costs, eliminating redundancies within portfolios, and emphasizing the need to adequately grow and train the acquisition workforce. DOD also has made progress in its efforts to assess the root causes of poor weapon system acquisition outcomes and in monitoring the effectiveness of its actions to improve its management of weapon systems acquisition. Through changes to acquisition policies and procedures, DOD has made demonstrable progress and, if these reforms are fully implemented, acquisition outcomes should improve. At this point, there is a need to build on existing reforms by tackling the incentives that drive the process and behaviors. In addition, further progress must be made in applying best practices to the acquisition process, attracting and empowering acquisition personnel, reinforcing desirable principles at the beginning of the program, and improving the budget process to allow better alignment of programs and their risks and needs. While DOD has made real progress on the issues we have identified in this area, with the prospect of slowly growing or flat defense budgets for years to come, the department must continue this progress and get better returns on its weapon system investments than it has in the past. DOD has made some progress in updating its policies to enable better weapon systems outcomes. However, even with this call for change we remain concerned about the full implementation of proposed reforms as DOD has, in the past, failed to convert policy into practice. In addition, although we reported in March 2014 on the progress many DOD programs are making in reducing their cost in the near term, individual weapon programs are still failing to conform to best practices for acquisition or to implement key acquisition reforms and initiatives that could prevent long-term cost and schedule growth. We added this high-risk area in 1997 and expanded it this year to include protection of PII. Although significant challenges remain, the federal government has made progress toward improving the security of its cyber assets. For example, Congress, as part of its ongoing oversight, passed five bills, which became law, for improving the security of cyber assets. The first, The Federal Information Security Modernization Act of 2014, revises the Federal Information Security Management Act of 2002 and clarifies roles and responsibilities for overseeing and implementing federal agencies’ information security programs. The second law, the Cybersecurity Workforce Assessment Act, requires DHS to assess its cybersecurity workforce and develop a strategy for addressing workforce gaps. The third, the Homeland Security Cybersecurity Workforce Assessment Act, requires DHS to identify all of its cybersecurity positions and calls for the department to identify specialty areas of critical need in its cybersecurity workforce. The fourth, the National Cybersecurity Protection Act of 2014, codifies the role of DHS’ National Cybersecurity and Communications Integration Center as the nexus of cyber and communications integration for the federal government, intelligence community, and law enforcement. The fifth, the Cybersecurity Enhancement Act of 2014,through the National Institute of Standards and Technology, to facilitate and support the development of voluntary standards to reduce cyber risks to critical infrastructure. authorizes the Department of Commerce, The White House and senior leaders at DHS have also committed to securing critical cyber assets. Specifically, the President has signed legislation and issued strategy documents for improving aspects of cybersecurity, as well as an executive order and a policy directive for improving the security and resilience of critical cyber infrastructure. In addition, DHS and its senior leaders have committed time and resources to advancing cybersecurity efforts at federal agencies and to promoting critical infrastructure sectors’ use of a cybersecurity framework. However, securing cyber assets remains a challenge for federal agencies. Continuing challenges, such as shortages in qualified cybersecurity personnel and effective monitoring of, and continued weaknesses in, agencies’ information security programs need to be addressed. Until the White House and executive branch agencies implement the hundreds of recommendations that we and agency inspectors general have made to address cyber challenges, resolve identified deficiencies, and fully implement effective security programs and privacy practices, a broad array of federal assets and operations may remain at risk of fraud, misuse, and disruption, and the nation’s most critical federal and private sector infrastructure systems will remain at increased risk of attack from adversaries. In addition to the recently passed laws addressing cybersecurity and the protection of critical infrastructures, Congress should also consider amending applicable laws, such as the Privacy Act and E-Government Act, to more fully protect PII collected, used, and maintained by the federal government. The Department of the Interior’s (Interior) continued efforts to improve its management of federal oil and gas resources since we placed these issues on the High Risk List in 2011 have resulted in the department meeting one of the criteria for removal from our High Risk List— leadership commitment. Interior has implemented a number of strategies and corrective measures to help ensure the department collects its share of revenue from oil and gas produced on federal lands and waters. Additionally, Interior is developing a comprehensive approach to address its ongoing human capital challenges. In November 2014, Interior senior leaders briefed us on the department’s commitment to address the high- risk issue area by describing the following corrective actions. To help ensure Interior collects revenues from oil and gas produced on federal lands and waters, Interior has taken steps to strengthen its efforts to improve the measurement of oil and gas produced on federal leases by ensuring a link between what happens in the field (measurement and operations) and what is reported to Interior’s Office of Natural Resources Revenue or ONRR (production volumes and dispositions). To ensure that federal oil and gas leases are inspected, Interior is hiring inspectors and engineers with an understanding of metering equipment and measurement accuracy. The department has several efforts under way to assure that oil and gas are accurately measured and reported. For example, ONRR contracted for a study to automate data collection from production metering systems. In 2012, the Bureau of Safety and Environmental Enforcement hired and provided measurement training to a new measurement inspection team. To better ensure a fair return to the federal government from leasing and production activities from federal offshore leases, Interior raised royalty rates, minimum bids, and rental rates. For onshore federal leases, according to Interior’s November 2014 briefing document, ONRR’s Economic Analysis Office will provide the Bureau of Land Management (BLM) monthly analyses of global and domestic market conditions as BLM initiates a rulemaking effort to provide greater flexibility in setting onshore royalty rates. To address the department’s ongoing human capital challenges, Interior is working with the Office of Personnel Management to establish permanent special pay rates for critical energy occupations in key regions, such as the Gulf of Mexico. Bureau managers are being trained on the use of recruitment, relocation, and retention incentives to improve hiring and retention. Bureaus are implementing or have implemented data systems to support the accurate capture of hiring data to address delays in the hiring process. Finally, Interior is developing strategic workforce plans to assess the critical skills and competencies needed to achieve current and future program goals. To address its revenue collection challenges, Interior will need to identify the staffing resources necessary to consistently meet its annual goals for oil and gas production verification inspections. Interior needs to continue meeting its time frames for updating regulations related to oil and gas measurement and onshore royalty rates. It will also need to provide reasonable assurance that oil and gas produced from federal leases is accurately measured and that the federal government is getting an appropriate share of oil and gas revenues. To address its human capital challenges, Interior needs to consider how it will address staffing shortfalls over time in view of continuing hiring and retention challenges. It will also need to implement its plans to hire additional staff with expertise in inspections and engineering. Interior needs to ensure that it collects and maintains complete and accurate data on hiring times—such as the time required to prepare a job description, announce the vacancy, create a list of qualified candidates, conduct interviews, and perform background and security checks—to effectively implement changes to expedite its hiring process. The Centers for Medicare & Medicaid Services (CMS), in the Department of Health and Human Services (HHS), administers Medicare, which has been on the High Risk List since 1990. CMS has continued to focus on reducing improper payments in the Medicare program, which has resulted in the agency meeting our leadership commitment criterion for removal from the High Risk List and partially meeting our other four criteria. HHS has demonstrated top leadership support for addressing this risk area by continuing to designate “strengthened program integrity through improper payment reduction and fighting fraud” an HHS strategic priority and, through its dedicated Center for Program Integrity, CMS has taken multiple actions to improve in this area. For example, as we recommended in November 2012, CMS centralized the development and implementation of automated edits—prepayment controls used to deny Medicare claims that should not be paid—based on a type of national policy called national coverage determinations. Such action will ensure greater consistency in paying only those Medicare claims that are consistent with national policies. In addition, CMS has taken action to implement provisions of the Patient Protection and Affordable Care Act that Congress enacted to combat fraud, waste, and abuse in Medicare. For instance, in March 2014, CMS awarded a contract to a Federal Bureau of Investigation-approved contractor that will enable the agency to conduct fingerprint-based criminal history checks of high-risk providers and suppliers. This and other provider screening procedures will help block the enrollment of entities intent on committing fraud. CMS made positive strides, but more needs to be done to fully meet our criteria. For example, CMS has demonstrated leadership commitment by taking actions such as strengthening provider and supplier enrollment provisions, and improving its prepayment and postpayment claims review However, all parts of the process in the fee-for-service (FFS) program.Medicare program are on the Office of Management and Budget’s list of high-error programs, suggesting additional actions are needed. By implementing our open recommendations, CMS may be able to reduce improper payments and make progress toward fulfilling the four outstanding criteria to remove Medicare improper payments from our High Risk List. The following summarizes open recommendations and procedures authorized by the Patient Protection and Affordable Care Act that CMS should implement to make progress toward fulfilling the four outstanding criteria to remove Medicare improper payments from our High Risk List. CMS should require a surety bond for certain types of at-risk providers and suppliers; publish a proposed rule for increased disclosures of prior actions taken against providers and suppliers enrolling or revalidating enrollment in Medicare, such as whether the provider or supplier has been subject to a payment suspension from a federal health care program; establish core elements of compliance programs for providers and improve automated edits that identify services billed in medically unlikely amounts; develop performance measures for the Zone Program Integrity Contractors who explicitly link their work to the agency’s Medicare FFS program integrity performance measures and improper payment reduction goals; reduce differences between contractor postpayment review requirements, when possible; monitor the database used to track Recovery Auditors’ activities to ensure that all postpayment review contractors are submitting required data and that the data the database contains are accurate and complete; require Medicare administrative contractors to share information about the underlying policies and savings related to their most effective edits; and efficiently and cost-effectively identify, design, develop, and implement an information technology solution that addresses the removal of Social Security numbers from Medicare beneficiaries’ health insurance cards. The National Oceanic and Atmospheric Administration (NOAA) has made progress toward improving its ability to mitigate gaps in weather satellite data since the issue was placed on the High Risk List in 2013. NOAA has demonstrated leadership on both its polar-orbiting and geostationary satellite programs by making decisions on how it plans to mitigate anticipated and potential gaps, and in making progress on multiple mitigation-related activities. In addition, the agency implemented our recommendations to improve its polar-orbiting and geostationary satellite gap contingency plans. Specifically, in September 2013, we recommended that NOAA establish a comprehensive contingency plan for potential polar satellite data gaps that was consistent with contingency planning best practices. In February 2014, NOAA issued an updated plan that addressed many, but not all, of the best practices. For example, the updated plan includes additional contingency alternatives; accounts for additional gap scenarios; identifies mitigation strategies to be executed; and identifies specific activities for implementing those strategies along with associated roles and responsibilities, triggers, and deadlines. In addition, in September 2013, we reported that while NOAA had established contingency plans for the loss of geostationary satellites, these plans did not address user concerns over potential reductions in capability and did not identify alternative solutions and timelines for preventing a delay in the Geostationary Operational Environmental Satellite-R (GOES-R) launch date. We recommended the agency revise its contingency plans to address these weaknesses. In February 2014, NOAA released a new satellite contingency plan that improved in many, but not all, of the best practices. For example, the updated plan clarified requirements for notifying users regarding outages and impacts and provided detailed information on responsibilities for each action in the plan. NOAA has demonstrated leadership commitment in addressing data gaps of its polar-orbiting and geostationary weather satellites by making decisions about how to mitigate potential gaps and by making progress in implementing multiple mitigation activities. However, capacity concerns— including computing resources needed for some polar satellite mitigation activities and the limited time available for integration and testing prior to the scheduled launch of the next geostationary satellite—continue to present challenges. In addition, while both programs have updated their satellite contingency plans, work remains to implement and oversee efforts to ensure that mitigation plans will be viable if and when they are needed. Overall, the government continues to take high-risk problems seriously and is making long-needed progress toward correcting them. Congress has acted to address several individual high-risk areas through hearings and legislation. Our high-risk update and high-risk website, http://www.gao.gov/highrisk/ can help inform the oversight agenda for the 114th Congress and guide efforts of the administration and agencies to improve government performance and reduce waste and risks. In support of Congress and to further progress to address high-risk issues, we continue to review efforts and make recommendations to address high- risk areas. Continued perseverance in addressing high-risk areas will ultimately yield significant benefits. Thank you, Chairman Chaffetz, Ranking Member Cummings, and Members of the Committee. This concludes my testimony. I would be pleased to answer any questions. For further information on this testimony, please contact J. Christopher Mihm at (202) 512-6806 or [email protected]. Contact points for the individual high-risk areas are listed in the report and on our high-risk web site. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The federal government is one of the world's largest and most complex entities; about $3.5 trillion in outlays in fiscal year 2014 funded a broad array of programs and operations. GAO maintains a program to focus attention on government operations that it identifies as high risk due to their greater vulnerabilities to fraud, waste, abuse, and mismanagement or the need for transformation to address economy, efficiency, or effectiveness challenges. Since 1990, more than one-third of the areas previously designated as high risk have been removed from the list because sufficient progress was made in addressing the problems identified. The five criteria for removal are: (1) leadership commitment, (2) agency capacity, (3) an action plan, (4) monitoring efforts, and (5) demonstrated progress. This biennial update describes the status of high-risk areas listed in 2013 and identifies new high-risk areas needing attention by Congress and the executive branch. Solutions to high-risk problems offer the potential to save billions of dollars, improve service to the public, and strengthen government performance and accountability. Solid, steady progress has been made in the vast majority of the high-risk areas. Eighteen of the 30 areas on the 2013 list at least partially met all of the criteria for removal from the high risk list. Of those, 11 met at least one of the criteria for removal and partially met all others. Sufficient progress was made to narrow the scope of two high-risk issues— Protecting Public Health through Enhanced Oversight of Medical Products and DOD Contract Management. Overall, progress has been possible through the concerted actions of Congress, leadership and staff in agencies, and the Office of Management and Budget. This year GAO is adding 2 areas, bringing the total to 32. Managing Risks and Improving Veterans Affairs (VA) Health Care. GAO has reported since 2000 about VA facilities' failure to provide timely health care. In some cases, these delays or VA's failure to provide care at all have reportedly harmed veterans. Although VA has taken actions to address some GAO recommendations, more than 100 of GAO's recommendations have not been fully addressed, including recommendations related to the following areas: (1) ambiguous policies and inconsistent processes, (2) inadequate oversight and accountability, (3) information technology challenges, (4) inadequate training for VA staff, and (5) unclear resource needs and allocation priorities. The recently enacted Veterans Access, Choice, and Accountability Act included provisions to help VA address systemic weaknesses. VA must effectively implement the act. Improving the Management of Information Technology (IT) Acquisitions and Operations. Congress has passed legislation and the administration has undertaken numerous initiatives to better manage IT investments. Nonetheless, federal IT investments too frequently fail to be completed or incur cost overruns and schedule slippages while contributing little to mission-related outcomes. GAO has found that the federal government spent billions of dollars on failed and poorly performing IT investments which often suffered from ineffective management, such as project planning, requirements definition, and program oversight and governance. Over the past 5 years, GAO made more than 730 recommendations; however, only about 23 percent had been fully implemented as of January 2015. GAO is also expanding two areas due to evolving high-risk issues. Enforcement of Tax Laws. This area is expanded to include IRS's efforts to address tax refund fraud due to identify theft. IRS estimates it paid out $5.8 billion (the exact number is uncertain) in fraudulent refunds in tax year 2013 due to identity theft. This occurs when a thief files a fraudulent return using a legitimate taxpayer's identifying information and claims a refund. Ensuring the Security of Federal Information Systems and Cyber Critical Infrastructure and Protecting the Privacy of Personally Identifiable Information (PII). This risk area is expanded because of the challenges to ensuring the privacy of personally identifiable information posed by advances in technology. These advances have allowed both government and private sector entities to collect and process extensive amounts of PII more effectively. The number of reported security incidents involving PII at federal agencies has increased dramatically in recent years. This report contains GAO's views on progress made and what remains to be done to bring about lasting solutions for each high-risk area. Perseverance by the executive branch in implementing GAO's recommended solutions and continued oversight and action by Congress are essential to achieving greater progress. |
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FERC now issues few licenses to construct and operate new hydropower projects. Therefore, most of FERC’s licensing activities relate to the relicensing of projects with licenses currently nearing their expiration dates. FERC recognizes two licensing processes—a traditional process and an alternative process. In addition, some licensees use a combination of the two processes—informally referred to as a “hybrid” process. All three processes begin between 5 and 5-½ years before a project’s license expires, when the licensee notifies FERC of its intent to seek relicensing. Each process ends when FERC either issues a new license or denies the license application. However, FPA provides for subsequent administrative and judicial reviews of a FERC license decision. If a license expires while a project is undergoing relicensing, FERC issues an annual license, allowing a project to continue to operate under the conditions found in the original license until the relicensing process is complete. Currently, more than 60 projects are operating under annual licenses, including several that have been operating under annual licenses for over a decade. FERC’s newly issued licenses include a standard “reserved authority” that allows FERC to “reopen” a license to modify its terms and conditions to meet fish and wildlife needs. New licenses may also include “reopener articles” that allow federal and state agencies, nongovernmental organizations, and individuals to petition FERC to reopen a license for other issues, including minimum streamflows and water quality. Federal fish and wildlife agencies may also ask FERC to reconsider the impacts of a project when an affected species is listed as endangered or threatened under the Endangered Species Act. FERC divides the traditional licensing process into two phases—a pre- application consultation phase and a post-application analysis phase. Each phase consists of stages and individual steps defined by “windows of time” rather than by specific dates. (See app. I.) For example, FERC requires at least 30 days to review a licensee’s initial consultation package, and a meeting between the licensee and federal and state agencies typically takes place between 30 and 60 days after the initial consultation package is prepared. During the pre-application consultation phase, the licensee must consult with officials at federal and state land and resource agencies, as well as those representing affected Indian tribes, who identify studies the licensee should undertake to determine the project’s impacts on fish and wildlife, recreation, water, and other resources. If the licensee disagrees with the need for a study, FERC may be asked to resolve the dispute. After completing the agreed-upon studies, the licensee prepares a draft application and obtains comments from, and attempts to resolve any disagreements on needed actions with, the relevant federal and state agencies. The post-application analysis phase begins when the licensee files a formal application to obtain a new license. This filing must occur at least 2 years before the license expires. The application is a comprehensive, detailed document specifying the project’s proposed operations, its anticipated impact on resources and other land uses, and proposed actions to mitigate adverse effects. FERC reviews the application to ensure that it meets all requirements and then asks relevant federal and state land and resource agencies to formally comment on it. Depending on the comments and its own independent analysis of the application, FERC may ask the licensee to provide additional data and studies. When FERC is satisfied that these are sufficient, it conducts an environmental analysis under the National Environmental Policy Act of 1969 (NEPA) and an economic analysis of the project’s benefits and costs. In addition to using FERC’s NEPA analysis, affected federal land and resource agencies frequently conduct separate environmental analyses under NEPA, or assessments under other laws, to determine the license terms and conditions to be prescribed or recommended to protect or enhance fish, wildlife, and other resources. FERC reviews these terms and conditions and, if necessary, negotiates with the relevant federal and state land and resource agencies or affected Indian tribes on the license’s terms and conditions. In October 1997, FERC issued an order codifying an alternative licensing process. Similar to the traditional licensing process, the alternative licensing process is divided into pre-application and post-application phases. (See app. II.) The licensee may choose the alternative licensing process, if it can demonstrate that all the participants agree on its use, subject to final approval by FERC. The alternative licensing process shortens the process by combining many of the earlier consultations and studies with the later analyses in the pre- application phase. For example, the licensee begins a preliminary NEPA analysis during the pre-application phase rather than having FERC begin the NEPA analysis during the post-application phase. The alternative licensing process also seeks to improve communication and collaboration among the participants in the process and often results in a “settlement agreement” at the end of the pre-application phase. This agreement, signed by all the participants in the process, includes the conditions to protect and enhance resources. Beginning the NEPA analysis and reaching agreement on license conditions in the pre-application phase are intended to shorten the post-application analysis phase. Some licensees use a hybrid licensing process that often combines the structured sequence of the traditional licensing process with the improved earlier consultation and collaboration of the alternative licensing process. Under this process, a licensee may try during the pre-application phase to achieve a settlement agreement among participants, but reserve the option to use the traditional process in instances when agreement cannot be reached. A further difference is that FERC conducts the NEPA analysis during the post-application phase rather than having the licensee begin the analysis during the pre-application phase as under the alternative licensing process. The licensing process is complete when FERC either issues a license or denies the license application. However, FPA provides for subsequent administrative and judicial reviews of a FERC license decision. Any party to the licensing process may file an application for a rehearing with FERC within 30 days of FERC’s licensing decision. FERC subsequently issues an order (decision) on the application for a rehearing. Any party to the licensing process may also obtain a judicial review of FERC’s decision in the relevant federal appeals court within 60 days after FERC’s order on the application for a rehearing. FERC often delays implementation of contested license conditions until the reconsideration phase is completed. FERC and other participants in the licensing process acknowledge that the process is far more complex, time-consuming, and costly today than it was when FERC issued the approximately 1,000 original hydropower licenses 30 to 50 years ago. FERC must now attempt to balance and make tradeoffs among competing economic and environmental interests and to improve the environmental performance of projects while preserving hydropower as an economically viable energy source. Balancing these interests and making the necessary tradeoffs lengthen the process and make it more costly. FPA remains the basic statutory authority governing the licensing of hydropower projects. However, the Electric Consumers Protection Act of 1986 amended section 4(e) of FPA to require FERC to give “equal consideration” to water power development and other resource needs, including protecting and enhancing fish and wildlife, in deciding whether to issue an original or a renewed license. In addition, environmental and land management laws—enacted primarily during the 1960s and 1970s—require other participating federal and state agencies to address specific resource needs, including protecting endangered species, achieving clean water, and preserving wild and scenic rivers. For example, section 7 of the Endangered Species Act of 1973 represents a congressional design to give greater priority to the protection of endangered species than to the primary missions of FERC and other federal agencies. FERC, like all other federal agencies, must ensure that its actions, including licensing decisions, are not likely to jeopardize the existence of endangered and threatened species. Moreover, NEPA requires each federal agency, including FERC, to assess the environmental impact of proposed actions—which can include licensing decisions—that may significantly affect the environment. NEPA is designed to compel federal agencies to consider the environmental impacts of their actions and to inform the public that these impacts have been taken into account prior to reaching decisions. FPA authorizes federal and state agencies other than FERC to influence license terms and conditions, and in some instances, precludes FERC from altering license conditions imposed by other agencies. For instance, section 4(e) of FPA makes licenses for projects on federal lands reserved by the Congress for other purposes—such as national forests—or that use surplus water from federal dams subject to mandatory conditions imposed by the head of the federal agency responsible for managing the lands or facilities. Today, these agencies include the Forest Service, U.S. Department of Agriculture, and the Department of the Interior’s Bureau of Land Management, Fish and Wildlife Service, Bureau of Indian Affairs, and Bureau of Reclamation. Similarly, section 18 of FPA requires FERC to include license conditions for fish passage prescribed by federal fish and wildlife agencies. These agencies now include Interior’s Fish and Wildlife Service and the National Marine Fisheries Service in the Department of Commerce. In addition, the Electric Consumers Protection Act of 1986 added section 10(j) to FPA. This section authorizes federal and state fish and wildlife agencies to recommend license conditions to benefit fish and wildlife that FERC must include in the license unless it (1) finds them to be inconsistent with law and (2) has already established license conditions that adequately protect fish and wildlife. Moreover, section 401 of the Clean Water Act—added in 1972—requires anyone seeking a license or permit for a project that may affect water quality to seek approval from the relevant state water quality agency. States have begun to use section 401 to influence license terms and conditions. The regulations adopted by FERC under FPA require FERC to involve the public in the licensing process. Members of the public may express their views on resource needs that they believe need to be addressed in an application to obtain a license. They may also submit comments and recommendations, request scientific studies, and formally intervene in the licensing process. As an intervenor, a member of the public is entitled, among other things, to request a rehearing of a license decision by FERC or to obtain judicial review of FERC’s decision in the relevant federal appeals court. Public values have changed over the past 30 to 50 years and now reflect a growing concern about the environmental impacts of hydropower projects. Environmental groups and others view the licensing of a hydropower project as a once-in-a-lifetime opportunity to have these values and concerns considered. Changing public values, coupled with requirements to give equal or greater consideration to environmental concerns than to hydropower generation, have resulted in new license conditions intended to protect and enhance fish, wildlife, and other resources. For example, in an effort to reduce the risk to fish resources, new licenses may include conditions that require licensees to change minimum streamflows, construct fish-passage facilities, install screens and other devices to prevent fish from being injured or killed, limit the amount or timing of reservoir drawdowns, or purchase or restore lands affected by a project. FERC, federal and state land and resource agencies, licensees, environmental groups, and other participants in the licensing process do not agree on whether further reforms are needed to reduce process- related time and costs. Some within and among these diverse parties believe that the time and money spent on licensing a project reflect the level of complexity of the issues involved and that recent reforms will likely reduce the time and cost needed to obtain a license. Conversely, others believe that recent reforms will do little to reduce time and costs. However, they cannot agree on what further reforms are needed to shorten the process and make it less costly. Some participants believe that the time and money spent on project licensing reflect the level of complexity of the issues involved. They consider the process to be worthwhile as long as it results in a new license that is legally defensible, scientifically credible, and more likely to protect resources over the term of the license. Some of these participants also believe that recent reforms will likely reduce the time and costs associated with obtaining a new license and that additional reforms may not be necessary. For example, they believe that, when compared with projects using the traditional licensing process, projects using FERC’s relatively new alternative licensing process are more likely to obtain licenses before their old ones expire and less likely to have their license decisions delayed as a result of administrative and judicial reviews. Other recent reforms that these participants believe might shorten the licensing process or make it less costly include the following: A January 2001 policy by the departments of the Interior and Commerce that would, for the first time, (1) standardize the way that the two departments consider input and comments on mandatory license conditions and (2) ensure that public participation does not delay the licensing process. A series of recently issued reports by an interagency task force— established in the winter of 1998 by FERC and other federal agencies involved in the licensing process—that addresses practical ways to improve the process and make it more efficient. A February 2000 report by a national review group convened by the Electric Power Research Institute—a research consortium created by the nation’s electric utilities. In the report, licensees, federal and state agencies, tribes, and nongovernmental organizations (1) share their licensing experiences and “lessons learned” and (2) provide participants in licensings with reasonable solutions and alternative approaches to “tough” licensing issues. Other participants in the licensing process believe that recent reforms will do little to reduce the time and costs to obtain a new license. For example, they believe that licensees and other participants will not use FERC’s alternative licensing process for projects that involve contentious issues or when participants have conflicting values and concerns. They also believe that, while the alternative licensing process may shorten the time required to obtain a new license, it may also be more costly than the traditional licensing process. Therefore, they believe that further administrative reforms or legislative changes are needed to shorten the process and make it less costly. However, these participants cannot agree on what further reforms are needed to shorten the process and make it less costly. For instance, some environmental groups believe that certain licensees deliberately prolong the licensing process to delay the sometimes substantial costs of complying with new license conditions. Conversely, some licensees believe that federal and state land and resource agencies prolong the process and increase the costs to obtain a new license by (1) requesting unnecessary studies; (2) not reviewing licensing applications in a timely manner; (3) analyzing or reanalyzing issues at different steps in the process without any clear sequence leading to their timely resolution; and (4) insisting on unreasonable, and sometimes conflicting, license conditions. Federal and state land and resource agencies, however, counter these claims, saying that licensings are sometimes delayed because, until FERC requires them to, licensees are unwilling to conduct studies or to provide additional information required for the agencies to fulfill their statutorily mandated missions and responsibilities. In addition, many licensees, federal and state agencies, and environmental groups believe that FERC has not provided necessary leadership and direction, especially during the pre-application consultation phase, when much of their process-related time and costs can be incurred. In addition to blaming each other, these proponents of further reforms to reduce the time and costs to obtain a new license cannot agree on what reforms are needed to shorten the process and make it less costly. Some believe that additional administrative reforms can improve the process and make it more efficient. Others, however, believe that new legislation will be required. To reach informed decisions on the effectiveness of recent reforms to the licensing process and the need for further reforms, FERC must complete two tasks. First, it needs complete and accurate data on process-related time and costs by participant, project, and process step. Currently, FERC does not systematically collect much of these data. Second, FERC needs to identify why certain projects or groups of projects displaying similar characteristics take longer and cost more to license than others and why the time and costs required to complete certain process steps vary by project or group of similar projects. FERC has yet to link the time and cost data that it has collected to projects displaying similar characteristics, and instead is relying, in part, on observations and suggestions of parties involved or interested in the licensing process. However, without complete and accurate time and cost data and the ability to link time and costs to projects, processes, and outcomes, FERC cannot assess the extent to which the observations and suggestions—or any recommended administrative reforms or legislative changes—might shorten the process or make it less costly. Data on where in the process costs are incurred and by whom are needed to reach informed decisions about the effectiveness of recent reforms to the licensing process and the need for further reforms to reduce the process-related costs of obtaining a hydropower license. However, FERC lacks much of the required data for itself, other federal and state agencies, and licensees. For example, FERC cannot systematically separate its process-related licensing costs from other hydropower-program-related costs or link the costs to specific projects or steps in the licensing process. FERC also cannot identify other federal agencies’ actual costs to participate in the licensing process. Each year FERC requests federal agencies to report their hydropower-program-related costs for the prior fiscal year; however, it does not provided clear guidance to the other agencies on what costs they should report. As a result, federal agencies do not report millions of dollars of process-related costs. Moreover, FERC does not request federal agencies to break down their costs by project or by step in the licensing process. As a result, it cannot link the hydropower-program-related costs reported by other federal agencies to either specific projects or to the various steps in the process. In addition, FERC does not request, and states generally do not report, their process-related licensing costs. Similarly, FERC does not request licensees to report their process-related licensing costs. Some licensees have, however, voluntarily reported these costs to FERC so that FERC can include them—together with estimated mitigation costs, annual charges, and the value of power generation lost at relicensing—in its economic analysis of the projects’ benefits and costs. As of February 2001, FERC had compiled data on licensees’ process- related licensing costs for 83—or about 20 percent—of the 395 projects with licenses pending or issued between January 1, 1993, and December 31, 2000. However, because FERC did not provide licensees with guidance on what costs they should report, it has no assurance that the reported costs are consistent and comparable. Moreover, since the 83 projects did not represent a randomly selected sample, FERC cannot use these data to project the costs incurred by the universe of 395 projects. Moreover, FERC often could not link the costs to the various steps in the licensing process to identify which steps were the most costly. Finally, licensees reported only those costs that they incurred before they filed a formal application to FERC to obtain a new license and, thus, FERC has no data on any of their costs associated with the post-application analysis phase of the licensing process. Because a project proceeds through sequential phases, stages, and steps in the licensing process, process-related time data are more readily available than process-related cost data, which vary by participant. However, the time data that FERC has collected are incomplete and limited almost entirely to the post-application analysis phase of the process. FERC collected time data for the 180 projects with licenses expiring between January 1, 1994, and December 31, 2000. However, it collected data for only one step in the pre-application consultation phase of the licensing process. According to FERC, this phase generally requires 3 years or more to complete and constitutes, on average, more than 60 percent of the total time required to obtain a license. Moreover, FERC notes that the collected data on the one step in the pre-application consultation phase are incomplete because FERC did not request licensees to report when they completed the step. In addition, FERC is not collecting time data for administrative and judicial reviews of its license decisions, although FERC often delays the implementation of contested license conditions until these reviews are completed. Therefore, the time associated with administrative and judicial reviews should be included in the time required to obtain a license, according to many participants in the licensing process. When FERC completes its data collection efforts, it will have some process-related cost data (mostly from the pre-application consultation phase), and some process-related time data (mostly from the post- application analysis phase). However, FERC will not know why certain projects or groups of projects that display similar characteristics take longer and cost more to license than others or why the time and costs to complete certain steps in the process vary by project or group of similar projects. FERC needs to link time and costs to project, process, and outcome characteristics in order to reach informed decisions on the effectiveness of recent reforms to the licensing process, as well as the need for further reforms to the process. Project characteristics might include whether the project has considerable generating capacity, is operated for peak power production, is on federal land, or affects the habitat of one or more endangered or threatened species. Process-related characteristics might include (1) whether FERC had to resolve a dispute between the licensee and a federal or state agency, (2) whether federal and state agencies prescribed new mandatory license conditions, (3) whether FERC rejected or modified new license conditions recommended by federal and state agencies, or (4) whether parties formally intervened in a licensing. Outcome-related characteristics might include whether power generation was lost at relicensing or whether the terms and conditions of a new license compromise the project’s economic viability or environmental performance. As part of its mandated review of its licensing process, FERC held public meetings in six different cities. It also asked for written comments and distributed a questionnaire. In their oral and written comments and in their responses to the questionnaire, parties offered their observations and suggestions on how the process might be shortened or made less costly. However, without complete and accurate time and cost data and the ability to link time and costs to projects, processes, and outcomes, FERC will not be able to assess the extent that any of these observations and suggestions—or any administrative reforms or legislative changes that they may recommend—might (1) reduce the time and costs to obtain a license or (2) change the outcomes of the process. Thus, FERC will not be able to adequately assess the tradeoffs between efficiency and effectiveness, quickness and quality. FERC recognizes the importance of collecting complete, accurate, and timely data on which to base informed decisions. However, it has not established a schedule with firm deadlines for developing a system that tracks process-related time and costs, nor has it developed a process to share these data with other parties involved or interested in the process. Currently, FERC’s data on the licensing process are widely dispersed throughout FERC, often not comparable, and time-consuming and resource-intensive to collect. For example, to respond to its mandate to review its licensing process, FERC gathered time data from (1) various external and internal information and tracking systems, (2) independent databases and spreadsheets, (3) document storage and retrieval systems, (4) project-specific documents, (5) staff files, (6) various studies conducted for various purposes during the past several years, and (7) other data sources. These data were often not comparable, and FERC staff often had to link them manually to one another. To address its information technology needs, in 1999, FERC completed a review of its existing information and tracking systems. Subsequently, FERC performed a needs assessment that showed, on a macro level, how it planned to receive, generate, organize, and present information to users. In February 2001, FERC prepared a preliminary draft of its long-term vision for its hydropower-program-related data and information technology needs. FERC officials told us that their future plans include the release of a detailed document that will define needed enhancements to FERC’s information and tracking systems. However, FERC has not established a schedule with firm deadlines to implement the long-term vision of its hydropower-program-related data and information technology needs. It also has not determined what, if any, cost data to include. Lastly, the Congress directed FERC to conduct the review of its licensing process “in consultation with other appropriate agencies.” However, despite repeated requests by federal land and resource agencies, as of April 20, 2001, FERC had not provided them with a draft of its report or with any of the process-related time and cost data that it had collected and analyzed. As a result, Interior had to independently collect and analyze data from FERC’s information and tracking systems. On the basis of its analysis, Interior observed that it could not “determine why processing times are what they are, let alone whether these time periods are excessive or necessary for deliberative decision-making.” It continued that the “parties are engaged in numerous activities during the licensing process, and to determine the extent to which each activity contributes to the processing time calls for a more elaborate type of analysis.” Therefore, Interior recommended that it join with FERC to build a data set for all projects licensed by FERC and that the data be used to identify what, if any, further reforms are needed to shorten the process. FERC, federal and state land and resource agencies, licensees, environmental groups, and other participants in the licensing process acknowledge that the process to obtain a license is far more complex, time-consuming, and costly today than it was 30 to 50 years ago when FERC issued the approximately 1,000 original hydropower licenses. Today, FERC faces a formidable challenge in issuing a license that is legally defensible, scientifically credible, and likely to protect fish, wildlife, and resources while still preserving hydropower as an economically viable energy source. Participants in the licensing process do not agree on the effectiveness of recent reforms to the process or on the need for further reforms to shorten the process or make it less costly. To resolve this disagreement and to reach informed decisions on the effectiveness of recent reforms and the need for further administrative reforms or legislative changes, FERC needs (1) a system that collects complete and accurate data on process-related time and costs by participant, project, and process step and (2) the ability to link time and costs to projects displaying similar characteristics. To date, FERC has been reluctant to work with other process participants to (1) develop a system to collect and share process-related time and cost data and (2) link the data to projects displaying similar characteristics in order to identify those project, process, and outcome characteristics that can increase the time and costs to obtain a license. As a result, FERC will not be able to reach informed decisions on the need for further administrative reforms or legislative changes to the licensing process. We recommend that the Federal Energy Regulatory Commission inform the Congress of the extent that time and cost data limitations restrict its ability to reach informed decisions on whether further administrative reforms or legislative changes are needed to shorten the hydropower licensing process or make it less costly. We also recommend that the Commission work with other federal and state agencies and licensees to (1) collect complete and accurate data on process-related time and costs by participant, project, and process step and (2) link time and costs to projects displaying similar characteristics in order to identify those project, process, and outcome characteristics that can increase the time and costs to obtain a license. In addition, we recommend that the Commission (1) establish a schedule and firm deadlines for implementing the necessary enhancements to its management information systems that are required to track and analyze process-related time and costs and (2) share these data with other parties involved or interested in the process. We provided a draft of this report to the Chairman of FERC for his review and comment. FERC generally agreed with our characterization of the licensing process and the primary issues that affect time and costs. It also agreed that it does not systematically collect complete and accurate data on process-related time and costs by participant, project, and process step. However, FERC believes that these data are not needed to reach informed decisions on the effectiveness of recent reforms to the licensing process as well as the need for further reforms to the process. Rather, it thinks that it can address the salient issues by developing “targeted analyses” to determine major factors affecting licensing time and costs based, in part, on its “years of experience” with the licensing process. However, we continue to believe that good time and cost data are needed to reach good decisions. Without such data, it will not be possible for the Commission to determine how much either can be reduced. Moreover, without these data and the ability to link time and costs to projects, processes, and outcomes, FERC increases the risk that any reforms that it recommends may not only not reduce process-related time and costs but also result in unintended consequences to the outcomes of the process. FERC’s comments and our responses appear in appendix IV. We conducted our work from August 2000 through April 2001 in accordance with generally accepted government auditing standards. Appendix III contains the details of our scope and methodology. We are sending copies of this report to the Honorable Norm Dicks, Ranking Minority Member, Subcommittee on Interior and Related Agencies, House Committee on Appropriations, and the Honorable Curt Hebert, Jr., Chairman, Federal Energy Regulatory Commission. The report is also available on GAO’s home page at http://www.gao.gov. If you have any questions about this report, please call Charles S. Cotton or me at (202) 512-3841. Key contributors to this report are listed in appendix V. Public notice (acceptance) Additional study request, if any Public notice of application (tendering) Study comments, additional studies (if needed) Scoping comments, study request Initial meeting (Initial Information Package/Scoping) Concerned about the licensing of nonfederal hydropower projects, Representative Ralph Regula, former Chairman, Subcommittee on Interior and Related Agencies, House Committee on Appropriations, asked us to identify and assess significant issues related to the licensing process. As agreed, this report discusses (1) why the licensing process now takes longer and costs more than it did when FERC issued most original licenses several decades ago; (2) whether participants in the licensing process agree on the need for, and type of, further reforms to the process to reduce time and costs; and (3) whether available time and cost data are sufficient to reach informed decisions on the effectiveness of recent reforms and the need for further reforms to the process. To identify how the licensing process has changed since FERC issued most of its original licenses several decades ago, we reviewed relevant laws, regulations, court decisions, and guidance affecting hydropower licensing. We interviewed officials from FERC, federal land and resource agencies, states, industry, and nongovernmental organizations involved in the licensing process. We also reviewed pertinent documents from these sources as well as other independent analyses from academia and the private sector. To identify the extent of agreement among participants in the licensing process on the need for, and type of, reforms to the process, we (1) attended all six of the public meetings that FERC held in January 2001 and (2) reviewed the formal written comments provided to FERC by February 1, 2001, as part of its statutorily required review of the licensing process. We also met with and obtained data from federal and state agencies, licensees, industry, nongovernmental organizations, and academia. In addition, we reviewed pertinent documents, including congressional testimonies. We also visited two hydropower projects currently involved in the licensing process, and interviewed participants involved in several other recent or ongoing licensing processes. To identify the availability of time and cost data on which to base FERC’s May 8, 2001, report on reducing process-related time and costs, we reviewed FERC databases as well as those of other federal agencies and nongovernmental organizations involved in the process. We also interviewed officials from FERC, federal and state land and resource agencies, industry, and nongovernmental organizations. We assessed the adequacy of FERC’s data and information systems by examining the scope and content of its project files and databases. We then held interviews with FERC project managers, information specialists, and analysts to determine the availability of project and step-specific data on processing time and costs. In addition, we examined a survey instrument developed by FERC to gather information on licensing time and costs from participants at the public meetings. We also reviewed FERC’s strategic plan for fiscal years 2000 through 2005 prepared under Government Performance and Results Act of 1993 as well as its plans to enhance its existing information and tracking systems. We also interviewed FERC officials concerning their future information and technology plans. We conducted our work from August 2000 through April 2001 in accordance with generally accepted government auditing standards. Comment 1: FERC states that our audit work concluded almost 3 months ago and suggests that our conclusions are premature. However, nothing has changed during the intervening 3 months. FERC still does not have the data needed to reach informed decisions on the effectiveness of recent reforms to the licensing process or on the need for further reforms to the process. As reflected in their comments below, FERC’s position has not changed. It does not believe that it needs to systematically collect complete and accurate data on process-related time and costs by participant, project, and process step to reach informed decisions on the effectiveness of recent reforms to the licensing process as well as the need for further reforms to the process. Rather, it thinks that it can address the salient issues by developing “targeted analyses” to determine major factors affecting licensing time and costs based, in part, on its “years of experience” with the licensing process. However, we continue to believe that good data are needed to reach good decisions. Moreover, without complete and accurate time and cost data and the ability to link time and costs to projects, processes, and outcomes, FERC increases the risk that any reforms that it recommends may not only not reduce process-related time and costs but also result in unintended consequences to the outcomes of the process. Comment 2: According to FERC, systematically collecting complete and accurate data on process-related time and costs by participant, project, and process step would “divert money and staff away from the licensing process.” Conversely, we believe that the money would be well spent, if it resulted in informed decisions on the need for further reforms to the licensing process to reduce time and costs. In fact, FERC’s comment seems inconsistent with its own strategic plan. In its Strategic Plan for Fiscal Years 2000-2005, FERC states that “accurate and timely information is essential for external customers and staff alike.” Therefore, we did not make any changes to the report on the basis of this comment. Comment 3: We disagree with this comment. FERC states that requiring or requesting that licensees, federal and state agencies, tribes, non- government organizations, and members of the public provide additional time and cost data would “burden these entities unduly.” FERC also asserts that it cannot compel federal agencies to submit additional time and cost data. We recognize that providing the data will take time and cost money. However, we fail to see how doing so would unduly burden participants in the licensing process. Obtaining a license is not a yearly event. Rather, it occurs once every 30 to 50 years. Moreover, we never recommended or suggested that FERC collect time and cost data from tribes, non-government organizations, and members of the public. In addition, while FERC cannot compel federal agencies to submit additional time and cost data, it is not prohibited from requesting that the agencies provide this information and federal agencies appear willing to do so. For instance, in responding to our June 2000 report on recovering federal hydropower licensing costs, federal agencies agreed to ensure that their financial management and reporting systems were capable of producing accurate, timely, and reliable information on hydropower-program-related administrative costs. Comment 4: We did not make any changes to the report on the basis of this comment. FERC observes that “it has always been charged under FPA section 10(a)(1) with balancing all relevant public interest considerations.” While this statement is true, congressional dissatisfaction with FERC’s efforts to carry out this responsibility led to a 1986 amendment to FPA, which required FERC to give “equal consideration” to water power development and other resource needs, including protecting and enhancing fish and wildlife, when deciding whether to issue an original or a renewed license. This amendment was one of a series of statutes enacted subsequent to the passage of FPA that specifically required FERC and other federal agencies to consider resource needs in addition to water power development. We used the 1986 amendment to illustrate the increasing complexity of the licensing process. Comment 5: We agree that FERC is not charged with assuring that hydropower projects it licenses are economically viable. However, as stated in its September 2000 strategic plan, FERC does attempt to “optimize hydropower benefits by improving the environmental performance of projects while preserving hydropower as an economically viable energy source.” Since the language in our report is consistent with the language in FERC’s strategic plan, we did not make any changes to the report on the basis of FERC’s comment. Comment 6: We revised the report to state that FERC does not systematically collect much of the needed time and cost data. Comment 7: We revised the report to make clear that, if a license expires while a project is undergoing relicensing, FERC issues an annual license, allowing a project to continue to operate under the conditions found in the original license until the relicensing process is complete. Comment 8: We revised the report to add “affected Indian tribes.” Comment 9: We agree with FERC that only parties to the licensing process may (1) file an application for a rehearing with FERC within 30 days of FERC’s licensing decision and (2) obtain a judicial review of FERC’s decision in the relevant federal appeals court within 60 days after FERC’s order on the application for a rehearing. Therefore, we revised the report accordingly. Comment 10: We revised the report to state that FPA authorizes federal and state agencies, other than FERC, to influence license terms and conditions, and in some instances, precludes FERC from altering license conditions imposed by other agencies. Comment 11: We revised the report to state that section 4(e) of FPA makes licenses for projects on federal lands reserved by the Congress for other purposes—such as national forests—or that use surplus water from federal dams subject to mandatory conditions imposed by the head of the federal agency responsible for managing the lands or facilities. Comment 12: We mentioned section 10(j) to emphasize the increased role of federal and state fish and wildlife agencies in the licensing process sine enactment of the Electric Consumers Protection Act of 1986. We revised the report to more clearly reflect this. Comment 13: We revised the report to delete “adversely.” Comment 14: We revised the report to state that participants who believe that further reforms are needed to reduce the time and costs to obtain a new license cannot agree on what further reforms are needed to shorten the process and make it less costly. Comment 15: FERC notes that our report states that many licensees, federal and state agencies, and environmental groups believe that FERC has not provided necessary leadership and direction; however, we do not cite what is lacking. FERC then provides examples of recent actions that it has taken that it believes provide leadership and direction. We recognize that FERC has taken actions intended to shorten the licensing process or make it less costly and provide examples of these actions under the subcaption “Some Licensing Participants Are Satisfied With the Current Process.” We also cite one of the most often mentioned concerns about FERC; that is, its lack of leadership and direction during the pre- application consultation phase when much of their process-related time and costs can be incurred. Moreover, FERC is aware of these concerns since they were raised at the public meetings that FERC held as part of its mandated review of its licensing process. Comment 16: We revised the report to state that, as of February 2001, FERC had compiled data on licensees’ process-related licensing costs for 83—or about 20 percent—of the 395 projects with licenses pending or issued between January 1, 1993, and December 31, 2000. FERC did not provide us with any new data subsequent to February 2001. Comment 17: We revised the report to make a clearer the link between data and outcomes. Specifically, we state that without complete and accurate time and cost data and the ability to link time and costs to projects, processes, and outcomes, FERC will not be able to assess the extent to which the observations and suggestions—or any administrative reforms or legislative changes that it may recommend—might (1) reduce the time and costs to obtain a license or (2) change the outcomes of the process. Comment 18: We did not make any changes to the report on the basis of this comment. Rather, FERC’s comment, which does not identify any completion dates for either phase of its system development, supports our finding that it has not established a schedule with firm deadlines for developing a system to track process-related time and costs. Comment 19: We revised the report to delete the two sentences in question. The one-time difficulties incurred in shifting from an old tracking system to a new one are not germane to our finding that FERC has not established a schedule with firm deadlines for developing a system to track process-related time and costs. Comment 20: FERC states that it is not aware of its staff’s refusal to share data with other agencies. However, documentation that we obtained from the Department of the Interior shows that Interior asked for, but was not provided, the process-related time and cost data that FERC had collected. As a result, Interior had to independently collect and analyze process- related time data from FERC’s information and tracking systems. Comment 21: According to FERC, at a February 13, 2001, meeting, it requested that other federal agencies provide it with their process-related time and cost data. FERC states that it did not receive the data. However, as we reported in June 2000, FERC has not provided these agencies with guidance on what and how process-related costs should be reported and continues to decline to do so. Therefore, we did not make any changes to the report on the basis of this comment. Comment 22: Appendixes I and II correspond exactly to the sequence of steps in the handouts and viewgraphs presented by FERC at the public meetings held in six cities in January 2001 as part of its mandated review of the licensing process. Therefore, we did not make any changes to the report on the basis of these comments. In addition to those named above, Jerry Aiken, Paul Aussendorf, Erin Barlow, David Goldstein, Richard Johnson, Chester Joy, and Arvin Wu made key contributions to this report. | This report assesses the licensing process of the Federal Energy Regulatory Commission (FERC). Specifically, GAO examines (1) why the licensing process now takes longer and costs more than it did when FERC issued most original licenses several decades ago; (2) whether participants in the licensing process agree on the need for, and type of, further reforms to reduce time and costs; and (3) whether available time and cost data are sufficient to allow informed decisions on the effectiveness of recent reforms and the need for further reforms. GAO found that since 1986, FERC has been required to give "equal consideration" to, and make tradeoffs among, hydropower generation and other competing resource needs. Additional environmental and land management laws have also placed additional requirements on other federal and state agencies participating in the licensing process to address specific resource needs. GAO found no agreement between FERC, federal and state land resource agencies, licensees, environmental groups, and other participants in the licensing process on the need for further reforms to reduce process-related time and costs. Finally, available time and cost data are insufficient to allow informed decisions on the effectiveness of recent reforms. Without complete and accurate time and cost data and the ability to link time and costs to projects, processes, and outcomes, FERC cannot assess the extent to which the observations and suggestions--or any recommended administrative reforms or legislative changes--might reduce the process' length and costs. |
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We reviewed reconstruction contracts that had been funded, in whole or in part, with U.S. appropriated funds. We focused our review on new contracts, modifications, task orders under existing contracts, and contract actions using the General Services Administration’s (GSA) federal supply schedule program as of September 30, 2003. We did not review contracts that were funded entirely with international or Iraqi national funds, such as funds seized after the 1991 Gulf War or funds that were discovered during Operation Iraqi Freedom in 2003. We also did not review contracts or task orders that were used only for support of military operations or grants and cooperative agreements awarded to international or nongovernmental organizations. We continue to evaluate various issues related to military operations and the progress in rebuilding Iraq under separate reviews. To determine the number of reconstruction contract actions, the types of contract actions, the procedures used to make the awards, and the funding sources, we requested information from each of the principal organizations responsible for rebuilding activities in Iraq: the CPA, the Office of the Secretary of Defense, the Department of the Army, the Army Corps of Engineers, USAID, and the Departments of State and Justice. To verify the information provided, we requested copies of each contract action issued as of September 30, 2003, and corrected the information provided as appropriate. Agency officials could not provide the contract files for a limited number of small-dollar contracts awarded during the early stages of the reconstruction effort. To determine the amount obligated for reconstruction, we primarily used the obligation data recorded in the contracts. We also reviewed the data maintained by the agencies’ budget offices and information reflected in the Office of Management and Budget’s (OMB) quarterly status reports. To obtain information on contract activities since September 2003, we interviewed CPA and agency officials, attended industry day conferences, and reviewed solicitations and other relevant agency documents. To determine whether agencies had complied with applicable laws and regulations governing competition when awarding contracts and issuing task orders, we reviewed the requirements of the Competition in Contracting Act (CICA) of 1984 and other relevant laws and regulations. We judgmentally selected 25 contract actions, consisting of 14 new contracts awarded using other than full and open competition and 11 task orders issued under existing contracts. These 25 contract actions represented about 97 percent of the total dollars obligated for reconstruction through September 30, 2003. New contracts accounted for nearly 80 percent of this spending. We selected the 25 contracts or task orders based on various factors. We focused on high-dollar value contracts and task orders, and on contracts awarded using other than full and open competitive procedures. We also considered whether audits by the DOD or USAID Inspectors General were under way. Overall, the 25 contracts or task orders consisted of the following: the largest contract awarded and the 4 largest task orders, by dollar value, issued to support CPA operations; 9 contracts awarded and 1 task order issued by USAID, as well as 1 task order issued under an Air Force contract to provide logistical support for USAID-managed efforts; 2 contracts awarded and 4 task orders issued by the Army Corps of Engineers and the Army Field Support Command to help restore Iraq’s oil or electrical infrastructure; 1 contract awarded and 1 task order issued by the Army to train or equip the New Iraqi Army; and 1 contract awarded by the Department of State to support Iraqi law enforcement efforts. For new contract awards, we determined whether agency officials followed appropriate procedures in using other than full and open competition and assessed the agency’s justification for its contracting approach. For task orders issued under existing contracts, we determined whether the task orders were within the scope of the existing contracts, and if not, whether the agencies had followed proper procedures to add the work. To do so, we obtained the contracts or task orders and associated modifications, justification and approval documentation, negotiation memoranda, audit reports, and other relevant documents. We discussed the award and issuance process with agency procurement personnel, including contracting officers, program managers, and, in some cases, agency counsel. We also reviewed audit reports on various procurement issues prepared by the DOD and USAID Inspectors General and the Defense Contract Audit Agency (DCAA). To assess agencies’ initial contract administration efforts, we interviewed procurement officials to determine how contract administration for their contracts was initially staffed, including the use of support contracts to assist in administering the contracts. We obtained information on plans for reaching agreement on key contract terms and conditions. We also reviewed the 25 contracts or task orders to determine whether they included provisions related to contract administration, such as quality assurance plans, requirements for monthly status reports, and subcontractor management plans. As part of our monitoring of reconstruction activities, we conducted field visits in October 2003 in Baghdad and in other areas in Iraq, including Al Hillal and Al Basrah. During these visits, we held discussions with officials and visited project sites, including power plants, oil wells, oil processing facilities, water and sewage systems, schools, and many other reconstruction activities. During these visits, we observed the challenges faced in carrying out reconstruction efforts, including the hostile security environment, poor communications, and unsettled working conditions. Appendix I lists the agencies visited during our review. We conducted our work between May 2003 and April 2004 in accordance with generally accepted government auditing standards. During the latter part of 2002, as diplomatic efforts to convince the former Iraqi regime to comply with United Nations Security Council resolutions continued, discussions took place within the administration about the need to rebuild Iraq should combat operations become necessary. In October 2002, OMB established a senior interagency team to establish a baseline assessment of conditions in Iraq and to develop relief and reconstruction plans. According to an OMB official, the team developed plans for immediate relief operations and longer-term reconstruction in 10 sectors: health, education, water and sanitation, electricity, shelter, transportation, governance and the rule of law, agriculture and rural development, telecommunications, and economic and financial policy. Though high-level planning continued through the fall of 2002, most of the agencies involved in the planning were not requested to initiate procurement actions for the rebuilding efforts until early in 2003. Once assigned the responsibilities, agency procurement personnel were instructed to be ready to award the initial contracts within a relatively short time period, often within weeks. During 2003, several agencies played a role in awarding or managing reconstruction contracts, most notably USAID and the Army Corps of Engineers. Various agencies awarded contracts on behalf of the CPA and its predecessor organization, the Office of Reconstruction and Humanitarian Assistance. Table 1 shows the principal areas of responsibility assigned to the CPA and other agencies. As of September 30, 2003, the agencies had obligated nearly $3.7 billion on 100 contracts or task orders for reconstruction efforts (see table 2). These obligations came from various funding sources, including U.S. appropriated funds and Iraqi assets. The Army Corps of Engineers and USAID together obligated about $3.2 billion, or nearly 86 percent of this total. The majority of these funds were used to rebuild Iraq’s oil infrastructure and to fund other capital-improvement projects, such as repairing schools, hospitals, and bridges. This spending reflects a relatively small part of the total amount that may be required to rebuild Iraq, with estimates ranging from $50 billion to $100 billion. Appendix II lists the 100 reconstruction contracts and task orders we identified and the associated obligations as of September 30, 2003. In November 2003, Congress appropriated an additional $18.4 billion for rebuilding activities. The CPA’s projected uses for the funds reflect a continued emphasis on rebuilding Iraq’s infrastructure and on providing improved security and law enforcement capabilities (see table 3). In appropriating these funds, Congress required that the CPA Administrator or the head of a federal agency notify Congress no later than 7 calendar days before awarding a contract, with these funds, valued at $5 million or more for reconstruction using other than full and open competition procedures. U.S.-funded reconstruction efforts were undertaken through numerous contracts awarded by various U.S. agencies. CICA generally requires that federal contracts be awarded on the basis of full and open competition— that is, all responsible prospective contractors must be afforded the opportunity to compete. The process is intended to permit the government to rely on competitive market forces to obtain needed goods and services at fair and reasonable prices. Within this overall framework, agencies can use various procurement approaches to obtain goods and services. Each approach, as listed in table 4, involves different requirements with which agencies must comply. In some cases, agency officials may determine that a contractor working under an existing contract may be able to provide the required goods or services through issuance of a task order, thus obviating the need to award a new contract. Before awarding a task order under an existing contract, however, the agency must determine that the work to be added is within the scope of that contract (i.e., that the work fits within the statement of work, performance period, and maximum value of the existing contract). In making this determination, the contracting officer must decide whether the new work is encompassed by the existing contract’s statement of work and the original competition for that contract. Agencies generally complied with applicable laws and regulations governing competition when using sole-source or limited competition approaches to award the initial reconstruction contracts we reviewed. The exigent circumstances that existed immediately prior to, during, and following the war led agency officials to conclude that the use of full and open competitive procedures for new contracts would not be feasible. We found these decisions to be within the authority provided by law. We found several instances, however, in which agencies had issued task orders for work that was outside the scope of existing contracts. Such task orders do not satisfy legal requirements for competition. In these cases, the out-of-scope work should have been awarded using competitive procedures or supported with a Justification and Approval for other than full and open competition in accordance with legal requirements. Given the urgent need for reconstruction efforts, the authorities under the competition laws for using noncompetitive procedures provided agencies ample latitude to justify other than full and open competition to satisfy their needs. The agencies responsible for rebuilding Iraq generally complied with applicable requirements governing competition when awarding new contracts. While CICA requires that federal contracts be awarded on the basis of full and open competition, the law and implementing regulations recognize that there may be circumstances under which full and open competition would be impracticable, such as when contracts need to be awarded quickly to respond to unforeseen and urgent needs or when there is only one source for the required product or service. In such cases, agencies are given authority by law to award contracts under limited competition or on a sole-source basis, provided that the proposed actions are appropriately justified and approved. We reviewed 14 new contracts that were awarded using other than full and open competition: a total of 5 sole-source contracts awarded by the Army Corps of Engineers, the Army Field Support Command, and USAID and 9 limited competition contracts awarded by the Department of State, the Army Contracting Agency, and USAID (see table 5). Because of the limited time available to plan and commence reconstruction efforts, agency officials concluded that the use of full and open competitive procedures in awarding new contracts would not be feasible. For 13 of these new contracts, agency officials adequately justified their decisions and complied with the statutory and regulatory competition requirements. In the remaining case, the Department of State justified and approved the use of limited competition under a unique authority that, in our opinion, may not be a recognized exception to the competition requirements. State took steps to obtain competition, however, by inviting offers from four firms. State could have justified and approved its limited competition under recognized exceptions to the competition requirements. We found a lesser degree of compliance when agencies issued task orders under existing contracts. When issuing a task order under an existing contract, the competition law does not require competition beyond that obtained for the initial contract award, provided the task order does not increase the scope of the work, period of performance, or maximum value of the contract under which the order is issued. The scope, period, or maximum value may be increased only by modification of the contract, and competitive procedures are required to be used for any such increase unless an authorized exception applies. Determining whether work is within the scope of an existing task order contract is primarily an issue of contract interpretation and judgment by the contracting officer (in contrast to the contract’s maximum value and performance period, which are explicitly stated in the contract). Other than the basic requirement that task orders be within scope, there are no statutory or regulatory criteria or procedures that guide a contracting officer in making this determination. Instead, guiding principles for scope of contract determinations are established in case law, such as bid protest decisions of the Comptroller General. These decisions establish that the key factor is whether there is a material difference between the new work and the contract that was originally awarded—in other words, whether new work is something potential offerors reasonably could have anticipated in the competition for the underlying contract. Of the 11 task orders we reviewed, 2 were within the scope of the underlying contract and 7 were, in whole or part, not within scope; we have reservations concerning whether 2 others were within scope (see table 6). The seven instances in which agencies issued task orders for work that was, in whole or in part, outside the scope of an existing contract are described on the following pages. In each of these cases, the out-of-scope work should have been awarded using competitive procedures or supported with a Justification and Approval for other than full and open competition in accordance with legal requirements. Given the urgent need for reconstruction efforts, the authorities under the competition laws for using noncompetitive procedures provided agencies ample latitude to justify other than full and open competition to satisfy their needs. DCC-W improperly used a GSA schedule contract to issue two task orders with a combined value of over $107 million for work that was outside the scope of the schedule contract. Under GSA’s federal supply schedule program, GSA negotiates contracts with multiple firms for various commercial goods and services and makes those contracts available for other agencies to use. In March 2003, DCC-W placed two orders with Science Applications International Corporation (SAIC) under SAIC’s schedule contract. One order involved development of a news media capability—including radio and television programming and broadcasting—in Iraq. The other required SAIC to recruit people identified by DOD as subject matter experts, enter into subcontracts with them, and provide them with travel and logistical support within the United States and Iraq. The schedule contract, however, was for management, organizational, and business improvement services for federal agencies. In our view, the statements of work for both task orders were outside the scope of the schedule contract, which typically would encompass work such as consultation, facilitation, and survey services. The period of performance for the media services task order has expired, and the task order for subject matter experts was extended through April 30, 2004. Over $91 million was obligated under an Air Force Contract Augmentation Program contract for delivery of commodities to USAID for reconstruction activities and logistical support for USAID’s mission in Iraq. The contract is intended primarily to provide base-level logistical and operational support for Air Force deployments. Under an interagency agreement, the Air Force used the contract to provide USAID a variety of support tasks related to storage, inventory control and management, and other logistical and operational support. Some of these funds, however, had been obligated for services such as building materials for Iraqi schools and planning for fixing electrical power generation for Baghdad water treatment plants. Because these types of services—though related to USAID’s foreign assistance mission—are not related to support for a deployment, they appear to be outside the scope of the contract. When we brought this issue to the attention of Air Force officials, they agreed that some of the work was outside the scope of the contract, and they are issuing guidance to ensure that logistical support for USAID does not go beyond the scope of the contract. The Army Field Support Command issued a $1.9 million task order for contingency planning for the Iraqi oil infrastructure mission under its LOGCAP contract with Kellogg Brown & Root. The task order was not within the scope of that contract. This task order, issued in November 2002, required the contractor to develop a plan to repair and restore Iraq’s oil infrastructure should Iraqi forces damage or destroy it. Because the contractor was knowledgeable about the U.S. Central Command’s planning for conducting military operations, DOD officials determined the contractor was uniquely positioned to develop the contingency support plan. DOD determined that planning for the missions was within the scope of the LOGCAP contract, but it also determined that the actual execution of the Iraq oil mission, including prepositioning of fire-fighting equipment and teams, was beyond its scope. We agree with the DOD conclusion that repairing and continuing the operations of the Iraqi oil infrastructure are not within the scope of the contract. But unlike DOD, we conclude that preparation of the contingency support plan for this mission was beyond the scope of the contract. We read the LOGCAP statement of work as contemplating planning efforts for missions designated for possible contractor execution under the contract. Consequently, the Army Field Support Command should have prepared a written justification to authorize the work without competition. The resulting contingency plan was used as justification for subsequently awarding a sole-source contract to Kellogg Brown & Root for restoring the oil infrastructure, for which nearly $1.4 billion was obligated during fiscal year 2003. As noted in table 5, we found that the award of this contract generally complied with applicable legal standards. In March 2003, the Army Corps of Engineers conducted a limited competition resulting in multiple-award contracts with three firms— Washington International, Inc., Fluor Intercontinental, Inc., and Perini Corporation—for construction-related activities in the Central Command’s area of responsibility. These contracts had a maximum value of $100 million each. In the latter part of August 2003, as efforts to restore electricity throughout Iraq lagged and amid concerns that the electrical shortages presented social unrest and security threats to the CPA and the military forces, the Central Command tasked the Army Corps of Engineers with taking steps to rebuild the electrical infrastructure as quickly as possible. In response, the Army Corps of Engineers issued task orders under each of these contracts causing them to exceed their maximum value. Consequently, the orders are outside the scope of the underlying contracts. The Army Corps of Engineers prepared a justification for award of the underlying contracts in August 2003 and a subsequent justification in September 2003 to increase the maximum value of each contract from $100 million to $500 million. Neither justification had been approved as of March 31, 2004. Finally, we note that section 803 of the National Defense Authorization Act for Fiscal Year 2002 (Pub. L. No. 107-107) requires that an order for services in excess of $100,000 issued under a multiple-award contact by or on behalf of a DOD agency be made on a competitive basis, unless a contracting officer justifies an exception in writing. The Army Corps of Engineers did not compete these task orders among the three multiple- award contractors. Rather, the agency and the contractors collectively decided to allocate the electrical infrastructure work based on geographical sectors and the capabilities of the contractors in the theater. We found that the contracting officer had not prepared a justification for these noncompetitive task orders. After we raised this issue with agency officials, the contracting officer prepared the required documentation in April 2004. As described in table 6, we also have reservations about whether work ordered under two other Army task orders was within the scope of an underlying contract for combat support. These task orders were issued by the Army Field Support Command for the CPA’s logistical support and for a base camp used in training the New Iraqi Army. In these, as in the other cases, the competition laws provided agencies ample latitude to justify using other than full and open competition to satisfy their needs. The need to award contracts and begin reconstruction efforts quickly—the factors that led agencies to use other than full and open competition—also contributed to initial contract administration challenges. Faced with uncertainty as to the full extent of the rebuilding effort, agencies often authorized contractors to begin work before key terms and conditions, including the statement of work to be performed and the projected cost for that work, were fully defined. Until agreement is reached, contract incentives to control costs are likely to be less effective. Staffing constraints and security concerns posed further challenges. Agencies have made progress in addressing these issues, but there remains a backlog of contracts for which final agreement has not yet been reached. The CPA has created a new office to better manage and coordinate reconstruction efforts to be conducted over the next year. To meet urgent operational needs, as is the case in Iraq’s reconstruction, agencies are permitted to authorize contractors to begin work before contracts or task orders have been definitized—that is, before key terms and conditions, including price, have been defined and agreed upon. While this approach allows agencies to initiate needed work quickly, it also can result in potentially significant additional costs and risks being imposed on the government. Agencies generally are required to definitize contractual actions within 180 days. For many of the contracts we reviewed, agencies authorized the contractors to begin work before terms were fully defined, and later reached final agreement on the scope and price of the work. There remain six DOD contracts or tasks orders, however, that had yet to be definitized as of March 2004, two involved work that had been completed more than a year earlier (see table 7). In total, nearly $1.8 billion had been obligated on these contracts or task orders as of September 30, 2003. These contracts or task orders had been awarded or issued by either the Army Corps of Engineers or the Army Field Support Command, and they include efforts to restore Iraq’s oil and electrical infrastructures and to provide logistical support to the CPA. Agency officials attribute much of the delay in reaching agreement to continued growth in reconstruction efforts, which in turn have required numerous revisions to contract statements of work. The continued growth in requirements has resulted in an increase in both contractor costs and administrative workload on both contractor and agency procurement personnel. For example, the Army Corps of Engineers’ contract to restore Iraq’s oil infrastructure had individual task orders placed in March and May 2003 that were supposed to be definitized within 180 days. Similarly, the Army Field Support Command has four task orders that have to be definitized. For example, the Army Field Support Command’s task order to support the CPA was originally issued in March 2003, at an estimated cost of $858,503. As of September 30, the Army had obligated $204.1 million, and the statement of work had been modified a total of nine times. With each change, the contractor had to revise its cost and technical proposals, which also increased the workload for agency procurement personnel. The Army Field Support Command’s revised schedule now calls for definitizing the task orders between June and October 2004. Some of the delays reflect concerns over the adequacy of the contractors’ proposals. For example, on the task order awarded to restore Iraq’s electrical infrastructure, DCAA found a significant amount of proposed costs for which the contractor had not provided adequate support. Consequently, DCAA believed that the proposal was inadequate for the purposes of negotiating a fair and reasonable price. As of March 2004, negotiations between the contractor and the Army Corps of Engineers were still ongoing. To reduce risks, the Army Corps of Engineers has proposed paying the contractor only 85 percent of incurred costs until the contractor has adequately fulfilled its contract closeout responsibilities and acceptable business systems were in place. The lack of timely contract definitization potentially can have a significant impact on total contract costs and related risks. Specifically, the major reconstruction efforts have used cost-reimbursement type contracts under which the government has agreed, subject to cost ceilings, to reimburse the contractor for all reasonable and allowable costs incurred in performing the work. In two of the largest contract actions—the contract to repair and maintain Iraq’s oil infrastructure and the task order to support the CPA operations—the agencies have included an award fee provision under which the contractor can earn additional profit for meeting set targets in specified areas, such as cost control. As long as work continues to be performed under an undefinitized contract, however, the award fee incentive is likely to be less effective as a cost control tool since there is less work remaining to be accomplished and therefore less costs to be controlled by the contractor. Given the high cost involved, particularly for the Iraq oil mission (over $2.5 billion), any reduction in cost control incentives potentially involves a significant contract cost risk. The lack of adequate staffing presented challenges to several agencies involved in reconstruction efforts and, at times, resulted in inadequate oversight of the contractors’ activities. While agencies have taken actions, some of these early contract administration issues have yet to be fully resolved. When the CPA’s predecessor organization—Office of Reconstruction and Humanitarian Assistance---was established in mid-January 2003, it lacked an in-house contracting capability. It was not until February 27, 2003, that the Defense Contract Management Agency (DCMA) was asked to provide contracting support, including providing acquisition planning assistance and awarding and administering contracts. DOD officials noted that this tasking was unusual for DCMA, as it is typically responsible for administering, rather than awarding, contracts. According to DOD officials, they found that the Office of Reconstruction and Humanitarian Assistance did not have an official responsible for authorizing contract actions and supervising contracting officers and others performing procurement-related duties. Further, DOD had authorized positions for only two contracting officers, who had yet to arrive. In addition, DCMA officials reported that the lack of an organizational structure led to contractors providing draft statements of work and cost estimates to the contracting officers so that contracts could be awarded more quickly. Normally, it is the government’s responsibility to provide statements of work and develop independent cost estimates. We found that there were not always sufficient in-country personnel to administer the contracts or task orders when they were initially awarded or issued. For example, for the federal supply schedule order issued in March 2003 by DCC-W to establish an Iraqi media capability, contractor personnel purchased property that was not part of the task order, including purchases that may not have been necessary or appropriate. According to DOD officials, contractor personnel purchased about $7 million in equipment and services not authorized under the contract, including a H-2 Hummer and a pickup truck, and then chartered a flight to have them delivered to Iraq. According to DCMA officials, these actions were primarily due to inadequate government property management to control or monitor the contractor’s purchases. DCMA officials decided in May 2003 that it was in the best interests of the government to modify the approved equipment list, and include the materials purchased by the contractor. The lack of in-country procurement staff proved problematic in another task order issued by the DCC-W to help recruit and support subject matter experts to assist the CPA and Iraqi ministries. According to DCC-W and DCMA officials, there was initially neither contractor staff nor government officials to monitor the subject matter experts once they arrived in Iraq. DCMA officials indicated that some experts failed to report to duty or perform their responsibilities as expected or were no longer performing work under the task order. Staffing concerns affected other agencies as well. For example, USAID recognized early that its resources were insufficient to administer and oversee the contracts it expected to award. Consequently, USAID arranged for the Army Corps of Engineers to provide oversight on its $1.0 billion infrastructure contract, arranged to have DCAA audit contractors, and made plans to augment its mission in Iraq. As of January 2004, however, a senior USAID procurement official stated that its Iraq mission remained understaffed to provide adequate contract oversight in Iraq. USAID stated it has four full-time procurement staff that will be assigned to work in Iraq for 3 years. According to the senior official, this long-term commitment is essential to establishing the institutional knowledge needed to monitor and administer the contracts effectively. However, USAID indicated that given the workload, providing an appropriate degree of oversight would require at least seven additional personnel. Consequently, USAID found it necessary to augment the mission staff with personnel on temporary assignment from other USAID missions, who will serve between 1 and 3 months. Similarly, State Department officials noted that the Bureau of International Narcotics and Law Enforcement Affairs—the bureau responsible for monitoring State’s law enforcement support contract—is understaffed. For example, the department official responsible for contract oversight had multiple, time-consuming roles. This official currently serves as both the program manager and the contracting officer’s representative for the law enforcement support contract. As such, the official approves the contractor’s monthly vouchers along with carrying out other detailed procurement tasks. The same official also had responsibilities for the department’s efforts to recompete a $1.3 billion effort to provide worldwide law enforcement support and for law enforcement support efforts in Liberia and Haiti. To address the workload issue, the bureau has assigned two additional staff to assist in overseeing contract activities in Iraq and is exploring options for reorganizing the bureau to use resources more efficiently. Providing adequate oversight on reconstruction efforts is challenging given the uncertain security environment and harsh working conditions. During site visits to Iraq in October 2003, we observed the considerable degree to which these factors were affecting reconstruction efforts. For example, travel outside secure compounds occurred only in convoys of armored vehicles with armed security forces. Flak jackets and helmets were required to be worn or, at a minimum, carried. Communications were generally difficult and unreliable. In addition, the living and working environment afforded individuals little privacy or time to rest. We observed that personnel generally worked 12 to 15 hour days and often shared cramped living and working quarters. In Al Hillah, for example, five USAID personnel shared two small offices with their security team. To better coordinate and manage the $18.4 billion in reconstruction funding provided for fiscal year 2004, the CPA established a program management office that is responsible for infrastructure-related programs. The office, which includes representatives from USAID and the Army Corps of Engineers, is responsible for coordinating the efforts of the CPA, the Iraqi ministries, and other coalition partners. The office’s acquisition strategy reflects a plan to award 1 program management support contract to support the program management office and to oversee reconstruction efforts of specific sectors—electricity, oil, public works and water, security and justice, transportation and communications, and buildings and health; 6 program management contracts to coordinate reconstruction efforts specific to each sector; and 15 to 20 design-build contracts to execute specific tasks. In March 2004, various DOD components, on behalf of the CPA, awarded 17 contracts—the program management support contract, the 6 sector- specific program management and the 10 design-build contracts. These contracts were awarded pursuant to a DOD decision to limit competition to firms from the United States, Iraq, coalition partners, and force contributing nations. In addition to these contracts, other agencies will continue to award and manage contracts for areas within their assigned area of responsibility. For example, in January 2004, USAID competitively awarded a $1.8 billion contract to enable further reconstruction efforts, while the Army Corps of Engineers competitively awarded two contracts with a combined value of $2.0 billion to further repair and rehabilitate Iraq’s oil infrastructure. USAID announced its intent to solicit bids on at least seven new contracts. One of these contracts is intended to provide USAID with an enhanced capability to carry out data collection, performance monitoring, and evaluation of USAID’s ongoing work in Iraq. The United States, along with its coalition partners and various international organizations and donors, has undertaken an enormously complex, costly, and challenging effort to rebuild Iraq. At the early stages of these efforts, agency procurement officials were confronted with little advance warning on which to plan and execute competitive procurement actions, an urgent need to begin reconstruction efforts quickly, and uncertainty as to the magnitude of work required. Their actions, in large part, reflected proper use of the flexibilities provided under procurement laws and regulations to award new contracts using other than full and open competitive procedures. With respect to several task orders issued under existing contracts, however, some agency officials overstepped the latitude provided by competition laws by ordering work outside the scope of the underlying contracts. This work should have been separately competed, or justified and approved at the required official level for performance by the existing contractor. Given the war in Iraq, the urgent need for reconstruction efforts, and the latitude allowed by the competition law, these task orders reasonably could have been supported by justifications for other than full and open competition. In some cases, such as the task order for the Iraqi media capability, the work has been completed so there is no practical remedy available. In several other cases, however, the opportunity exists to bring task orders into compliance with requirements, as well as to ensure that future task orders are issued properly. Providing effective contract administration and oversight remains challenging, in part due to the continued expansion of reconstruction efforts, the staffing constraints, and the need to operate in an unsecure and threatening environment. Indeed, the magnitude of work that remains undefinitized is symptomatic of changing requirements and the lack of sufficient agency and contractor resources. Nevertheless, timely definitization of outstanding contracts and task orders is needed to promote effective cost control. More broadly, these challenges suggest the need to assess the lessons learned from the contract award and administration processes in Iraq to identify ways to improve similar activities in the future. It is too early to gauge whether the CPA approach to improving its ability to monitor and coordinate reconstruction efforts through the use of a new program management office and the planned award of various types of construction and management support contracts will be effective. However, recent congressional action requiring the CPA Administrator and heads of federal agencies to report on contracts awarded using other than full and open competition will provide more transparency and accountability in the award of new Iraq reconstruction contracts. To ensure that task orders issued to rebuild Iraq comply with applicable requirements, and to maximize incentives for the contractors to ensure effective cost control, we recommend that the Secretary of the Army take the following four actions: Review the out-of-scope task orders for Iraqi media and subject matter experts issued by the Defense Contracting Command-Washington and take any necessary remedial actions. Ensure that any future task orders under the LOGCAP contract for Iraq reconstruction activities are within the scope of that contract. Address and resolve all outstanding issues in connection with the pending Justifications and Approvals for the contracts and related task orders used by the Army Corps of Engineers to restore Iraq’s electricity infrastructure. Direct the Commanding General, Army Field Support Command, and the Commanding General and Chief of Engineers, U.S. Army Corps of Engineers, to definitize outstanding contracts and task orders as soon as possible. To improve the delivery of acquisition support in future operations, we recommend that the Secretary of Defense, in consultation with the Administrator, U.S. Agency for International Development, evaluate the lessons learned in Iraq and develop a strategy for assuring that adequate acquisition staff and other resources can be made available in a timely manner. DOD and the Department of State provided written comments on a draft of this report. Their comments are discussed below and are reprinted in appendixes III and IV. USAID concurred with the draft report as written. USAID’s response is reprinted in appendix V. GSA also provided comments regarding its efforts to ensure that agencies properly use the federal supply schedule program. GSA’s comments are reprinted in appendix VI. DOD generally concurred with our recommendations. DOD noted that it is in the process of taking appropriate remedial actions on the task orders issued by the Defense Contracting Command-Washington, and is resolving outstanding issues related to the task orders issued by the Army Corps of Engineers to restore Iraq’s electrical infrastructure. As part of its efforts to definitize contracts, DOD noted that the Army Field Support Command has, among other things, established firm dates for the submission of contractor proposals and to complete negotiations. DOD also noted that progress on these efforts is being reviewed by senior Command officials on at least a weekly basis. DOD did not indicate, however, what steps the Army Corps of Engineers is taking to definitize the actions for which they are responsible. As we noted in the report, the Army Corps of Engineers had two undefinitized contracts on which they had obligated more than $1.5 billion as of March 2004. Lastly, DOD reported that efforts are already underway to conduct a study to evaluate the lessons learned in Iraq and develop a strategy for assuring that adequate staff and other resources can be made available. DOD partially concurred with our recommendation to ensure that future task orders issued on the LOGCAP contract are within the scope of that contract. DOD noted that the LOGCAP contracting officer reviews each proposed scope of work and determines whether the action is within the scope of the contract, and obtains legal advice as needed. DOD also noted that the recommendation appeared to be based on only one action, namely the task order for contingency planning for the Iraq oil infrastructure mission. We also expressed concern, however, about whether the task orders to provide logistical support for the CPA and to the New Iraqi Army training program were within the scope of the underlying LOGCAP contract. Consequently, the steps taken by the contracting officer—while necessary and appropriate—may not be sufficient to ensure that work outside the scope of the LOGCAP contract is either competed or properly justified. DOD provided two comments on our findings. First, DOD took exception to our observations on the manner by which the Deputy Secretary limited competition for contracts awarded in fiscal year 2004 to firms from the United States, Iraq, coalition partners and force contributing nations. DOD noted that the Deputy Secretary has broad authority from the Secretary to act on his behalf, which we do not dispute. We note, however, that the plain language of the law provides that authority to approve public interest exceptions may not be delegated. While the Deputy Secretary may have broad authority to act on the Secretary’s behalf, he was not authorized to do so in this case. Second, regarding our conclusion that the LOGCAP contingency planning order was not within the scope of the contract, DOD commented that our conclusion should be couched in terms of opinion. While legal analysis by its nature reflects opinion, we remain convinced of our conclusion and emphasize the need for more analytical rigor in the review of LOGCAP task orders. The Department of State disagreed with our assessment that the authority it cited to limit competition may not be a recognized exception to competition requirements. The department believed that the authority it cited—section 481 of the Foreign Assistance Act of 1961, as amended— was used appropriately. The specific section of the Act cited by the department—section 481(a)(4)—speaks to the authority of the President to furnish assistance to a country or international organization, but does not provide relief from statutory competition requirements. In its comments and in earlier discussions, State did not provide us with a persuasive basis to conclude that the authority is a recognized exception to the competition requirements. However, we did not need to resolve the issue because State appears to have maximized competition under the circumstances, and we believe State could have used other recognized exceptions, such as 40 U.S.C. §113(e), to meets its requirements. This authority permits the waiver of competitive contracting procedures when use of those procedures would impair foreign aid programs. GSA recognized that it has a responsibility to ensure that agency personnel are adequately trained in the proper use of the federal supply schedule program. GSA noted that it has been working with DOD and other federal agencies to ensure that their contracting officers are fully trained on the proper use of the program and identified some of its ongoing and planned efforts toward this objective. We are sending copies of this report to the Director, Office of Management and Budget; the Secretaries of Defense and State; the Administrator, U.S. Agency for International Development; the Commanding General and Chief of Engineers, U.S. Army Corps of Engineers; the Director, Defense Contract Management Agency; and the Director, Defense Contract Audit Agency. We will make copies available to others on request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. The major contributors to this report are listed in appendix VII. If you have any questions about this report, please contact me on (202) 512-4841 or Timothy DiNapoli on (202) 512-3665. During the course of the review, we contacted the following organizations: Office of Management and Budget, Washington, D.C.; Office of Reconstruction and Humanitarian Assistance, Washington, Coalition Provisional Authority, Washington, D.C., and Baghdad, Iraq; Department of Defense, the Comptroller, Pentagon, Washington, D.C. Department of the Army, Pentagon, Washington, D.C; Washington Headquarters Services, Pentagon, Washington, D.C.; Defense Contracting Command-Washington, Pentagon, Washington, Southern Region Contracting Center, Army Contracting Agency, Fort Northern Region Contracting Center, Army Contracting Agency, Fort Army Field Support Command, Rock Island, Illinois; Headquarters, U.S. Army Corps of Engineers, Washington, D.C.; U.S. Army Engineer Division, Southwestern, Dallas, Texas; U.S. Army Engineer District, Fort Worth, Fort Worth, Texas; Engineering and Support Center, Huntsville, Alabama; Transatlantic Program Center, Winchester, Virginia; U.S. Army Engineer District, Philadelphia, Philadelphia, Pennsylvania; and Vicksburg Consolidated Contracting Office, Alexandria, Virginia; Defense Information Systems Agency, Arlington, Virginia, and Scott Air Force Base, Illinois; Department of Defense, Inspector General, Arlington, Virginia; Defense Contract Management Agency, Alexandria, Virginia; Defense Contract Audit Agency, Fort Belvoir, Virginia; U.S. Agency for International Development, Washington, D.C.; U.S. Department of State, Washington, D.C.; and U.S. Department of Justice, Washington, D.C. The following are GAO’s comments on the Department of Defense’s letter dated May 13, 2004. 1. The Department of Defense (DOD) incorrectly noted that the recommendation was based on only one instance. In addition to the example cited by DOD, we also expressed concern about whether the task orders to provide logistical support for the Coalition Provisional Authority (CPA) and to the New Iraqi Army training program were within the scope of the underlying Logistics Civil Augmentation Program (LOGCAP) contract. 2. The actions being taken by the Army Field Support Command are positive steps to monitor progress in reaching agreement on the contracts’ key terms and conditions. DOD did not indicate, however, what steps the Army Corps of Engineers was taking to definitize the actions for which the Corps is responsible. As noted in table 7, the Army Corps of Engineers had two undefinitized contracts on which had obligated more than $1.5 billion as of March 2004. 3. DOD asserts that the determination and finding was not made on a class basis because it included a common justification for 26 specifically identified “particular procurements.” The Federal Acquisition Regulation (FAR) provides for determination and findings for individual contract actions (FAR 1.702) and a class of contract actions (FAR 1.703). Because the determination and finding encompasses 26 contract actions, we conclude that it is a class determination and finding. Specifically enumerating members of the class does not alter the fundamental fact that it is for more than one action. Class determination and findings are specifically prohibited by FAR 6.302-7(c)(4). As to the question of authority to execute the determination and finding, we do not dispute that the Deputy Secretary has broad authority to act on behalf of the Secretary. We note, however, that the plain language of the law provides that authority to approve public interest exceptions may not be delegated and conclude that the Deputy Secretary did not have authority in this instance. 4. Legal analysis by its nature reflects opinion. In the opinion of GAO, the Army, and DOD, the actual restoration of Iraqi oil infrastructure was not within the scope of the LOGCAP contact. We also noted that the LOGCAP contract anticipates contingency planning for work that can be executed under the contract. In other words, contingency planning is within the scope of the contract only if the actual work is also within the scope of the contract. In this instance, all parties agree that actual restoration of the oil infrastructure was not within the scope of the contract. Consequently, we conclude that planning the oil infrastructure restoration was also not within the scope of the contract. We would encourage the contracting officer to continue to obtain legal assistance given the complexity of the LOGCAP contract, but we also believe that DOD needs to ensure analytical rigor in its review of task orders. Major contributors to this report were Robert Ackley, Ridge Bowman, Carole Coffey, Muriel Forster, Glenn D. Furbish, Charles D. Groves, John Heere, Chad Holmes, John Hutton, Ronald Salo, Karen Sloan, Lillian Slodkowski, Steve Sternlieb, Susan Tindall, Adam Vodraska, and Tim Wilson. | Congress has appropriated more than $20 billion since April 2003 to support rebuilding efforts in Iraq. This complex undertaking, which is occurring in an unstable security environment and under significant time constraints, is being carried out largely through contracts with private-sector companies. As of September 2003, agencies had obligated nearly $3.7 billion on 100 contracts or task orders under existing contracts. Given widespread congressional interest in ensuring that reconstruction contracts are awarded properly and administered effectively, GAO reviewed 25 contract actions that represented about 97 percent of the obligated funds. GAO determined whether agencies had complied with competition requirements in awarding new contracts and issuing task orders and evaluated agencies' initial efforts in carrying out contract administration tasks. Agencies used sole-source or limited competition approaches to issue new reconstruction contracts, and when doing so, generally complied with applicable laws and regulations. Agencies did not, however, always comply with requirements when issuing task orders under existing contracts. For new contracts, the law generally requires the use of full and open competition, where all responsible prospective contractors are allowed to compete, but permits sole-source or limited competition awards in specified circumstances, such as when only one source is available or to meet urgent requirements. All of the 14 new contracts GAO examined were awarded without full and open competition, but each involved circumstances that the law recognizes as permitting such awards. For example, the Army Corps of Engineers properly awarded a sole-source contract for rebuilding Iraq's oil infrastructure to the only contractor that was determined to be in a position to provide the services within the required time frame. The Corps documented the rationale in a written justification, which was approved by the appropriate official. The U.S. Agency for International Development properly awarded seven contracts using limited competition. The Department of State, however, justified the use of limited competition by citing an authority that may not be a recognized exception to competition requirements, although a recognized exception could have been used. There was a lesser degree of compliance when agencies issued 11 task orders under existing contracts. Task orders are deemed by law to satisfy competition requirements if they are within the scope, period of performance, and maximum value of a properly awarded underlying contract. GAO found several instances where contracting officers issued task orders for work that was not within the scope of the underlying contracts. For example, to obtain media development services and various subject matter experts, the Defense Contracting Command-Washington placed two orders using a management improvement contract awarded under the General Services Administration's schedule program. But neither of the two orders involved management improvement activities. Work under these and other orders should have been awarded using competitive procedures or, due to the exigent circumstances, supported by a justification for other than full and open competition. The agencies encountered various contract administration challenges during the early stages of the reconstruction effort, stemming in part from inadequate staffing, lack of clearly defined roles and responsibilities, changing requirements, and security constraints. While some of these issues have been addressed, staffing and security remain major concerns. Additionally, the Army and its contractors have yet to agree on key terms and conditions, including the projected cost, on nearly $1.8 billion worth of reconstruction work that either has been completed or is well under way. Until contract terms are defined, cost risks for the government remain and contract cost control incentives are likely to be less effective. |
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To carry out NNSA’s nuclear weapons and nonproliferation missions, contractors at the eight NNSA sites conduct research, manufacturing, testing at facilities located at those sites. (See fig. 1.) DOE establishes safety or security requirements based on a categorization of site-specific risks, including hazardous operations and the presence of special nuclear material—material which can be used in producing nuclear weapons. Federal regulations define three categories of nuclear facilities based on the potential significance of radiological consequences in the event of a nuclear accident. These categories range from Hazard category 1 nuclear facilities with the potential for off-site radiological consequences, to Hazard category 2 nuclear facilities with the potential for significant on-site radiological consequences beyond the facility but which would be contained within the site, to Hazard category 3 nuclear facilities with the potential for significant radiological consequences at only the immediate area of the facility. In terms of security, DOE’s security orders establish levels of security protection according to a site’s types and quantities of special nuclear material. Special nuclear material is classified according to 4 levels—Category I Accordingly, DOE’s sites with (highest risk) to Category IV (lowest risk).Category I nuclear materials—including specified quantities and forms of special nuclear material such as nuclear weapons and nuclear weapons components—require the highest level of security since the risks may include the theft of a nuclear weapon or creation of an improvised nuclear device capable of producing a nuclear explosion. As discussed earlier, work activities to support NNSA’s national security missions are largely carried out by M&O contractors. This arrangement has historical roots. Since the Manhattan Project produced the first atomic bomb during World War II, DOE, NNSA, and predecessor agencies have depended on the expertise of private firms, universities, and others to carry out research and development work and operate the facilities necessary for the nation’s nuclear defense. Currently, DOE spends 90 percent of its annual budget on M&O contracts, making it the largest non- Department of Defense contracting agency in the government. NNSA’s M&O contractors are largely limited liability companies consisting of multiple member companies. Contractors at only two NNSA sites—the KCP and Sandia National Laboratories—are owned by a sole parent corporation. NNSA requires its contractors to adhere to federal laws, departmental regulations, and DOE and NNSA requirements that are provided in the department’s system of directives, including policies, orders, guides, and manuals. The agency incorporates directives into contracts and holds contractors accountable for meeting the associated requirements. Contractors, NNSA, DOE, and other organizations manage and oversee operations through a multitiered approach. First, contractors manage operations, conduct self-assessments, and perform corrective actions to maintain compliance with government expectations. Second, NNSA headquarters organizations (1) set processes and corporate expectations for contractors managing the sites, (2) have primary responsibility for ensuring contractors are performing and adhering to contract requirements, and (3) evaluate contractor performance. Third, NNSA’s field offices oversee the contractors on a daily basis. This includes on-site monitoring and evaluating contractor work activities. Fourth, entities outside of NNSA provide independent oversight of contractor performance. In particular, DOE’s Office of Health, Safety, and Security (HSS), is responsible for, among other things, developing the department’s safety and security policy, providing independent oversight of contractor compliance with DOE’s safety and security regulations and directives, and conducting enforcement activities. The Defense Nuclear Facilities Safety Board also provides oversight of nuclear safety that is independent of NNSA and DOE. In implementing its new management and oversight approach in 2007, KCP implemented reforms that sought to (1) streamline operating requirements, (2) refocus federal oversight, and (3) provide clear contractor goals and meaningful incentives. KCP reported that these actions produced a number of benefits, including cost reductions at the site. According to the KCP Field Office and contractor, KCP under took the following actions: Streamlined operating requirements. The KCP Field Office sought to streamline operating requirements and limit the imposition of new DOE requirements in the future. These changes included eliminating, where possible, some DOE directives and replacing others with industry or site-specific standards, such as quality assurance requirements and emergency management requirements. The contractor remained obligated to meet all applicable federal laws and regulations. According to the contractor, by 2009, the site had reduced 160 operating requirements from specific DOE orders, regulations, and other standards to 71 site operating requirements. For example, the site replaced requirements from DOE’s quality assurance order with quality assurance processes outlined in the International Standards Organization’s Standard 9001-2008, an international standard used in private industry to ensure that quality and continuous improvement are built into all work processes. KCP was also able to eliminate its on-site fire department by relying on municipal firefighting services to fulfill a DOE requirement for site fire protection capability. To help limit future growth of requirements, KCP implemented a directives change control board. This group, with joint federal Field Office and contractor staff membership, reviews new or revised directives to determine their applicability to the contract, rejecting those requirements not deemed to be relevant. According to a KCP Field Office official, since 2007, the board has rejected 235 of 370 new directives issued by DOE and other sources. The KCP Field Office official noted that reasons for rejecting directives include their inapplicability to a nonnuclear site or because the new directive requirements were already covered in KCP’s site-specific standards. Refocused federal oversight. The KCP Field Office sought to refocus federal oversight by (1) changing its approach from reviewing compliance with requirements to monitoring contractor assurance systems for lower-risk activities; (2) exerting greater control over audit findings at the field office level; and (3) increasing its use of external reviewers. First, the field office changed its oversight approach from reviewing compliance of all contractor activities to allowing the contractor to assume responsibility for ensuring performance in lower- risk activities, allowing federal staff to concentrate resources on monitoring high-risk activities such as safety and security. In this approach, the field office moved from a traditional “transactional” oversight—in which performance is determined by federal oversight staff checking compliance against requirements—to a “systems- based” oversight—in which performance on lower-risk activities is ensured by monitoring the contractor’s systems, processes, and data, including its systems of self-assessment and actions to correct problems. According to KCP Field Office officials, federal oversight staff assumed the role of reviewing the contractor’s management and oversight systems, as well as reviewing selected data provided by these systems, to ensure adequate processes were in place to identify and correct problems. Second, the field office exerted greater control over audit findings from external reviews, by determining which findings would need to be addressed by the contractor. According to KCP Field Office and contractor officials, this ability to accept or reject audit findings from external reviews enabled the field office to prevent implementation of new requirements that would not be applicable at the site. According to another KCP Field Office official, although the field office had this authority under the reforms, it had not rejected any audit findings. Finally, to revise its oversight approach, the KCP Field Office relied more on third-party assessments or certifications of contractor performance in place of federal oversight reviews, according to a field office official. Such assessments included those by the contractor’s parent corporation, as well as external groups, such as the Excellence in Missouri Foundation, which administers the Missouri Quality Award to promote quality in business in the state. Clear contractor goals and meaningful incentives. KCP Field Office officials noted that, under the reforms, the Field Office and the contractor agreed on five outcome areas for contractor performance, and performance award fees were linked to these outcome areas. This differed from the previous approach under which performance award fees were linked to meeting headquarters expectations and directive requirements. KCP Field Office officials noted this allowed them to focus performance award fee on “what” a contractor does, rather than on “how” it meets requirements. Under the reforms, the five outcome areas on which performance would be evaluated included: (1) meeting product schedule; (2) meeting product specification; (3) managing cost; (4) managing assets and resources, including facilities, inventory, and staff; and (5) meeting contract standards. Under the reforms, each year, the KCP Field Office highlighted performance areas of major importance to encourage the contractor to focus resources on those areas, rather than expending resources on what the field office and contractor agrees are less important goals and requirements. In this framework, the contractor is eligible to earn the majority of associated fees as long as adequate performance was achieved. According to the KCP Field Office implementing plan, this differed from the previous approach, under which the contractor needed to exceed performance expectations to earn more than 60 percent of an award fee. KCP Field Office officials noted a key to effective contract management under the reforms was the ability of the field office to hold the contractor accountable by focusing fee on desired outcomes. In implementing the reforms, the site reported it was able to reduce costs in its initial year of implementation, some of which was achieved by decreasing oversight staff. A January 2008 review commissioned by the KCP Field Office to assess cost savings resulting from implementing the reforms reported the Field Office achieved a cost reduction of $936,000 in fiscal year 2007 by eliminating, through attrition, eight full-time staff positions. The total savings this review reported was nearly $14 million (fiscal year 2006 dollars) which comprised cost reductions that had been achieved in fiscal 2007 directly or indirectly by implementing the KCP reforms. This reported $14 million in cost reductions was about 3 percent of the site’s overall fiscal year 2007 budget of about $434 million. According to a KCP Field Office official, no further analyses of cost savings has been conducted since that time. Reviews of the reforms, as well as NNSA and KCP Field Office and contractor officials, cited several important factors that assisted with implementation of the reforms at the site. Key factors included having (1) high-level support from leadership for reforms, (2) site specific conditions and operations, and (3) a cooperative federal-contractor partnership. High-level support from NNSA and field office leadership and key stakeholders. According to a 2008 KCP Field Office review of lessons learned from implementing the reforms, gaining and maintaining the support of the NNSA Administrator and buy-in from some of the KCP federal staff for changes was critical to their implementation. With the support of the NNSA Administrator, the KCP Field Office Manager was given clear authority and responsibility to make the changes necessary to implement the reforms. According to the 2008 review, implementation required getting support from federal staff at the site, whose oversight activities were likely to change because of the reforms. The KCP Field Office Assistant Manager told us field office staff involved in oversight at the site were initially reluctant to make the necessary changes to their oversight activities—such as moving away from a compliance-type oversight approach to relying on reviews of contractor assurance systems—but they ultimately agreed to the changes. The 2008 KCP Field Office review of lessons learned noted that acceptance by stakeholders was more easily obtained for reforms such as applying industry standards because of the unique operations at KCP, which included lower risk, nonnuclear activities. These stakeholders included program offices within NNSA. Other stakeholders were more qualified in their support. For example, DOE’s HSS reported in a March 2008 review of the KCP reforms that, overall, the reform framework had the potential for providing sufficient federal oversight at reduced cost for the site. The report also found, however, that some weaknesses existed in implementing the reforms, such as the field office not being able to complete a significant percentage of scheduled security oversight reviews and observations in fiscal year 2007 due to staffing shortages and not having adequate reviews of site-specific standards for safeguards and security. Unique site conditions and operations. In selecting KCP to implement the reforms in 2006, the NNSA Administrator noted that, in comparison to NNSA’s other sites, unique conditions existed at the site that enabled implementation of the proposed reforms. These conditions included (1) KCP operations, which are largely manufacturing, were comparable to those of commercial industry, most notably the aerospace industry; (2) activities at the site were largely lower-risk, nonnuclear, and generally did not involve or potentially affect nuclear safety and security; and (3) the site contractor was owned by a single corporate parent—Honeywell—that has, according to a Field Office official, well-developed corporate management systems and a commitment to quality. In addition, the implementation of reforms at KCP was undertaken at a time of broader operational changes at KCP. More specifically, NNSA was in the process of modernizing KCP operations to lower operations and maintenance costs. This included building and relocating to a new modernized production facility and increasing the use of external suppliers for nonnuclear components rather than producing the components in-house. According to a KCP Field Office official, as of April 2014, more than 70 percent of operations had been moved to the new facility. A cooperative federal-contractor partnership. The KCP Field Office noted in its April 2008 review of lessons learned from implementing the reforms that development of the reforms was enabled because of a cooperative relationship between the field office and the contractor. According to the review, a steering committee with members from both the KCP Field Office and the contractor managed the implementation of the reforms. These members agreed to the overall objectives and key elements of the reforms early in the process and worked together to develop those key reforms. According to this field office review, this cooperative relationship not only eased implementation of the reforms but assisted in gaining approval for the reforms from NNSA and DOE headquarters officials. The January 2008 study assessing cost reductions resulting from implementing the reforms found that this cooperation between site federal and contractor officials had developed over a period of years. In addition, KCP Field Office officials told us that having the leadership and involvement by the contractor’s parent corporation resulted in greater accountability. According to a 2009 review commissioned by NNSA to assess the reforms, the parent corporation was responsible for setting core processes and policies, determining best practices to be implemented, and ensuring the field office maintained transparency in how the site was managed. This was a change from the previous approach, whereby the contractor adhered to NNSA-set expectations and requirements. In addition, under the reforms, the contractor was allowed to leverage corporate management systems, in place of DOE-required systems to manage work and performance. KCP Field Office officials noted that, although the contractor was held responsible for the agreed-upon mission performance outcomes, it fell to both the contractor and the parent company to fix any problems. According to the 2009 review, allowing the contractor to use corporate management systems resulted in encouraging the parent company to take a more active part in providing oversight. Since the 2007 implementation of reforms at KCP, NNSA has taken steps to extend some elements of the site’s reforms at other NNSA sites and to integrate the reforms into subsequent agency-wide initiatives to improve contractor performance and accountability. However, NNSA is revisiting the reforms following a July 2012 security breach at one of its sites, and NNSA’s future plans to continue extending KCP-like reforms at its other sites are currently uncertain. After KCP undertook implementation of its reforms in 2007, NNSA began to implement similar reforms at selected sites and subsequently, incorporated elements of the reforms into agency-wide initiatives to improve oversight and management of M&O contractors. At the site level, in 2009, the NNSA Administrator formed an internal team to look at ways of accelerating efforts to implement KCP-like reforms at other NNSA sites, where appropriate. In addition, in February 2010, the NNSA Administrator tasked officials at the Sandia National Laboratories and Nevada Test Site with implementing reforms similar to those implemented at KCP for nonnuclear activities. These two sites were to, among other things, (1) streamline operating requirements by identifying opportunities to eliminate some agency requirements and make greater use of industry standards; (2) refocus federal oversight by, among other things, making greater use of the contractor’s management system; and (3) set clear contractor goals and meaningful incentives following the KCP approach. The two sites were tasked with identifying cost efficiencies associated with implementing these reforms. In 2010, NNSA issued two Policy Letters that sought to streamline security requirements for the control of classified information, such as classified documents and electronic media, and on the physical protection of facilities, property, personnel, and national security interests, such as special nuclear material. These two policy letters were included in NNSA’s M&O contracts in place of the corresponding DOE directives. Subsequently, in 2011, NNSA issued a new policy for all of its sites that outlined basic requirements for a new oversight and management approach that had roots in the KCP reforms. This new policy—called “transformational governance”—directed, for example, site oversight staff to focus greater efforts on assessing contractor performance in higher- risk activities, such as security, and for lower-risk activities, rely more heavily on monitoring contractor assurance systems. More broadly, DOE was undertaking similar reforms during this period. Specifically, in March 2010, the Deputy Secretary of Energy announced an initiative to revise DOE’s safety and security directives by streamlining or eliminating duplicative requirements, revising federal oversight and encouraging greater use of industry standards. As we reported in 2012, DOE’s effort resulted in reducing the overall number of directives. For example, DOE reduced its number of safety directives from 80 to 42. However, according to NNSA officials, since the July 2012 security breach at NNSA’s Y-12 National Security Complex in Oak Ridge, Tennessee, some of NNSA’s efforts to extend KCP-like reforms to other sites have been placed on hold or are being revised, and NNSA’s plans on how to further implement KCP-like reforms are still being determined. DOE and NNSA reviews of the security breach indicated that its underlying causes may have been related to implementation of reforms similar to some of those implemented at KCP. For example, a 2012 review of the security breach by the DOE’s Office of Inspector General noted that a breakdown in oversight, specifically one based on monitoring the contractor’s systems instead of compliance with requirements, did not alert site officials to conditions that led to the breach. In the aftermath of the security breach, NNSA and DOE have moved cautiously to reevaluate or revise reforms, and agency officials told us it is still determining how reforms will be implemented in the future. NNSA is currently reevaluating how to implement some of the principal aspects of the KCP reforms identified earlier in this report—streamlining requirements, refocusing federal oversight, and establishing clear contractor goals, including: Streamlining operating requirements. Since the July 2012 Y-12 security breach, NNSA has been reassessing the need for some NNSA-specific policies. For example, NNSA initiated actions to rescind certain NNSA security policies and reinstate DOE’s security directives. NNSA initiated these actions in response to a recommendation made in 2012 by the NNSA Security Task Force—a task force established by the NNSA Administrator in August 2012 to assess NNSA’s security organization and oversight in the wake of the Y-12 security breach. As of March 2014, according to NNSA officials, NNSA sites were in varying stages of incorporating the DOE directives into their contracts and implementing the associated requirements. Refocusing federal oversight. Since the July 2012 Y-12 security breach, NNSA has been reviewing the use of contractor assurance systems in its oversight model and for evaluating contractor performance. According to a February 2013 report by the Office of Inspector General, the July 2012 Y-12 security breach highlighted the negative outcomes that may result when contractor assurance systems are too heavily relied on for federal oversight. The February 2013 report noted that the Y-12 contractor’s assurance system did not identify or correct major security problems that led to the security breach, and that while federal oversight staff knew of some security problems, they believed that the agency’s oversight approach of relying on the contractor assurance system prevented them from intervening in contractor activities to correct problems. In reevaluating NNSA’s oversight approaches, according to the Associate Principal Deputy Administrator, the agency is continuing to work on establishing contractor assurance systems but is moving toward using these systems to enable, rather than replace, federal oversight. In addition, according to the official, NNSA has recommitted to strengthening oversight, both by working to ensure sufficient oversight staff are in place in field offices and by leveraging independent oversight by DOE’s HSS. According to NNSA’s Acting Assistant Administrator for Infrastructure and Operations, as of February 2014, the agency was looking at opportunities to evaluate how best to use contractor assurance systems and data in federal oversight of contractor performance and was currently revising its oversight policy. Setting clear contractor goals and meaningful incentives. Prior to the July 2012 Y-12 security breach, NNSA had been reassessing how it evaluated contractor performance and held contractors responsible for meeting agency goals. In fiscal year 2013, NNSA introduced its Strategic Performance Evaluation Plan, which lays out broad, common goals to which each site must contribute to achieve the overall agency mission. According an NNSA headquarters official, the plan streamlines NNSA evaluation of contractor performance by focusing on each site’s contribution to the common set of desired agency outcomes—such as its nuclear weapons mission, and science and technology objectives. The official indicated that NNSA will evaluate each site using a standardized set of ratings as defined in regulation to replace the previous system of unique site-office- developed and site-office-evaluated performance ratings. According to the NNSA official, the Strategic Performance Evaluation Plan should help ensure consistent performance evaluation across the enterprise. Although some opportunities may exist for implementing KCP-like reforms at other NNSA sites, since the Y-12 security breach, NNSA officials and studies we reviewed noted that key factors enabling implementation of the reforms at KCP may not be present across the nuclear security enterprise. As noted above, these factors include having (1) high-level support for such reforms at NNSA headquarters; (2) specific site conditions to enable implementation, such as having a contractor with a single parent corporation and work activities that are solely nonnuclear in nature; and (3) a cooperative federal-contractor relationship. First, regarding high-level headquarters support for extending the KCP reforms, NNSA’s Acting Assistant Administrator for Infrastructure and Operations told us, in February 2014, that critical organizational issues, such as clarifying headquarters’ organization and establishing field office roles and responsibilities for overseeing contractors, were still being discussed within NNSA and need to be settled before moving forward on KCP-like reforms. Second, most NNSA sites differ considerably from KCP (see table 1). For example, reports we reviewed noted that, because most NNSA sites are managed and operated by limited-liability companies made up of multiple member companies, instead of by a single parent corporation, adopting the reforms elsewhere would be challenging. According to the January 2008 study commissioned by the KCP to assess cost reductions from implementing the reforms, having multiple corporate partners could limit successful implementation of KCP-like reforms at other NNSA sites. Specifically, the study notes that a single corporate parent can more easily use existing corporate systems to oversee and manage its subsidiary M&O entity, whereas this model may not work with an M&O having multiple member organizations. In addition, as noted above, the KCP M&O contractor’s parent company was a Fortune 100 company with, according to a KCP Field Office official, a strong commitment to quality. In addition, an April 2008 KCP Field Office review of the reforms noted that implementation was enabled at KCP because the site activities were considered low-risk and nonnuclear. The review stated that it was not clear how to apply similar reforms to other NNSA sites, most of which have some nuclear operations, nuclear or other high-risk materials, or nuclear waste requiring disposition. Further, the March 2008 review by the department’s HSS noted that KCP is a unique operation within NNSA and that careful analysis would need to be done if consideration will be given to applying the reforms to other sites, particularly where hazards are more complex or where the contractor’s ability to self-identify and correct program weaknesses is not mature. Third, the January 2008 cost reductions study noted that having a single parent company governing the KCP M&O contractor for decades resulted in establishing a cooperative relationship between the federal government and its contractor. More specifically the study noted that successful implementation of reforms at KCP resulted, in part, from the mutual trust built between the field office and contractor staff. However, a February 2012 National Research Council report that examined NNSA’s management of its three national security laboratories found there had been an erosion of trust between NNSA and its laboratories, and it recommended the agency work toward rebuilding positive relationships with its laboratories. Diminished trust between NNSA and its sites was also highlighted in a recently issued report by a congressional advisory panel, which described the relationship as “dysfunctional.” During the course of our work, in December 2013, the National Defense Authorization Act for Fiscal Year 2014 was enacted. act required the NNSA Administrator to develop a feasibility study and plan for implementing the principles of the KCP pilot to additional facilities in the national security enterprise by June 2014. We agree that further study of the applicability, costs, and benefits of the KCP reforms is warranted, and, in light of the congressional direction to NNSA, we are not making recommendations at this time. We provided a draft of this report to NNSA for its review and comment. In written comments, reproduced in appendix I, NNSA generally concurred with the overall findings of the report. The agency noted that it continues to study the appropriateness of further expansion of the Kansas City Pilot oversight reforms to other sites and implementation of NNSA’s governance policy. NNSA also provided technical comments that we incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. Pub. L. No. 113-66, 127 Stat. 672. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the individual named above, Jonathan Gill, Assistant Director; Nancy Kintner-Meyer; Cynthia Norris; and Kiki Theodoropoulos made key contributions to this report. | NNSA, a separately organized agency within DOE, has had long-standing problems managing its contracts and projects, which GAO has identified as being at high risk for fraud, waste, abuse, and mismanagement. Both DOE and, specifically, NNSA, undertook initiatives in 2002 and 2003 to improve contractor performance through revised federal oversight and greater contractor accountability. In 2006, concerned that efforts were moving too slowly, the NNSA Administrator tasked its KCP Field Office and contractor with implementing reforms at that site. House Report 113-102, accompanying H.R. 1960, an early version of the National Defense Authorization Act for Fiscal Year 2014 mandated GAO to review the KCP reforms and issues with extending them to other NNSA sites. This report, among other things, (1) identifies key reforms implemented at KCP and reported benefits; (2) describes key factors NNSA and others identified as helping the site implement reforms; and (3) provides information on how NNSA has implemented and plans to implement similar reforms at other sites. GAO reviewed relevant documents prepared by NNSA, DOE, contractors, and others; visited KCP; and discussed the reforms with cognizant federal officials and contractor staff. During GAO's review, Congress required NNSA to develop a study and plan for implementing the principles of the Kansas City reforms at its other sites. In light of the congressional requirement, GAO is not making additional recommendations at this time. NNSA generally agreed with the findings of this report. Key reforms at the National Nuclear Security Administration's (NNSA) Kansas City Plant (KCP)—a site in Missouri that manufactures electronic and other nonnuclear components of nuclear weapons—included (1) streamlining operating requirements by replacing Department of Energy (DOE) requirements with industry standards, where appropriate; (2) refocusing federal oversight to rely on contractor performance data for lower-risk activities; and (3) establishing clear contractor goals and incentives. A 2008 review of the reforms reported nearly $14 million in cost reductions were achieved at the site by implementing these reforms. NNSA and KCP federal and contractor staff identified key factors that facilitated implementation of reforms at KCP, including the following: High-level support from NNSA and field office leadership . Gaining and maintaining the support of the NNSA Administrator and buy-in of some KCP Field Office staff for changes from the reforms was critical. Unique site conditions and operations . Conditions at KCP enabled implementation of the proposed reforms, including (1) the comparability of the site's activities and operations to those of commercial industry; (2) the site's relatively low-risk, nonnuclear activities generally did not involve or potentially affect nuclear safety and security; and (3) the site was managed by a contractor owned by a single corporate parent with a reputation for quality. A cooperative federal-contractor partnership . A cooperative relationship between the KCP Field Office and the contractor facilitated implementation of the reforms. NNSA has extended to other sites some elements of the reforms, including (1) encouraging greater use of industry standards, where appropriate; (2) directing field office oversight staff to rely more on contractor self-assessment of performance for lower-risk activities; and (3) setting clearer contractor goals by revising how the agency evaluates annual contractor performance. However, NNSA and DOE are re-evaluating implementation of some of these reforms after a July 2012 security breach at an NNSA site, where overreliance on contractor self-assessments was identified by reviews of the event as a contributing factor. Moreover, NNSA officials and other studies noted that key factors enabling implementation of reforms at KCP may not exist at NNSA's other sites. For example, most NNSA sites conduct high-hazard activities, which may involve nuclear materials and require higher safety and security standards than KCP. NNSA is evaluating further implementation of such reforms and expects to report to Congress its findings later in 2014. |
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A firm must meet several initial eligibility requirements to qualify for the 8(a) program (a process known as certification), and then meet other requirements to continue participation. In general, a concern meets the basic requirements for admission to the program if it is a small business that is unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and U.S. citizens, and which demonstrates the potential for success. Table 1 summarizes the key requirements. Participation in the 8(a) program lasts 9 years, and once it is completed, a firm and the individual cannot reapply. The 9-year program tenure is divided into two stages—a developmental stage covering years 1 through 4, and a transitional stage covering years 5 through 9. During the transitional years, firms are required to meet certain activity targets for non-8(a) contracts to ensure they do not develop an unreasonable reliance on the program. Additionally, firms in the 8(a) program are eligible to receive sole-source and competitively awarded set-aside federal contracts. As part of the 8(a) program, SBA developed the Mentor-Protégé Program, in which experienced firms mentor 8(a) firms to enhance the capabilities of the protégé, provide various forms of business developmental assistance, and improve the protégé’s ability to successfully compete for contracts. To qualify initially as a protégé, an 8(a) firm must meet one of three conditions: (1) be in the developmental stage of the 8(a) program, or (2) never have received an 8(a) contract, or (3) be of a size that is less than half the size standard corresponding to its primary standard industry code. The mentor and protégé enter into a written agreement that sets forth the protégé’s needs and details the assistance the mentor commits to provide to address those needs. SBA must review and approve the initial agreement and annually evaluate specific mentor-protégé requirements. SBA’s 8(a) program is delivered collaboratively by two departments of SBA. The Office of Business Development (OBD) is responsible for policy formation and the certifications of 8(a) applications, approval of mentor- protégé applications, as well as the approval of existing 8(a) firms that are exiting the program (early graduations, approval of changes of ownership, approval of voluntary withdrawals, approval of terminations, and suspensions). OBD is also responsible for the virtual training and relevant policy briefings provided to SBA staff across the country responsible for executing the 8(a) program on an ongoing basis throughout the year. The Office of Field Operations (OFO) is responsible for supporting the business development specialists, tasked with executing the 8(a) program, who are located in 68 district offices across the country. Selected BDSs will have 8(a) firms assigned to them. The BDSs work directly with 8(a) firms to help prepare business plans; provide technical assistance; review continuing eligibility; coordinate with resource partners that provide counseling, training, loans, and other assistance to small businesses; and coordinate additional assistance and training for firms through another SBA program. BDS staff also conduct annual reviews of the firms’ progress in implementing business plans and analyze firms’ year-end financial statements, income tax returns, and records of contracting activity for certain compliance requirements, including program eligibility. The purpose of the annual reviews is to determine if firms continue to meet eligibility requirements and to identify business development needs. SBA long has been required by statute to complete annual reviews of all firms. As of fiscal year 2008, SBA had 182.5 full-time-equivalent BDS staff. SBA relies primarily on its annual reviews of 8(a) firms to ensure the continued eligibility of firms enrolled in the program, but we observed inconsistencies and weaknesses in annual review procedures related to determining continued eligibility for the program. For example, we found that SBA did not consistently notify or graduate 8(a) firms that exceeded industry averages for economic success or graduate firms that exceeded the net worth threshold of $750,000. The lack of specific criteria in the current regulations and procedures may have contributed to the inconsistencies that we observed, and SBA has taken steps to clarify some, but not all, of these requirements in a recent proposed rule change. Although BDSs have been challenged to perform all their responsibilities—in particular the statutory requirement to perform annual reviews on 100 percent of 8(a) firms—SBA has not yet assessed its workload to ensure it could carry out its responsibilities as we recommended in our 2008 report. SBA recently has implemented new procedures intended to streamline terminations that may address some of these inconsistencies that we identified with the lack of termination actions taken against firms that did not submit annual review documents as required. Finally, we found that SBA did not maintain an accurate inventory of Mentor-Protégé Program participants and did not document some annual oversight activities of these firms. As a result of these inconsistencies and weaknesses, there is increased potential that firms that no longer meet SBA 8(a) continuing eligibility requirements could be allowed to continue in the program and receive 8(a) contracts. In a substantial number of cases we reviewed, SBA staff failed to complete required annual review procedures intended to assess fundamental eligibility conditions, such as the firm’s net worth, used to determine if participants continue to meet the criteria for being economically disadvantaged. SBA may terminate firms found to be ineligible based on several conditions, including failure to submit required documentation for the annual review process or failure to maintain ownership and control by a disadvantaged individual. SBA may also graduate firms that have successfully completed the program by substantially achieving the targets, objectives, and goals in their business plans prior to the expiration of their program terms, and demonstrated their ability to compete in the marketplace without assistance from the program, or where one or more of the disadvantaged owners no longer are economically disadvantaged (a process known as early graduation). Criteria used to determine continuing eligibility and associated conditions such as economic disadvantage include factors such as personal assets, income, and net worth, while criteria used to determine if a firm successfully met targets and objectives include exceeding industry averages for economic success and owners making excessive withdrawals of company funds or other assets. We selected a random sample of files from each of the five district offices we visited to determine if district offices’ practices for monitoring 8(a) firms were consistent with requirements in regulations, policies, and procedures. Specifically, we estimated that for the five district offices, SBA failed to complete one or more annual required review procedures 55 percent of the time. Our estimates were based on a statistical sample of 123 annual review files from a population of 672 files. Of the 123 files sampled, we identified 67 instances where SBA failed to complete one or more annual review procedures related to eligibility determinations (a 55 percent rate). We tested seven specific annual review requirements relating to continuing eligibility: (1) notifying 8(a) firms that they had exceeded industry averages for economic success, (2) reviewing or graduating 8(a) firms or providing an explanation for retention if they had exceeded industry averages for 2 consecutive years, (3) reviewing net worth or graduating firms in which individuals exceeded the net worth threshold of $750,000, (4) performing eligibility reviews when required for such cases as a change in the firm’s ownership, (5) completing the required annual reviews, (6) obtaining required supervisory reviews (and signatures), and (7) imposing remedial actions or obtaining waivers for firms not meeting business activity targets. Table 2 shows information on the extent to which SBA did not complete these annual review requirements. Taking action when a firm exceeded industry averages for economic success by notifying firms that exceeded four of seven industry averages for 1 year graduating or explaining retention of firms that exceeded four of seven industry averages for 2 consecutive years Reviewing net worth or graduating firms in which individuals exceeded adjusted net worth limitations Performing required eligibility reviews because of a change in the firms’ ownership Imposing remedial actions or obtaining waivers for firms not meeting business activity targets Exceeding industry averages: Officials from two of the five district offices told us that while the guidance requires notifying 8(a) firms when they have exceeded industry averages for economic success, in practice the districts have been using discretion in notifying the firm after the first year in which this condition occurs. SBA procedures identify exceeding industry averages as a criterion for considering that the firm has met its goals and therefore may no longer be economically disadvantaged. The notification is intended to make participants aware that they may be subject to early graduation proceedings if they exceed industry averages for 2 consecutive years. SBA procedures state that if the firm exceeds industry averages for 2 consecutive years, the participant no longer can be considered economically disadvantaged unless the BDS provides evidence that early graduation is not warranted because of compelling reasons. Officials from these district offices explained that they did not follow these procedures, even though they were required, because they did not think that exceeding industry averages always indicated that participants no longer were economically disadvantaged. The level of staff knowledge about calculations for industry averages and the way in which staff entered the calculations into information systems also may have contributed to failures to meet this requirement. One district office told us it was not clear how the ratios were calculated. We also found errors in the calculations of industry averages at another district office. As we discuss in more detail later in the report, the industry ratio calculations require the BDS to manually enter data into a template that will then calculate the ratio of the firm’s performance against that of industry. As shown in table 2, we estimate that staff failed to complete this requirement in about 26 percent of the cases in which a notification letter was required, and in about 4 percent of cases in which industry averages were exceeded for 2 consecutive years. Reviewing net worth or graduating firms in which individuals exceeded adjusted net worth limitations: One of the clearest indicators of economic disadvantage that SBA uses is the net worth requirement. The regulations specifically state that for continued eligibility after admission into the program, adjusted net worth must be less than $750,000. Our file review shows that SBA retained an estimated 7 percent of the firms we sampled, in which there was no evidence that staff reviewed the firms’ net worth, or retained firms in the program despite their exceeding the net worth limits. Similarly, in our companion report investigating the potential for 8(a) program fraud and abuse, we identified cases in which SBA’s files clearly indicated that the firms were not eligible for the 8(a) program, yet SBA staff failed to terminate or graduate the firms from the program. Later in this report we discuss different factors that may have contributed to the retention of firms that clearly appeared to be no longer eligible, including the BDSs’ dual role of advocacy for and monitoring of the firms and workload constraints. Completing eligibility reviews: We estimated that about 4 percent of our file sample contained no evidence that SBA staff had performed a separate required eligibility review. Eligibility reviews are required in cases in which the BDS has reason to question a participant’s eligibility, including a change in the firm’s ownership (the factor we used for our analysis). Eligibility reviews are critical because they could uncover program participants that no longer met control and ownership eligibility requirements. Representatives from one district office we visited explained that these reviews were a low priority compared with other responsibilities, such as completing annual reviews and initial certifications. Completing annual reviews: Although SBA is statutorily required to perform annual reviews of 100 percent of 8(a) firms, we estimated that in about 2 percent of our sample, the files contained no evidence that SBA had performed the annual reviews. For example, in two cases, a district office had no record on file that annual reviews had been performed, and in three other cases it had bundled 2 years of reviews because of a change in the internal deadline for completing annual reviews (it skipped an annual review). Our sample of 123 files included only firms that received contracts. As a result, SBA could be unaware that a potentially ineligible firm had received contracts because it had not performed an annual review. We also identified a few instances in which SBA failed to follow procedural requirements related to the annual reviews, including not consistently documenting supervisory reviews in one district and failing to take remedial actions for firms not meeting their business activity targets. Documenting supervisory reviews: One district office did not always have the required supervisory signatures on the BDSs’ annual review recommendations. Of the 64 files that we sampled in that district, 20 lacked evidence of supervisory review signatures. That is, it appeared that only a BDS recommended a firm’s retention or dismissal from the program. Overall, we estimated that SBA did not meet this requirement for about 23 percent of the files in the five district offices. The noncompliance rate in this district may be attributable to the large size of its 8(a) portfolio—about 20 percent of all active fiscal year 2008 8(a) firms. According to district officials, the office also had competing priorities, such as the need to review applications for the Mentor-Protégé Program. Nevertheless, SBA officials were not properly monitoring their staff in these cases. Without the quality controls intended by the supervisory reviews, SBA has limited assurances that the annual reviews are fulfilling their intended purpose. Imposing remedial actions or obtaining waivers for firms not meeting business activity targets: In about 10 percent of the files we reviewed, district offices did not submit required documentation of remedial actions or a waiver when a firm in the transitional phase of the program did not meet its business activity targets. The remedial action is intended as an incentive for firms to obtain non-8(a) contracts so that they will be prepared to compete in the marketplace without the assistance of the 8(a) program upon graduation. Firms are required to achieve their targets or otherwise are not eligible to receive 8(a) sole-source contracts. By not notifying firms and setting up a remedial plan when required, the BDSs’ actions did not appear to be consistent with a key business development activity intended to help firms develop and exit from the program. Furthermore, SBA could be providing opportunities for potentially ineligible firms to receive sole-source contracts. Our file review results and interviews with district office officials identified numerous instances in which staff did not consistently apply objective standards relating to eligibility determinations. SBA lacks specific criteria in its current regulations and procedures that relate to some of the eligibility requirements such as determining whether a firm should be graduated from the program when it exceeds size standards, industry averages (such as total assets, net sales, working capital, or pretax profit), limits for personal compensation and assets, and excessive withdrawals. Furthermore, SBA guidance directs staff to rely on Office of Hearings and Appeals (OHA) decisions to use as thresholds for eligibility criteria, such as total assets and total compensation, in order to make eligibility determinations. However, as we noted in our related investigation, agency staff did not follow case law consistently. More specifically, we estimate that 17 percent of the firms had exceeded one or more eligibility criteria for 2 consecutive years, indicating that the firms may have been outgrowing the program, but were recommended by SBA for retention. Although each criterion in and of itself may not be a determinant for early graduation based on the current regulations, each is an important factor in determining if these firms continue to meet eligibility requirements and if they should remain in the program. SBA considers the totality of circumstances to determine whether a firm has met its goals and objectives and should be recommended for early graduation. In two cases in one district office, firms had exceeded both average compensation limits and the limits for excessive withdrawals for 2 consecutive years, and still were recommended for retention. The District Director and staff at the district office agreed that the two cases were red flags and that the firms should have been recommended for early graduation or termination. In another example, at a different district office, one firm that, over its 8- year tenure in the 8(a) program. had exceeded (1) industry averages for 5 years (in 2 of these years, the firm could have been considered for early graduation because it exceeded industry averages for 2 consecutive years), (2) compensation limits by having an average salary of more than $200,000 for 2 years, (3) the size standard for its primary North American Industry Classification System code, (4) and made excessive withdrawals in 1 year, but in each year was recommended for retention. This firm had more than $16 million in contracts by its sixth year in the program. We also found inconsistencies in the use of third-party sources to verify firm-reported data. For instance, two districts told us they reviewed third- party sources such as Internal Revenue Service (IRS) tax transcripts, debarments, and bank information such as withdrawals more routinely as part of their annual review, while two other districts told us they had not performed any third-party verification. At least in part, these inconsistencies can be attributed to lack of specific guidance or criteria regarding the need for third-party verification. Overall, the regulations state that SBA may terminate a firm on the basis of discovering false information, but contain few specific requirements to consult third-party sources for continuing eligibility. For example, participants must submit the IRS 4506-T transcript request form as part of the annual review requirements, which allows SBA to request tax return information. Additionally, the regulations suggest that staff should consult the federal list of debarred and suspended firms, since such firms are ineligible for admission to the 8(a) program. However, we found little evidence of regulatory requirements to obtain other third-party verifications. As noted in our report on the potential for 8(a) program fraud and abuse, validating data against other government or third-party sources is a fraud preventive control meant to keep ineligible firms from entering the program. However, we found that SBA relied heavily on self-reported information from the firms during the initial certification and annual reviews, with limited data validation performed after the firms had entered the program. Additionally, in that report we make a recommendation to assess the feasibility of using additional third-party data sources and site visits, based on random or risk-based criteria, to allow more independent verification of firm-reported data. SBA recently proposed changes to its Small Business Size and 8(a) Business Development Regulations to address technical issues as well as make more substantive changes resulting from its experience in implementing the current regulations. The agency last updated most of these regulations in 1998. According to a senior SBA official, these changes are intended to help SBA administer the program more effectively. The proposed rules would introduce more detailed guidance and allow for less staff judgment, particularly for the standards that appeared to be associated with the inconsistencies in the annual review procedures in our review of 8(a) case files. For example, the proposed regulations define more specific thresholds for considering an individual’s personal assets and compensation, and whether a firm has exceeded size standards. However, the proposed regulations do not introduce more specific requirements relating to exceeding industry averages, and would increase staff flexibility to make judgments relating to excessive withdrawals. Furthermore, the proposed rule changes do not address under what circumstances or to what extent staff should verify firm- reported information with third-party sources. According to SBA, the proposed rules attempt to address areas where the current regulations needed more clarity to ensure consistency with SBA policy as well as areas where the current regulations may unreasonably restrict participants. For example, the proposed rule changes allow for flexibility in judgment regarding excessive withdrawals because SBA believes that it is important that SBA look at the totality of the circumstances in determining whether to include a specific amount as a withdrawal in an effort to prevent some firms from circumventing excessive withdrawal limitations. However, the lack of specific criteria in the current regulations and procedures reduces assurances that the BDSs are making consistent and objective determinations about 8(a) firms’ continued eligibility in the program. BDSs devote significant time and resources to complying with the statutory requirement to perform annual reviews on 100 percent of 8(a) firms, a fact that affects the time and resources they can devote to other 8(a) activities. Monitoring the firms’ continuing eligibility for the 8(a) program is just one of many responsibilities of the BDS. The BDS also has an advocacy role—maintaining an ongoing responsibility to assist the participant in developing the business to the fullest extent possible. This includes striving to increase both the dollar value and the percentage of 8(a) contracts through communication of procurement activities, training, and counseling. SBA guidance requires the BDS to be the primary provider in helping firms develop business plans, seek loans, and receive counseling on finances, marketing, and management practices. Officials in all five of the district offices we visited indicated that they met the 100 percent annual review goal for fiscal year 2008 but stated it was a time- and resource-intensive process. For example, district staff estimated that the annual review process consumed from about 40 to 70 percent of their time. BDSs in the district offices told us their individual portfolios ranged from about 30 to 140 firms, depending on their experience level. Three districts noted that BDS turnover resulted in newer staff initially taking more time to process reviews and having smaller portfolios while they were learning their job. One of the districts told us that all available staff in the district office, including staff not assigned to the 8(a) program, had to assist in completing and processing annual reviews in order to meet the review goal. District office staff also told us that they spent a significant amount of time and resources following up with 8(a) firms to have them submit required documentation such as tax and business financial information, which also slowed the review process. District offices indicated that firms that did not have contracts were especially prone to submitting documents late because annual reviews were not a priority for them. These delays, in turn, reduced the amount of time that the BDSs had to spend on firms that exhibited a high risk of misrepresentation or noncompliance with 8(a) eligibility requirements— monitoring necessary for effective program oversight. Furthermore, in our November 2008 report we noted that demands of the annual review process and resource constraints affected SBA’s ability to conduct other program activities. For this report, some districts noted that the annual review goal affected their ability to perform site visits; follow up on issues that warranted more attention, such as red flags identified in the prior year’s annual review; and conduct other core business development activities. For instance, the frequency of site visits varied in the five offices we visited. One district office told us that staff were able to conduct site visits for all firms, but another district conducted site visits for about half of its firms, and the remaining districts performed site visits on a limited basis, citing circumstances such as a firm transferring into the district or confirming that a firm was operating at a bona fide place of business. Another district stated that staff do not have time to follow up on red flags such as concerns identified in prior annual reviews because of the emphasis on meeting the annual review goal. Another district also told us that meeting the 100 percent annual review goal has limited the district’s ability to get out and educate agencies and firms. This included providing outreach and awareness training. Finally, another district told us the annual reviews have affected its ability to provide developmental assistance and services to address the 8(a) firm’s needs. The officials also stated that it was hard to develop working relationships with the firms because of the amount of work reports, projects, and other duties assigned. Although BDSs have been challenged to perform all their responsibilities, SBA has not yet assessed their workload to ensure they could carry out their responsibilities, as we recommended in our 2008 report. As we reported, SBA did recognize specifically that staffing constraints affected its ability to perform annual reviews. For example, according to its 2006 Performance and Accountability Report, a main contributing factor in the agency’s inability to complete annual reviews of all 8(a) firms was a lack of staff resources in the district offices. However, since our previous work in 2008, the emphasis on meeting annual review compliance requirements has strained staff capacity to conduct other core activities for the 8(a) program. By not assessing BDS workloads, SBA may be bypassing opportunities to better support the mission of the 8(a) program—that is, to develop and prepare small disadvantaged firms for procurement and other business opportunities. In addition, the lack of time to follow up on issues of concern identified in prior-year reviews also undermines SBA’s ability to carry out its monitoring responsibilities. On the basis of our file review, we observed instances in which firms were not compliant with 8(a) continuing eligibility requirements related to document submission, but remained in the program. Failure to submit documentation as required is the primary source of noncompliance in the 8(a) program, and is listed in the regulations as an example of good cause for termination. Our file review showed that business development staff frequently accepted incomplete, incorrect, and late documentation from firms and in many cases recommended the noncompliant firms for retention. Of the 123 firms we tested, 61 percent were noncompliant because of failures to submit documents as required, but staff recommended 3 percent for termination. According to the regulations and procedures, unless participants are also suspended in conjunction with termination proceedings, 8(a) firms remain eligible to receive program benefits and to compete for contracts during termination proceedings, a fact that affords them the opportunity for notice and an opportunity to appeal a termination decision. During interviews with district office staff, SBA officials acknowledged that some firms took more time than allowed to submit documents. One district office official stated that some firms did not take deadlines seriously and would delay the annual review process. District staff estimated that despite a 30-day deadline, most firms submitted documents within 30 to 45 days and in some cases, up to 60 days after their anniversary date. As mentioned earlier, our file review of 123 firms showed that 49 percent submitted late documentation. In one case, a firm failed to provide documents on time and SBA staff waited 4 months before recommending the firm for termination. After receiving the letter of intent to terminate, the firm took another 2 months to submit the requested documents. SBA then reinstated the firm after a total of 6 months’ delinquency. In another case, a firm failed to submit financial information, and business development staff sent the letter of intent to terminate shortly after the firm’s deadline passed. SBA waited another 6 months for the firm to submit the required documentation, which turned out to be incomplete, but upon receipt SBA chose to reinstate the firm. The next year, the firm submitted a personal financial statement identical to the previous year’s (including dates), but SBA did not take action. As previously discussed, the BDS’s role as an advocate for 8(a) firms may have contributed to a reluctance to terminate firms even if the BDSs had a basis for doing so. Staff in one district office explained they worked with firms before initiating the termination process, in an attempt to avoid termination and to achieve the program mission of preparing disadvantaged firms to compete in the market. Similarly, as noted in our companion report, SBA staff responsible for annually assessing the eligibility of participants were not actively looking for fraud and abuse in the program—and in some cases, staff supported firms despite eligibility concerns that we raised. Furthermore, our file review provides examples of reluctance to terminate noncompliant firms. An 8(a) firm sent an unsigned annual update form 3 months after its deadline. One month later, SBA recommended retention pending receipt of the firm’s remaining documents, such as the personal financial statement and tax returns required to demonstrate economic disadvantage. More than 2 months later, the firm provided partial financial documentation. Although SBA’s recommendation to retain the firm was based on expecting to eventually receive the firm’s remaining documents, these required documents still were outstanding at the time of our file review— which occurred approximately 1.5 years after the initial annual review deadline. As a result, it is unknown whether the firm was eligible to continue participating in the 8(a) program because SBA did not have the needed information to fully assess the financially disadvantaged status of the firm. We also have observed instances in which the BDS recommended termination but higher levels of management retained the noncompliant firms in the program. For example, one firm did not submit any annual review documentation and the BDS subsequently recommended it for termination. SBA headquarters disagreed with the determination and chose to retain the firm. However, there was no documentation in the file to explain the basis for this decision. In contrast to these cases, there has been an overall upward trend of firms exiting the 8(a) program through termination or voluntary withdrawal. According to headquarters officials, this trend is a result of the agency’s emphasis in recent years on fully meeting its statutory requirements to conduct annual reviews of all firms. By requesting the annual update from the firm in anticipation of completing the annual review, business development staff provide the firms an opportunity to demonstrate basic program compliance. Table 3 shows exit data trends over the past several years. The most recent data indicate a sharp increase in overall terminations and voluntary withdrawals from the 8(a) program. For example, from 2007 to 2008, the number of terminations increased more than threefold. Firms are given the option to withdraw from the program when faced with termination proceedings. SBA headquarters officials explained that some firms prefer a withdrawal instead of a termination on their record, and that the increase in annual reviews also increased this opportunity. Effective September 2009, SBA revised its 8(a) program procedures to shorten the termination process and improve internal controls. The procedural change shortens the termination process by 30 days to 135 days. While this falls short of the 75-day reduction SBA officials planned at the time of our November 2008 report, it may succeed in removing more ineligible firms from the program. It remains to be seen what effect this time reduction will have on termination as an eligibility control. To create the 30-day reduction in the termination procedure, SBA gave the district offices responsibility for sending letters of intent to terminate directly to the firms. Previously, district offices had to submit termination information to headquarters before an intent letter could be mailed. Because of this change, the district office primarily will be in charge of handling new documents the firm submits after receiving the intent letter. By giving the district offices direct responsibility for tracking documentation and communicating with the firm during this phase, SBA intends the process to be more streamlined and straightforward. While the new procedures reaffirm that firms may be terminated for good cause (as outlined in the program regulations), they provide no additional discussion of what factors or conditions would warrant termination. The 8(a) regulations to which the program procedures refer do provide examples of “good cause,” including a “pattern of failure” to make required submissions in a timely manner. However, they provide no examples or criteria for staff to use in determining what constitutes a pattern of failure. The lack of guidance may have contributed to staff decisions to retain or reinstate noncompliant firms. Issues such as data integration, compatibility, and functionality associated with SBA’s Business Development Management Information System (BDMIS) for the 8(a) program present challenges that affect effective program management. The agency has been planning to address some data integrity and compatibility issues with BDMIS and E-8(a), a database that provides business status and business contract activity for each participant in the 8(a) program. District office officials indicated that information discrepancies existed between the two systems and required dual data entry of some firm information. SBA officials stated they were reconciling the information in E-8(a) and BDMIS to address discrepancies. Additionally, the officials explained that some information had to be entered separately into the two systems but that they were moving toward a single data feed. The officials expected this change to occur by the end of the third quarter of fiscal year 2010. As of October 2008, BDMIS was operational in all district offices, allowing 8(a) participants to submit their annual review data electronically and the BDSs to review the documentation electronically. District staff identified benefits and challenges with the implementation of the online annual review process in BDMIS. For example, one district told us that learning the BDMIS system was challenging initially for some 8(a) participants and depended on participants’ skills and abilities to enter information into the system. Another district noted that a calculator that assesses a firm’s performance in its respective industry was a positive addition to the BDMIS system, allowing the BDS to move through reviews more quickly and efficiently. But the BDS still had to enter firm financial data manually into the calculator, a fact that could increase the likelihood for data entry errors. (The industry ratio calculations require the BDS to manually enter data into a template that calculates the ratio between the firm’s performance and that of industry.) For example, at one district we visited, we observed BDS staff manually entering industry performance ratios. District staff also told us that BDMIS’s functionality has been limited because the system did not allow staff to access complete firm information, such as contract and historical information, and develop reports. Some district offices also told us that the BDSs’ overall workload has not improved and that BDSs spend a significant amount of their time following up with 8(a) firms to submit relevant annual review documents. Despite these challenges, district staff with whom we spoke said BDMIS has been helping to achieve better organization and tracking and anticipated that when fully operational, it could save time and increase transparency. SBA officials also told us that they have been planning to upgrade BDMIS, which currently is operating in its first version. SBA expects to complete three upgrades by the end of the fiscal year 2010. As part of the upgrades, SBA plans to integrate an existing federal database, the Federal Procurement Data System-Next Generation, that contains contracting information that could help SBA staff to verify firms’ contracting information and enable district staff to run reports on their 8(a) firms. District staff told us they rely on the 8(a) firm and federal agencies to provide contract information that is used in the annual review to determine a firm’s ratio of 8(a) and non-8(a) contracts. As the firm matures, the goal for 8(a) firms is to increase the amount of non-8(a) contract work and decrease reliance on 8(a) contracts. However, one district explained that contract information such as contracts pending and awarded is recorded in E8(a) but the information is not complete because it does not contain obligation data. SBA’s planned system upgrades could improve the efficiency of annual reviews, particularly because they would likely address duplicative data entry, make more information readily available to staff, and decrease the amount of time spent on annual reviews. However, it is too early to tell whether these changes, once implemented and fully operational, would achieve their intended purposes. SBA did not maintain an accurate list of Mentor-Protégé Program participants. Specifically, the headquarters office has had difficulty verifying which firms actively participate in the program. An SBA headquarters official responsible for the program stated that staff added firms to a working list based on agreements once they were approved at headquarters. However, this list is not systematically updated when mentor-protégé agreements are extended or dissolved, which occurs at the district office level instead of at headquarters. While the list constituted the agency’s only central participation roster for the program, officials stated it was not meant to be used as an eligibility control. Most district offices that we visited kept their own lists, which occasionally were used to verify the headquarters list. One district office we visited did not compile a list of its mentor-protégé participants, but instead relied on individual program files and the list from headquarters for information. When we followed up with other district offices, we found contradictory or inconsistent data in comparison with those of headquarters. For example, the headquarters list showed two active mentor-protégé agreements for a district office that stated it had no active participants. Because there is no list of active mentor-protégé agreements, SBA may not be able to properly monitor 8(a) protégé firms that submit agreements with more than one mentor, or mentors that submit agreements with more than one 8(a) protégé. Currently, mentors may have more than one protégé if specially approved by SBA. At least 28 mentor firms appeared to have more than one protégé firm, but SBA was unable to confirm whether 5 of these mentors were authorized to do so. SBA has proposed new regulations that would limit mentor firms to a maximum of 3 protégé firms at a time. SBA also has proposed changes to the regulations that would allow protégé firms to have more than 1 mentor under limited circumstances. To date, the regulations have prohibited protégé firms from having more than one mentor at a time. However, we identified 12 protégé firms that appeared to have 2 mentors at the same time. SBA indicated that some of these relationships had been dissolved, but these firms remained on its list of approved mentor-protégé agreements. The current lack of data limits the agency’s ability to fully monitor the Mentor- Protégé Program. As a result, unauthorized partnerships could receive 8(a) set-aside contracts. Maintaining an accurate list of firms participating in SBA’s Mentor-Protégé Program is an important control mechanism to ensure participation only by eligible firms and that the agency has relevant and reliable information for management. Monitoring eligibility for the Mentor-Protégé Program is especially important because participants were more successful in earning proceeds from federal contracts in fiscal year 2008 than the larger pool of 8(a) firms. Mentor-protégé participants averaged $4.1 million in sales compared with $2.4 million for other 8(a) firms. As a group, these participants earned $638 million in fiscal year 2008. In addition to finding high-level data inconsistencies, including unverifiable participation lists and mentors and protégés with multiple agreements, we found cases in which SBA failed to properly document analysis and monitoring of the Mentor-Protégé Program. As part of our file review across five district offices, we tested 20 8(a) firms with mentor- protégé agreements. We focused on initial agreement information, annual updates, and recommendations. Our file review results showed that SBA staff failed to comply with certain initial review and annual review procedures for participants in 6 of the 20 mentor-protégé cases that we reviewed. These procedures include providing a written eligibility analysis and ensuring a signed supervisory review of the BDS’s recommendation. In our interviews with district office officials, we also found that Mentor- Protégé eligibility information had not been incorporated into BDMIS. District offices were not able to integrate initial approval recommendations and annual review monitoring with the firm’s general 8(a) eligibility information held electronically in BDMIS. As a result of the lack of documentation and the data limitations discussed above, SBA has not been able to properly oversee this program. SBA can receive information and complaints from other 8(a) firms, disgruntled 8(a) employees, and anonymous sources, but SBA does not maintain comprehensive data about complaints such as allegations that certain 8(a) firms may not comply with eligibility requirements. Although complaint information is not the primary mechanism for ensuring continuing program eligibility, it can be an additional tool for identifying fraud or wrongdoing. As we noted in our other GAO investigative report on the 8(a) program, detection and monitoring are crucial elements in a well-designed fraud prevention system. Complaints and other allegations regarding the eligibility of firms in the program can serve as red flags for SBA staff to take additional steps to ensure that firms continue to meet program requirements. District office officials told us that complaints received at the district receive an initial review (to determine if they warrant follow-up), which may include follow- up with other agencies and the specific firm to gather more information. SBA’s standard operating procedures instruct staff to refer to SBA’s Office of Inspector General (OIG) any possible criminal violations and other wrongdoing involving SBA programs, such as knowingly making or using a statement or document that is false, fictitious, or fraudulent. If warranted, complaints are to be referred to SBA’s OIG for possible investigation. One district told us that the district counsel reviews the evidence, and if the case has merit, the information is referred to the SBA OIG for further investigation. Two other districts told us the BDS will seek more information by checking with the contracting agency involved regarding the nature of the complaint or contacting the 8(a) firm for clarification before making a referral to OIG. However, because district staff do not collect and maintain comprehensive complaint information involving 8(a) firms, staff are not aware of the types and frequency of complaints across the agency, including potential eligibility concerns. Specifically, none of the five districts that we visited were able to provide us with a list of complaints or allegations that they received over the past year regarding the potential ineligibility of 8(a) firms in their districts. While OIG maintains general complaint information such as the name of the 8(a) firm and type of complaint, a senior OIG official told us that 8(a) complaints involving a single company generally did not rank high in priority for a review because of resource limitations and other priorities but that it might be considered in the OIG’s work- planning effort. OIG officials explained that the OIG ultimately also could refer a case to the U.S. Attorney for prosecution, but that the threshold for prosecutions was high and many cases did not meet that threshold. As a result, it appears that complaint data involving 8(a) firms are not being utilized to the full extent as a means to identify potential areas of concern such as program eligibility issues. Without a standard process for collecting and analyzing complaints, SBA staff—and the agency as a whole—lack information that could be used to help identify issues relating to program integrity and help improve the effectiveness of SBA oversight. SBA’s 8(a) program provides opportunities for participating firms to collectively receive billions of dollars in federal contracts on a competitive or noncompetitive basis. As a result, it is critical that SBA’s annual reviews of 8(a) firms are performed effectively to help ensure that only eligible firms are allowed to continue to participate in and benefit from the program. However, our file review at five district offices found inconsistencies in the annual review policies and procedures followed by SBA staff related to program eligibility. This suggests a need for greater monitoring by SBA and potentially a need for more guidance and training to ensure greater consistency in the performance of required annual review procedures. Furthermore, the lack of specific criteria in the current regulations related to eligibility determinants such as size standards and industry averages and the dual roles of the BDSs—providing oversight and being an advocate for the firm—may have contributed to the variation in annual review practices we observed. By clarifying guidance, further detailing or expanding procedures, and emphasizing the importance of quality controls, SBA could help eliminate ambiguities, improve the quality of reviews, and provide clearer criteria against which to judge eligibility and ensure that only intended recipients benefit from program participation. Workload constraints of BDS staff may have been a contributing factor to the inconsistencies and deficiencies identified in our review of annual review files in the five districts that we visited. While the annual review process is central to ensuring program integrity, SBA’s statutory requirement to conduct annual reviews of 100 percent of 8(a) firms also is time- and resource-intensive. The workload demands associated with the annual review process likely have affected the quality of these reviews as well as detracted from the time staff have been able to devote to other core 8(a) program responsibilities, ranging from technical assistance to mentoring. As we previously recommended and continue to believe, an assessment of the BDS workload could help ensure the BDSs can carry out their responsibilities and determine what mechanisms can be used to prioritize or redistribute their workload. Such an assessment also would be helpful in assessing the multiple roles and responsibilities of BDS staff, including ways to mitigate the conflicting roles of business development, and ensuring that only eligible firms are allowed to participate in the program. In a fiscally challenged environment and with workload constraints as a constant, it is important that the agency review staff and resource allocations and identify process efficiencies wherever possible. Changes that SBA recently made to termination procedures, coupled with the increase in terminations overall, may help to alleviate workload constraints for district office staff. As we noted in our November 2008 report, the inefficient termination process consumed scarce SBA resources and may have affected business development activities. District staff could take advantage of the revised, more efficient termination process to minimize time spent waiting for documents from firms and free up time for business development and other activities. However, SBA retained some firms that repeatedly did not submit required documentation for annual reviews. By monitoring the implementation of regulations relating to documentation requirements, SBA could help staff more readily identify firms for termination, reduce the time staff spent “chasing” documentation, and help improve the timeliness of annual reviews. Additionally, by providing specific examples in the regulations or procedures of what is considered to be a pattern of failure, staff would be able to better justify termination decisions. The agency also faces a number of challenges in effectively monitoring and managing the Mentor-Protégé Program, which is an important subset of the 8(a) program. For example, SBA headquarters and district offices could not agree or provide current and basic information on the total number of mentor-protégé agreements. Maintaining accurate information on participants is a basic and important control mechanism to monitor 8(a) protégé firms that submit agreements with more than one mentor, or mentors that submit agreements with more than one 8(a) protégé. By developing a centralized process to collect and maintain information on program participants, SBA would have a critical tool necessary to properly monitor and oversee the program. Finally, SBA also has an opportunity to develop another tool that could enhance its oversight of the 8(a) program. Currently, SBA lacks comprehensive data on complaints involving 8(a) firms because it does not systematically collect and analyze information on the nature of the complaints and their disposition. Although complaint data are not a primary mechanism to ensure program eligibility, continual monitoring is a key component in detecting and deterring fraud. By developing an agencywide process for documenting and analyzing complaints, SBA would have an information resource that could be used with other efforts to provide reasonable assurance that only eligible firms are participating in the program. To improve the monitoring of and procedures used in assessing the continuing eligibility of firms to participate in and benefit from the 8(a) program, we recommend that the Administrator of SBA take the following six actions: To help ensure greater consistency in carrying out annual review procedures and improve the overall quality of these reviews, we recommend that the SBA Administrator monitor, and provide additional guidance and training to, district offices on the procedures used to determine continuing eligibility, including taking appropriate action when firms exceed four of seven industry size averages, including notifying firms the first year and enforcing procedures relating to early graduation of firms that exceed industry averages for 2 consecutive years; obtaining appropriate supervisory signatures to finalize annual review submitting remedial action or a waiver for firms in the transition phase that did not meet business activity targets; graduating firms that exceed the net worth threshold of $750,000; performing timely eligibility reviews in required cases; and completing required annual reviews. To help reduce inconsistencies between districts and BDS staff in annual review procedures requiring judgment, we recommend that SBA review its existing 8(a) program regulations and its proposed changes with the intent of providing additional criteria and examples for staff when assessing key areas of program eligibility and determining whether a firm should be graduated from the program when it exceeds size standards, industry averages (such as total assets, net sales, working capital, or pretax profit), and limits for personal compensation and assets, and excessive withdrawals. To help address competing demands on 8(a) resources, SBA should assess the workload of business development specialists to ensure that they can carry out all their responsibilities. As part of this assessment, SBA should review the roles and responsibilities of the BDSs to minimize or mitigate to the extent possible the potentially conflicting roles of advocacy for firms in the program with the responsibility of ensuring that only eligible firms are allowed to continue to participate in the program. In addition, SBA should review the size of the 8(a) portfolio for all business development specialists and, if necessary, determine what mechanisms should be used to prioritize or redistribute their workload. To reduce the practice of retaining firms that fail to submit annual review documentation as required, SBA should monitor the implementation of regulations relating to termination to see if they are achieving their purpose or whether business development staff need further guidance in interpreting the regulations. SBA should consider providing specific examples of what might be considered a pattern of failure to submit documentation as required. To better manage and monitor participation in the Mentor-Protégé Program, including compliance with the number of allowable mentor and protégé firms, SBA should develop a centralized process to collect and maintain up-to-date and accurate data on 8(a) firms participating in the Mentor-Protégé Program. SBA should consider incorporating information on Mentor-Protégé approvals, extensions, and dissolutions in existing electronic data systems used for the annual review process. To more fully utilize and leverage third-party complaints to identify potentially ineligible firms participating in the 8(a) program, design and implement a standard process for documenting and analyzing complaint data. We requested SBA’s comments on a draft of this report, and SBA’s Associate Administrator of the Office of Government Contracting and Business Development provided written comments that are presented in appendix II. SBA agreed with each of the six recommendations and stated that some corrective measures have already been implemented and additional actions are planned to be implemented in the near future. For example, SBA stated it has implemented a comprehensive training curriculum, revised guidance for annual review procedures, and will provide additional examples that will assist staff in assessing key areas in making annual review determinations. SBA also indicated that it had begun to develop a routine centralized process to collect and maintain accurate data related to the Mentor-Protégé Program. Finally, SBA stated that it plans to assess BDS workload and develop a central repository for third-party complaints. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to other interested congressional committees and the Administrator of the Small Business Administration. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your office 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. Key contributors to this report are listed in appendix III. Our objectives were to (1) evaluate the procedures and processes that the Small Business Administration (SBA) has implemented to ensure that only eligible firms remain in the 8(a) program, and (2) assess the extent to which SBA used external mechanisms, such as complaints by other 8(a) firms, to help ensure that only eligible firms participate in the program. To evaluate the procedures and processes that SBA has implemented to help to ensure that only eligible firms participate in the 8(a) program, we reviewed applicable statutes and the legislative history of the 8(a) program, SBA’s regulations and guidance for administering the program, our previous reports, and studies of the program conducted by SBA, SBA’s Office of Inspector General (OIG), and external organizations. Additionally, we randomly sampled files for review at 5 selected district offices to assess SBA’s compliance with its eligibility review procedures for the 8(a) and Mentor-Protégé programs. We selected the 5 district offices based on the high dollar value of contract obligations in these districts and geographic diversity. Our sample population included firms that were active in the 8(a) program in fiscal year 2008 and had 8(a) contracts in fiscal year 2008. We identified these firms by using SBA’s list of active fiscal year 2008 8(a) firms and matching these data to the Federal Procurement Data System-Next Generation (FPDS-NG) to determine which of those firms had obligations. For our review, we excluded those firms that joined the program during calendar year 2008, because these firms would not yet have been in the program long enough to have an annual review on file. We also excluded Alaska Native Corporations, tribally owned, Native Hawaiian Organization-owned, other Native American-owned, and Community Development Corporation-owned firms because of the different 8(a) eligibility requirements applied to these entities. The results of our sample are generalizable only to the 5 district offices. We randomly sampled 123 8(a) firms from our population, and an additional 13 8(a) firms that had mentor-protégé agreements, which we judgmentally selected from SBA’s list of Mentor-Protégé firms as of September 2009. For each firm, we reviewed its most recent 2 years of annual reviews for the period 2007-2009, and any existing mentor-protégé agreements, related documents, and correspondence. We developed a data collection instrument (DCI) to collect key annual review data from each file. The DCI was pretested in 2 district offices and modified based on these tests. We also analyzed mentor- protégé data to identify protégé firms that may have multiple mentors, which are against regulation, and mentor firms that may have multiple protégés, which is allowable only when specially authorized by SBA. To identify these cases, we sorted the data by firm name and searched for duplicate matches. A total of 672 firms met our study criteria and are shown in table 4. We randomly selected the indicated number of cases within each regional office. We treated this as a stratified random sample and weighted the sample cases accordingly for our analysis. Our estimates are statistically representative for all files maintained in these 5 SBA regional offices. Because we treated our file review as a stratified random sample, we assumed our sample was only one of a large number that could have been drawn. Because each sample could have provided different estimates, we expressed our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. As a result, we are 95 percent confident that each of the confidence intervals based on the file review includes the true values in the sample population. The 95 percent confidence intervals for each of the estimates are summarized in table 5. We performed appropriate data reliability procedures for our sample testing at the 5 district offices and analysis of inappropriate mentor- protégé relationships. We compared SBA data with data from other sources such as FPDS-NG and the Central Contractor Registry, performed electronic testing, reviewed related documentation and internal controls, and performed interviews with knowledgeable agency officials. We determined that the data were sufficient to perform our sample testing and project our results to the 5 district offices in our population of 8(a) firms. We also determined through these methods that data relating to mentor- protégé participants were sufficient to report on descriptive statistics of mentor-protégé firms with contracts. The discrepancies we found in the general list of mentor-protégé participants are documented within the report. To assess the extent that external mechanisms exist, such as complaints by other 8(a) firms, to help ensure that only eligible firms participate, we interviewed agency and SBA Office of Inspector General officials, and we reviewed SBA OIG complaint data. We also interviewed officials in SBA’s Office of Business Development, Division of Program Certification and Eligibility, and district office staff to discuss their procedures for determining initial and continuing eligibility, oversight efforts, technical assistance offered, and mechanisms to help identify ineligible firms in the program. We conducted our work in Boston, Massachusetts; Denver, Colorado; San Antonio, Texas; San Francisco, California; and Washington, D.C., between May 2009 and March 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Harry Medina (Assistant Director), Carl Barden, Tania Calhoun, Janet Fong, Cindy Gilbert, Julia Kennon, Amy Moran Lowe, Barbara Roesmann, Verginie Tarpinian, and William Woods made key contributions to this report. | The Small Business Administration's (SBA) 8(a) program helps eligible socially and economically disadvantaged small businesses compete in the economy by providing business development activities, such as counseling and technical assistance, and providing opportunities to obtain federal contracts on a set-aside basis. GAO was asked to review SBA's internal control procedures for determining 8(a) eligibility. Specifically, we (1) evaluated the procedures and processes that SBA has implemented to ensure that only eligible firms participate in the 8(a) program, and (2) assessed the extent to which SBA uses external mechanisms such as complaint information in helping to ensure that only eligible firms participate. To address these objectives, GAO reviewed SBA guidance and prior reports, interviewed SBA officials, and conducted site visits and file reviews of 123 randomly sampled 8(a) firms covering the most recent 2 years of annual reviews at five SBA locations. SBA relies primarily on its annual review of 8(a) firms to ensure their continued eligibility in the program, but inconsistencies and weaknesses in annual review procedures limit program oversight. GAO's review of a random sample of 8(a) firms identified an estimated 55 percent in which SBA staff failed to complete required annual review procedures intended to assess fundamental eligibility criteria, such as being economically disadvantaged. Multiple factors appear to have contributed to the inconsistencies identified, including the lack of specific criteria in SBA's current regulations and procedures that relate to some eligibility requirements such as determining whether firms exceed program thresholds for industry size averages, personal compensation, and personal asset limits. As a result, firms that may have outgrown the program continued to receive 8(a) program benefits. For example, GAO estimated that 17 percent of the firms we reviewed had exceeded one or more eligibility criteria for 2 consecutive years, but were recommended by SBA for retention. SBA has taken steps to clarify some, but not all, of these rules in recent proposed rule changes. SBA is required by statute to perform annual reviews on 100 percent of 8(a) firms but staff spent significant amounts of time trying to obtain annual review documents from firms--especially firms that did not have 8(a) contracts--which affected the timeliness of reviews. GAO identified a significant number of instances in which firms failed to submit annual review documents as required but still were recommended for retention. The Business Development Specialists' (BDS) dual role of advocacy for and monitoring of the firms may have contributed in part to the retention of ineligible firms. SBA has been addressing some data integrity and compatibility issues by enhancing its primary electronic system for annual review information. Finally, SBA did not maintain an accurate inventory of 8(a) Mentor-Prot?g? Program participant data, which limited the agency's ability to monitor these firms. SBA's program offices did not maintain comprehensive data on or have a system in place to track complaints on the eligibility of firms participating in the 8(a) program. District staff were not aware of the types and frequency of complaints across the agency. As a result, SBA staff lacked information that could be used with other information to help identify issues relating to program integrity and help improve the effectiveness of SBA oversight. Although complaint data are not a primary mechanism to ensure program eligibility, continuous monitoring is a key component in detecting and deterring fraud. |
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Clinical contracts at VA are used to acquire the services of clinical personnel, such as physicians, pharmacists, and nurses. These contracts can be used to fill vacancies for clinicians in specialties that are difficult to recruit, supplement existing VAMC capacity by providing additional clinicians in high-volume areas where VA also manages a staff of its own employees, or fill critical staffing vacancies on a long- or short-term basis. Clinical contracting at VA is governed by two sets of regulations—the FAR and VAAR—that contain general requirements for all VA acquisitions. The FAR contains government-wide regulations and establishes uniform policies and procedures used by all executive branch federal agencies for their acquisitions. VA supplements the FAR with the VAAR to establish uniform policies and procedures for all VA acquisitions of supplies and services. In addition to the VAAR, VA provides guidance to its acquisition workforce in the form of policy directives and handbooks. Both acquisition and clinical staff at VA work together to plan, execute, and monitor clinical contracts at VA. On the acquisition side, COs are responsible for planning, awarding, and administering contracts on behalf of the federal government. Each CO is able to obligate federal funds up to a specified limit and a CO must formally approve all clinical contracts at VA. Common tasks of a CO include developing acquisition planning documents used to begin a clinical contract, conducting market research to determine pricing and availability for a clinical contract, and completing the formal competitive or non-competitive solicitation process for contracts. Each CO works within a network contracting office and is overseen by managers within that office who report directly to VA Central Office. There are 21 network contracting offices throughout VA’s health care system that manage all the contracting activities of a single VISN. Two types of VAMC staff have monitoring responsibilities for clinical contracts—CORs and medical directors. For each VA clinical contract, the CO responsible for the contract designates a COR at the VAMC to help develop the clinical contract and monitor the contract provider’s performance once the provider begins work. Common tasks delegated to the COR include providing input on the performance requirements for the clinical contract, determining how the contract provider’s performance will be measured and monitoring performance once work has begun, validating the contract provider’s invoices to ensure their accuracy, managing contract modifications, and assisting the CO in resolving any issues that may arise with the contract provider. At VA, CORs are commonly administrative personnel responsible for managing the operations of a specialty care line at a VAMC—such as primary care, surgery, etc.—where the contractor will be working. Medical directors in various specialty care lines often assist CORs in monitoring contract provider performance because CORs lack the expertise to evaluate a contract provider’s clinical abilities. Medical directors are responsible for overseeing the clinical care provided by all providers within a specialty care line, including VA-employed and contract clinicians. Medical directors use existing VA processes, including the credentialing and privileging process, to monitor contract providers. This clinical monitoring includes an initial assessment of the clinician’s competency during the first 90 days after the contract provider begins working at a VA facility and typically includes evaluations in several areas—such as patient care, clinical knowledge, and interpersonal communication skills. Upon successful completion of the initial competency evaluation, medical directors monitor contract providers through ongoing evaluations of their performance according to the specific performance standards used to evaluate all clinicians working at VA within their specialty. Medical directors provide the results of these initial and ongoing evaluations to the COR and work with the COR to resolve any issues that may arise as a result of a contract provider’s clinical performance. CORs are responsible for maintaining the official record of the contract provider’s performance and providing official performance assessments to the CO. VA Central Office has primary responsibility for overseeing network contracting offices and manages clinical contracting activities through the VHA Procurement and Logistics Office. There are five primary offices within the VHA Procurement and Logistics Office that are responsible for overseeing various aspects of clinical contracting activities and report to VHA’s Deputy Chief Procurement Officer. (See fig. 1.) Medical Sharing Office. The Medical Sharing Office is responsible for providing guidance to network contracting offices regarding the content and structure of solicitations for clinical contracts and for reviewing several types of clinical contracts. The Medical Sharing Office reviews solicitations of all competitive clinical contracts valued at over $1.5 million, all non-competitive clinical contracts valued at over $500,000, and all organ transplant contracts. All Medical Sharing Office reviews are conducted before a solicitation is issued to ensure that all the necessary provisions are in place prior to any competition or award. Procurement Operations Office. The Procurement Operations Office is responsible for providing ongoing guidance and monitoring of the COR population at VA. The Procurement Operations Office conducts reviews of COR files and publishes a COR newsletter. Procurement Audit Office. The Procurement Audit Office is responsible for ensuring compliance with VA policies and procedures related to contracting. This office conducts internal compliance audits of contracts, including clinical contracts, once they are executed to ensure that all required documentation was included in the final contract and audits the activities of network contracting offices and SAOs to ensure their compliance with VA policies and regulations. Procurement Policy Office. The Procurement Policy Office is responsible for providing guidance to VA’s acquisition workforce in network contracting offices and SAOs. This office produces and updates standard operating procedures for CORs and COs. Service Area Offices. SAOs are the regional contract management entities created to oversee the activities of the 21 network contracting offices and the COs and supervisors that work within them. VHA created three SAOs—East, West, and Central—to manage the contracting activities of six to eight VISNs each. SAOs review solicitations for most clinical contracts during their initial stages to ensure that all necessary provisions are in place prior to any competition or award. We found that all 12 contracts we reviewed from the four VAMCs we visited contained performance requirements consistent with VA acquisition policy. However, we found that 10 of the 12 contracts we reviewed lacked detailed descriptions of contractors’ performance requirements in one or more of the six categories we assessed. We analyzed the content of these contracts using six performance requirement categories we established through reviews of the VAAR, VA policies, and the standards of the leading hospital accreditation organization. (See fig. 2) We also found that the level of detail in contract performance requirements contained in the 12 contracts we reviewed varied both by the type of contract—CBOC contract, specialty care contract, or temporary clinical provider contract—and by the six performance requirement categories we assessed. (See table 1.) The CBOC contracts we reviewed were the most detailed, followed by specialty care contracts and temporary clinical provider contracts. CBOC contracts. Contracts for CBOCs generally contained the most detailed performance requirements. For example, all four of the CBOC contracts we reviewed had complete performance requirements for three of the six applicable categories—the type of provider or care, clinical practice standards, and medical record documentation. However, two of the four CBOC contracts—at the Minneapolis and Seattle VAMCs— lacked detail in one or more of the performance requirement categories we reviewed. For example, the Seattle VAMC CBOC contract was the only CBOC contract we reviewed that did not include a required set of operating hours for the contracted facility, which was a component we assessed within the access to care category. Specialty care contracts. The amount of detail in performance requirements within specialty care contracts varied across our four selected VAMCs. Overall, performance requirements in these contracts lacked specificity in key categories. For example, two of our selected specialty care contracts—for the Seattle and Minneapolis VAMCs—were for the services of cardiothoracic surgeons and had very similar results in our review, except for their descriptions of performance requirements within the clinical practice standards category. For this category, the Seattle VAMC cardiothoracic contract had detailed performance requirements, but the Minneapolis VAMC cardiothoracic contract did not contain a statement describing the provider’s responsibilities for the reporting of and response to adverse events and patient complaints, a component we assessed within the clinical practice standards category.In addition, the Nashville VAMC specialty care contract for the services of a psychiatrist had limited detail because it did not contain requirements for the clinical contractor’s privileges to be renewed at the beginning of each new contract term, and received a partial rating in the medical record documentation category because the contract did not contain performance requirements for the timely entry of information into VA’s electronic medical record. Temporary clinical provider contracts. We found that temporary clinical provider contracts included the least detailed performance requirements among the three contract types we reviewed. For example, the Lebanon VAMC temporary clinical provider contract for a gynecologist was missing descriptions of requirements for providers to undergo VA’s credentialing and privileging process, comply with The Joint Commission requirements that apply to gynecology, and enter relevant data into veterans’ electronic medical records. These specific requirements are components of three separate categories we reviewed—credentialing and privileging, clinical practice standards, and medical record documentation. In addition, the Seattle VAMC temporary clinical provider contract for a pharmacist was missing information on contractor requirements related to both the clinical practice standards and medical record documentation categories. According to VA officials, temporary clinical provider contracts are often written using a format that is designed to allow for shorter and faster contract award timeframes; however, this shorter format likely contributed to less complete performance requirement statements in the contracts we reviewed. We also found the level of detail in contract performance requirements varied significantly by performance requirement category, with a majority of reviewed contracts missing some component of the credentialing and privileging performance requirement category. Credentialing and privileging. This category included a review of three specific components of performance requirements: (1) requirements for all contract providers to initially undergo VA’s credentialing and privileging process; (2) the use of VA’s electronic credentialing system for that In our process; and (3) requirements for the renewal of privileges.review, we found that 10 of the 12 contracts were missing performance requirements from one or more of these three components. Six of the 10 contracts did not contain statements describing the rules for renewal of privileges, which is part of the credentialing and privileging process at VA. Privileges are required to be renewed every 2 years by VA policy. The term of a contract provider’s privileges may not extend beyond the term of the contract regardless of whether the VAMC intends to renew or extend the contract; this means that privileges need to be renewed more often than every 2 years for contract providers depending on the length of the contract. In addition, 5 of the 10 contracts did not contain statements requiring the use of VA’s electronic credentialing system for the credentialing process. Type of provider or care. This performance requirement category had three components: (1) provider licensure requirements, (2) a description of the specialty area care was contracted for, and (3) a listing of key personnel providing services under the contract. contracts we reviewed included detailed performance requirements in this category, with the exception of the Lebanon VAMC temporary clinical provider contract, which did not include the name of the gynecologist selected for the contract or rules for the substitution of another provider if needed. Business processes. This performance requirement category contained three components: (1) invoicing policies; (2) on- and off-duty hours and time card submission; and (3) personnel security responsibilities, such as background checks. Eleven of the 12 contracts included detailed performance requirements in this category, with the exception of the Seattle VAMC CBOC contract, which did not list on- and off-duty hours for staff, but included all other business process components. See Department of Veterans Affairs, Health Care Resources Contracting—Buying, Title 38 U.S.C. 8153, VA Directive 1663 (Aug. 10, 2006). Directive 1663 states that contracts for full-time providers must identify the key personnel proposed to provide the service and their qualifications. standard templates for clinical contracts. VA Central Office officials with whom we spoke said that there is a template for CBOC contracts that has been distributed among contracting officials and that templates for six common specialty care contracts, including cardiology and anesthesiology, are currently in development as of August 2013, and that VA’s progress in developing and implementing these templates is dependent upon VA Central Office and the VA OIG agreeing on the six specialties that will have templates developed. Absent available tools, such as standard templates for common types of contracts—including those for CBOCs, specialty care, and temporary clinical providers—VA cannot reasonably ensure that critical requirements for contract providers’ performance are consistently included in VA clinical contracts and are standardized across VAMCs. Without assurance that these critical performance requirements are included in clinical contracts, VA may not be able to hold clinical contractors accountable for providing the high-quality services VAMCs need to serve veterans. Two of the 12 clinical contracts we reviewed did not include any performance standards and 7 contracts did not include performance standards in key categories. Additionally, the performance standards included within the 12 clinical contracts we reviewed were not always stated clearly and did not always include measurable targets. We found that VA did not provide guidance to COs and CORs on how to develop performance standards that are clear and measurable for determining whether or not clinical contractors met the acceptable quality levels defined in selected contracts. The FAR requires agencies to ensure that requirements for services are clearly defined and appropriate performance standards are developed so that the agency’s requirements can be understood by potential offerors and that performance in accordance with contract terms and conditions In addition, agencies, in order to will meet the agency’s requirements.successfully measure the performance of their operations, use performance standards that demonstrate results, are limited to a vital few activities, and provide useful information for decision-making. To determine whether performance standards used by agencies meet these qualities, we previously found that performance standards should have several attributes—including being clearly stated and using measurable targets. We assessed each of the 12 selected contracts from the four VAMCs we visited to determine if the performance standards for five of the six categories we previously identified included these two attributes of successful performance standards. Performance standards were not clearly stated. Two of the 12 clinical contracts we reviewed—the Lebanon VAMC CBOC and temporary clinical provider contracts—did not include any monitoring plan provisions defining the performance standards against which the VAMC would assess the contractor’s performance. Performance standards included in the monitoring plans of the remaining 10 clinical contracts we reviewed lacked clarity in what would be used to determine a clinical contractor’s performance. For example, the Nashville VAMC CBOC contract includes a performance standard in the clinical practice standards category that requires the contractor to meet a specific target for three of four outpatient satisfaction survey scores. However, VA’s outpatient satisfaction survey includes significantly more than four elements and the contract’s performance standard does not clearly specify which four survey elements will be used for this analysis. In another instance, the Seattle VAMC temporary clinical provider contract includes a performance standard for prescription dispensing that includes multiple standards that cover numerous tasks related to prescription processing and validation in inpatient and outpatient settings. By including multiple parts in a single performance standard, it is unclear what the COR will actually be measuring to determine the clinical contractor’s performance in this area. As table 2 shows, none of the 12 contracts we assessed included clearly stated performance standards in all five categories. It is important to ensure that performance standards included in clinical contracts are clearly stated to minimize confusion during the monitoring of clinical contractors’ performance. Without clearly articulated performance standards, COs and CORs may not be able to effectively assess the performance of clinical contractors and VA may not be able to hold contractors accountable for poor performance. Performance standards did not include measurable targets. We found that there were no categories that included fully measurable performance standards in the 12 contracts we assessed. As previously noted, 2 of the 12 contracts—the Lebanon VAMC CBOC and temporary clinical provider contracts—did not include any monitoring plan provisions defining the performance standards against which the VAMC would assess the contractor’s performance. Of the remaining 10 contracts with monitoring plans, only 1 contract—the Lebanon VAMC specialty contract—included fully measurable performance standards in all categories, and the other 9 contracts either did not include performance standards for a critical category or had performance standards that were only partially measurable in at least one category. (See table 3.) For example, the Nashville VAMC temporary clinical provider contract included a performance standard in the clinical practice standards category that stated that the contractor should have no more than two patient or staff complaints. However, this contract did not define how frequently this target would be measured and therefore it is not possible to determine whether this threshold applies to complaints on a monthly, quarterly, or annual basis. This limited information on how often the complaints would be reviewed and measured for the clinical contractor makes it difficult to determine what a successful performance outcome would be. In another instance, the Minneapolis VAMC specialty contract includes several performance standards in the credentialing and privileging category that indicate the clinical contractor is responsible for maintaining medical and clinical knowledge and engaging in practiced- based learning. However, this contract does not include information on how the clinical contractor’s performance in these areas would be assessed and does not specify a clear numerical target for determining whether or not these standards have been fulfilled. Finally, the Nashville VAMC specialty contract includes a performance standard in the medical record documentation category that states the clinical contractor should maintain documentation in VA’s electronic medical record system of 95 percent, but does not include a description of how the COR would assess compliance with this performance standard. It is important to ensure that the performance standards included in clinical contracts be measurable in order to allow COs and CORs to confidently and effectively measure contractors’ performance. VA has not provided detailed guidance to COs and CORs on how to develop performance standards that allow CORs to conduct meaningful performance monitoring. VA requires that each contract contain appropriate quality assurance standards—including a detailed description of the monitoring procedures that the CO and COR will use to evaluate the performance of clinical contractors and data collection that will be performed. However, this guidance does not include any information on what type of performance standards should be included in a clinical contract, does not include examples of effective performance standards, and does not define the elements of successful performance standards. Without ensuring that COs and CORs have access to detailed guidance on how to construct meaningful performance standards that are both clearly stated and measurable, VA cannot ensure that all clinical contractors will be monitored appropriately or that these performance assessments will be based on the most appropriate measurement of the care they provided to veterans in VA facilities. During our review of 12 clinical contracts at four VAMCs, CORs reported two challenges that may compromise VA’s monitoring of contractors’ performance—the heavy workload associated with the COR position and the lack of adequate training for CORs. CORs at the four VAMCs we visited consistently reported facing significant challenges in effectively carrying out their COR responsibilities for monitoring clinical contractors. Most CORs at the four VAMCs we visited reported that they had other primary duties—including managing staff—that required them to approach their COR responsibilities as a collateral duty. This workload challenge may have led to CORs being unable to effectively monitor clinical contractors. Current VA guidance requires VAMCs to provide CORs with the time to complete their responsibilities and ensure that contract compliance is managed by a knowledgeable COR. Specifically, VA’s standard operating procedure for CORs requires VAMCs to provide CORs with the time and resources necessary to complete required training and fulfill their duties as a COR. Further, the policy governing clinical contracting at VA states that the COR is responsible for ensuring contract compliance and specifies that the COR must have sufficient knowledge of the operation of In addition, the facility and the specific specialty requesting the contract.to monitor clinical contracts effectively CORs are required to perform a number of key functions according to VA’s standard operating procedure for CORs. This guidance requires CORs to submit documentation to the CO and carry out a number of responsibilities as part of their monitoring efforts. (See table 4.) The CORs responsible for monitoring clinical contracts at the VAMCs we visited were often serving in this role as a collateral duty and most had other primary duties that limited their ability to monitor clinical contracts. Thirty-seven of the 40 CORs (93 percent) that completed our data collection instrument, administered to all CORs with responsibility for clinical contracts at the four VAMCs we visited, stated that the COR position is a collateral duty to their primary position. Many of these CORs’ primary positions require them to manage staff, maintain budgets, and oversee other clinical providers. (See table 5.) Based on the results from our data collection instrument administered to 40 CORs at the four VAMCs we visited, we found that the average COR spends about one-quarter of his or her time monitoring approximately 12 contracts, according to estimates provided by CORs; however, some of these CORs were responsible for overseeing significantly more contracts. For example, we found that 6 of these 40 CORs managed nearly 190 of the 452 (41 percent) contracts in place at the four VAMCs we visited and told us they estimated spending at most 30 percent of their work time to their COR duties. These 6 CORs were each managing about 20 more contracts than the average, in our group of 40 CORs completing the data collection instrument, in less time and all 6 of these CORs had other more time-consuming primary duties, such as serving as an administrative officer for a clinical specialty or as a program manager. In addition to CORs who responded to our data collection instrument, during our review of the 12 contracts for various clinical services in the four VAMCs we visited, we found that the CORs responsible for managing these contracts frequently did not have the time to effectively monitor the performance of contract providers. The majority of these CORs said that one of their greatest challenges is not having adequate time to fulfill their COR duties and responsibilities and that the demands of their primary positions prevented them from fully monitoring clinical contractors’ performance. Specifically, CORs for 8 of the 12 contracts reported that the demands of their primary positions have at times prevented them from fully monitoring contract providers’ performance. In addition, CORs for 6 of these 12 contracts stated that they could not complete certain elements of their COR responsibilities due to limited time and resources. For example, one COR stated that she did not adequately monitor costs for the 50 contracts she managed because the duties of her primary position demanded significant portions of her work day and caused frequent interruptions that did not allow her to focus on her duties as a COR. Another COR noted that she only had time to monitor contract issues that were a cause for concern or needed to be addressed immediately. As a result of this time pressure and the demands of their primary positions, CORs reported they did not complete several key monitoring functions, including: (1) submitting required reports, such as quarterly quality assurance reports; (2) documenting contract provider performance issues for annual evaluations; and (3) monitoring contract expenditures. CORs managing 5 of our 12 selected contracts reported that to help address challenges presented by time constraints and the demands of their primary positions, they often worked extended hours in order to complete at least some of their COR duties and manage their day-to-day responsibilities. For example, one COR responsible for managing 1 of our selected contracts, along with 49 other contracts, said that she worked after hours to devote a block of time to her COR work that she could not devote during the normal work day due to the responsibilities of her primary position. In addition, a few CORs also stated that they believe COR duties should be a separate, stand-alone, full-time position rather than a collateral duty to ensure that the monitoring of clinical contractors and other COR duties receives full attention. COs responsible for managing the 12 selected contracts echoed what CORs told us about the heavy workloads and monitoring challenges CORs face. However, none of the COs responsible for the 12 contracts we reviewed directly participate in the monitoring of contract providers’ performance, and all have delegated this responsibility directly to the COR for each clinical contract. Most of the 10 COs responsible for our 12 selected clinical contracts told us that they also rely on the CORs to identify performance issues with contract providers. The majority of these COs recognized that CORs face competing demands and heavy workloads that may prevent them from effectively monitoring contract providers’ performance. Specifically, 7 of the 10 COs responsible for the 12 selected contracts in our review reported that primary position duties and COR duties combined resulted in heavy workloads for CORs. As a result, these COs noted that CORs often do not have enough time to devote to their COR duties. Half of the COs responsible for the 12 selected contracts expressed that the COR responsibility should be a full- time, stand-alone position. We found that VA’s current guidance related to COR responsibilities does not include any information on how VAMCs are to determine the feasibility of whether a COR’s workload—including both COR and primary position responsibilities—will allow them to carry out their tasks as CORs for monitoring contract provider performance. The COR standard operating procedure also does not provide any guidance for determining when COR duties should be assigned as a collateral duty or a full-time responsibility. Without clear guidance on how to determine a COR’s workload, VAMCs can unintentionally assign COR duties to a staff member who does not have the time available to properly monitor clinical contractors. If CORs’ workloads prevent proper monitoring of clinical contracts, VA risks missing the opportunity to proactively identify and correct performance issues with contract providers and to recognize patient safety concerns potentially resulting from contract providers’ actions. By failing to identify performance concerns with contract providers, VA could unknowingly be receiving sub-standard service from these contractors, continue to receive services from these contract providers that do not meet the needs of the VAMCs, and risk patient safety problems when these contracts are extended for additional years. CORs from the four VAMCs we visited noted weaknesses in VA’s COR training courses and our own analysis of these courses confirmed these limitations. Specifically, over half of the 40 CORs that completed our data collection instrument at the four VAMCs we visited responded that either their COR training did not prepare them for their role as a COR or were neutral on whether or not this training was helpful preparation. In addition, CORs for 8 of the 12 contracts we reviewed did not find the required COR training helpful or applicable to VA clinical contracting. Several of the CORs monitoring the 12 selected contracts and CORs managing other contracts at the four VAMCs we visited stated that VA’s required COR training is focused on Department of Defense contracting and is not tailored to CORs managing clinical contracts at VA. For example, one COR stated that the training covered very broad areas of contracts and did not include specific information on which kinds of contracts need detailed quality assurance plans or information on how to manage a clinical contract rather than a supply contract. In addition, a few CORs stated that the instructors for their training courses had limited knowledge of clinical contracting. VA requires CORs to complete training courses to obtain the Federal Acquisition Certification (FAC) for CORs or FAC-COR. are developed and offered by VA’s Acquisition Academy and can be taken both in person and through instructor-led, web-based courses. These courses generally aim to provide individuals with the knowledge and tools to carry out the COR responsibilities, which include the monitoring of clinical contractors’ performance. Previously we found that well-designed training and development programs are linked to both agency goals and to the organizational, occupational, and individual skills and competencies needed for the agency to perform effectively. There are three levels of FAC-COR certifications, which directly correlate with the years of COR’s contracting experience. Specifically, the FAC-COR Level I certification is an 8-hour training and does not require previous experience as a COR, the FAC-COR Level II certification is 40 hours of training (Level I combined with an additional 32 hours of training) and requires 1 year of previous experience serving as a COR, and the FAC-COR Level III certification is 60 hours of training and requires 2 years of previous experience serving as a COR. equipment purchase, and soup contents and production. There were no examples focused on how to evaluate or measure the quality of services provided by a contract provider in a VAMC clinical setting. By focusing on the types of examples in the course content, CORs did not have the opportunity to learn and practice the skills necessary for developing and managing service contracts that do not focus on easily quantifiable elements and involve complex assessments of the performance of clinicians. Included little information on monitoring responsibilities. The course content includes limited information for CORs on post-award monitoring responsibilities for clinical contracts and instead is heavily weighted to discussing the pre-award development of a contract. By failing to incorporate a robust discussion of how CORs should be monitoring contract providers in the course, VA has not provided these critical personnel with a solid foundation for how to conduct their responsibilities for monitoring the performance of contract providers serving in clinical roles at VAMCs. To supplement the required FAC-COR Level II course, VA’s Medical Sharing Office recently developed and implemented an 8-hour training course for CORs managing clinical contracts. However, VA does not currently require this course be completed by all CORs managing clinical contracts. This course covers primarily pre-award contract development responsibilities of CORs and does not include any significant information on the post-award monitoring responsibilities of CORs managing clinical contracts. Without developing required training on clinical contract monitoring, VA cannot ensure that all CORs are receiving adequate information on how to carry out this critical contract management responsibility and cannot ensure that CORs are well trained in how to monitor contract providers. This training places VA at risk of having CORs miss performance weaknesses by clinical contractors that could affect patient safety, and extending clinical contracts for contract providers who do not help VAMCs effectively meet their clinical staffing needs or provide high-quality care to veterans. VA has not established a robust method for overseeing the monitoring of clinical contractors by COs and CORs throughout VA’s health care system. Standards for internal control in the federal government state that agencies should design internal controls that assure ongoing monitoring occurs in the course of normal operations, is continually performed, and is ingrained in agency operations. VA’s primary oversight entity for health care contracting activities, the VHA Procurement and Logistics Office, has a limited role in overseeing the monitoring actions of COs and CORs once a contract has been approved and initiated at a VAMC. The VHA Procurement and Logistics Office conducts limited oversight of contracting activities throughout the VA health care system through its SAOs and Procurement Operations Office. Service Area Offices. According to officials from the three SAOs, the role of the three SAOs in clinical contract monitoring is limited to an audit of the records COs maintain in VA’s electronic Contract Management System. These reviews focus only on the completeness of COs’ electronic contracting files—including documentation that a COR with current training records was assigned to the contract. SAO electronic Contract Management System audits do not include any reviews of CORs’ monitoring of clinical contractors. Procurement Operations Office. The Procurement Operations Office is the only VHA Procurement and Logistics Office entity responsible for overseeing the monitoring activities of CORs; however, the reviews conducted by this office are limited to a remote electronic documentation review of a small sample of COR files. Officials from the Procurement Operations Office told us that to select COR files for these reviews, a Procurement Operations Office staff member aims to select 25 COR files for active contracts per network contracting office—at most 2.1 percent of clinical contracts in an average VISN if all 25 selected COR files are for clinical contracts. VA officials told us that, while the Procurement Operations Office sets a goal to review COR files from two network contracting offices each month, since implementing the program in March 2013 these reviews have been completed in only four network contracting offices and none of these four offices have received feedback on the outcomes of these reviews as of August 2013. Officials added that this limited review schedule is due to only one Procurement Operations Office staff member being assigned to complete these reviews. These reviews also have a narrow focus on the completeness of COR files because the Procurement Operations Office staff member reviewing the files relies on a checklist to verify the presence or absence of required documentation of COR monitoring activities and does not review the quality of information contained within CORs records. The limited review schedule and narrow focus on file completeness do not allow the Procurement Operations Office to comprehensively assess the monitoring activities of COs and CORs throughout VA’s health care system, as recommended by federal internal control standards. Without a robust monitoring system in place, VA cannot reasonably assure that all CORs in all VAMCs are maintaining the proper records of their efforts to monitor the activities of clinical contractors caring for veterans. Clinical contracts serve an important role in helping to ensure that VA can provide health care to our nation’s veterans. Contract providers allow VAMCs and CBOCs to supplement the capacity of VA-employed providers and the ability to provide additional services at these VA facilities. However, VA must maintain robust monitoring of these contract providers to ensure they provide high quality care to veterans and fulfill the responsibilities of their contracts. We identified weaknesses in four areas that limit VA’s ability to effectively monitor clinical contractors and provide support to VAMC-based CORs and contracting officials responsible for conducting these critical reviews. First, the lack of available tools such as templates for common types of clinical contracts requires COs and CORs to rely on less consistent sources for constructing critical performance requirements in clinical contracts. As a result, most clinical contracts we reviewed were insufficiently detailed in their descriptions of contract providers’ performance requirements and these performance requirements were not consistently applied throughout our sample of clinical contracts. Without making tools such as templates available to COs and CORs, VA cannot ensure that all clinical contracts include performance requirements in key categories necessary to VA’s operations and patient care, such as credentialing and privileging and medical record documentation. Second, VA lacks guidance for COs and CORs that defines the types of performance standards and key elements of performance expected to be included in clinical contracts. Without access to this type of guidance, VA cannot ensure that contracting officials have the ability to establish clear and measurable performance standards. Consistency in performance measurement and attention to key elements—including clearly stating performance standards, and ensuring these performance standards can be accurately and consistently measured—is critical to VA’s efforts to ensure that all contract providers are monitored appropriately and can be held accountable for providing quality patient care. Third, two significant challenges CORs face in the monitoring of clinical contracts—COR workload and training—if left unresolved, will likely have continuing negative impacts on the quality of the monitoring that CORs are able to perform. Better guidance to VAMCs on how to determine an appropriate COR workload would allow CORs to fulfill key functions required to effectively monitor clinical contractors’ performance. Currently, VA guidance is silent on how to determine whether or not a potential COR has the time to take on the critical responsibilities of monitoring contract providers. With the current practice of assigning COR duties to VAMC staff as a collateral duty, it is critical that VA define how VAMC staff should allocate COR duties to ensure that contracts are monitored effectively. In addition, CORs are receiving insufficient training to prepare them for monitoring clinical contracts. Currently, CORs for clinical contracts cannot apply the current training to their duties because it focuses on purchasing supplies rather than on acquiring clinical care services. While VA has undertaken efforts to provide supplemental training to CORs on clinical contracts, this additional training fails to address how CORs should monitor clinical contracts and instead focuses on the development of contracts. Without ensuring that COR training addresses all of the critical monitoring functions CORs perform, VA cannot ensure that all CORs are approaching this role with adequate preparation and skills and VA risks failing to identify weaknesses in contract providers’ performance that could affect patient safety. Finally, VA Central Office currently provides limited oversight of clinical contract monitoring activities. Without a robust monitoring program that includes involvement from VA Central Office, VA does not have reasonable assurance that all CORs in VAMCs throughout VA’s health care system are properly monitoring clinical contractors and is missing the opportunity to identify system-wide limitations in the monitoring of these critical contract providers. To improve the monitoring and oversight of clinical contracts, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following five actions: Develop and disseminate tools, such as standard templates, for the most common types of clinical contracts in VA’s health care system. Such tools should include performance requirement statements covering key categories of VA health care policy and guidance—such as credentialing and privileging, provider qualifications, and expectations for compliance with critical VA policies and medical record documentation requirements. Develop and issue guidance on the performance standards that could be included in common types of clinical contracts—including CBOC, specialty, and temporary clinical provider contracts—to ensure that these performance standards are clearly stated in the contracts and have measurable targets for assessing contract provider performance. Revise current standard operating procedures for CORs to provide guidance on the number of contracts, based on size and complexity, each COR should manage to ensure that all CORs maintain a workload that allows them to fulfill their duties as a COR and their primary position responsibilities. Modify existing COR training to ensure it includes examples and discussion of how to develop and monitor service contracts—including contracts for the provision of clinical care in VAMCs. Increase SAO and VA Central Office oversight of COs and CORs by ensuring that post-award contracting files are regularly reviewed for all network contracting offices. VA provided written comments on a draft of this report, which we have reprinted in appendix II. In its comments, VA generally agreed with our conclusions, concurred with our five recommendations, and described the agency’s plans to implement each of our recommendations. In its comments, VA stated that to address our first and second recommendations, VHA’s Medical Sharing Office will work with VHA’s Patient Care Services to update and complete templates for clinical contracts so that they include performance requirement statements covering key categories included in our review. To address our third recommendation, VA noted that VHA’s Procurement Policy and Operations Offices will collaborate to revise existing COR standard operating procedures to include guidance on the number of contracts, based on size and complexity, that each COR should manage to ensure that all CORs maintain a workload that allows them to fulfill their duties as a COR and their primary position responsibilities. To address our fourth recommendation, VA stated that VHA’s Medical Sharing Office will provide training to CORs that covers post-award COR monitoring responsibilities. We support VA’s efforts to provide this training content to CORs, especially those that monitor clinical contracts, but encourage the agency to also modify the content of its existing required COR training to ensure that CORs have the adequate preparation and skills to effectively monitor contract providers. Finally, to address our fifth recommendation, VA noted that VHA’s Procurement Policy and Operations offices will collaborate to revise existing COR standard operating procedures to include Service Area Office and CO oversight to ensure that regular reviews take place for post-award contract files from all network contracting offices. We are sending copies of this report to the Secretary of Veterans Affairs, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. This appendix describes the information and methods we used to examine: (1) the extent to which the Department of Veterans Affairs (VA) establishes complete performance requirements for clinical contractors; (2) the extent to which VA clinical contracts include clear and measurable performance standards for assessing whether or not clinical contractors met the acceptable quality levels defined in selected contracts; (3) challenges VA staff encounter in monitoring clinical contractors’ performance; and (4) the extent to which VA Central Office provides oversight of VA staff responsible for monitoring clinical contracts. Specifically, we discuss our methods for selecting VA medical centers (VAMC) and network contracting offices to review; identifying appropriate VA Central Office Officials to interview; selecting clinical contracts for review and assessment; assessing the performance requirements included in our selected contracts; assessing the performance standards included in our selected contracts; administering a data collection instrument to contracting officer’s representatives (COR) at our selected VAMCs; and evaluating VA’s COR training. We conducted four site visits to VAMCs to obtain the perspectives of VAMC officials responsible for monitoring the day-to-day activities of clinical contractors. To identify VAMCs for our site visits, we: Selected VAMCs that were located in different Veterans Integrated Service Networks (VISN) to ensure that our selected VAMCs varied in their geographic locations and reported to different VISN management officials; Ensured that our selected VAMCs had a variety of active clinical contracts in place to allow for a variety of COR perspectives on clinical contractor monitoring; and Selected at least one VAMC from each of VA’s three Service Area Offices (SAO)—the regional contract management entities created to oversee the activities of the 21 network contracting offices and the contracting officers (CO) and supervisors that work within them. Using these criteria, we selected four VAMCs to visit during our field work located in Lebanon, Pennsylvania; Minneapolis, Minnesota; Nashville, Tennessee; and Seattle, Washington. During our site visits to these locations, we interviewed each VAMC’s leadership team; CORs responsible for managing all active clinical contracts; quality management staff; and the CORs and medical directors responsible for overseeing the clinical contractors for a select sample of clinical contracts. We spoke with these officials about a variety of topics—including COR training and workload, monitoring procedures for clinical contractors, and their role in developing performance requirements and performance standards for clinical contracts. In addition, we spoke with officials from the four network contracting offices responsible for managing the contracting activities of our selected VAMCs to discuss how COs and management staff manage the monitoring of clinical contractors and interact with CORs at VAMCs. Information obtained from our visits to selected VAMCs and interviews with selected network contracting offices cannot be generalized to all VAMCs and network contracting offices throughout VA’s health care system, but provide important insights. We also interviewed VA Central Office officials responsible for developing policies and procedures for VA clinical contracting activities and overseeing the actions of CORs and COs throughout VA’s health care system. We spoke with the following offices within the Veterans Health Administration (VHA) Procurement and Logistics Office: (1) the Medical Sharing Office; (2) the Procurement Audit Office; (3) the Procurement Operations Office; and (4) all three SAOs. To assess the monitoring of clinical contracts at VA, we reviewed the contracts and accompanying COR documentation for a sample of clinical contracts from the four VAMCs we visited during our field work. To select our sample of clinical contracts, we reviewed a list of all active clinical contracts for our selected VAMCs provided by the network contracting offices responsible for overseeing the contracting actions of the selected VAMCs. For each VAMC we visited, we selected three contracts to review in detail—one community-based outpatient clinic (CBOC) contract, one specialty care contract, and one temporary clinical provider contract. (See table 6.) To analyze the performance requirements included in our 12 selected clinical contracts, we identified six performance requirement categories for this analysis by reviewing: (1) VA Acquisition Regulation (VAAR); (2) VA policy, guidance, and training documents; and (3) The Joint Commission’s hospital accreditation standards. We also verified these categories with officials from the Medical Sharing Office, Procurement Operations Office, and Procurement Audit Office to ensure they were an accurate reflection of performance requirements that should be included in VA clinical contracts. During our assessment of the 12 selected contracts, we analyzed the performance requirements included in each clinical contract’s statement of work against these six performance requirement categories and determined whether or not performance requirements existed that matched each categories’ required components. (See table 7.) Results of our reviews were recorded as complete, partial, or incomplete based on whether the contract’s performance requirements covered all, some, or none of the specific components reviewed within each category. To analyze the performance standards included in our 12 selected clinical contracts, we reviewed whether each contract contained monitoring plan provisions that included performance standards in five of the same six categories we identified were vital to VA operations during our review of performance requirements. We did not include the business processes category in our analysis of performance standards because these requirements do not require performance standards for their validation and assessment. For the 12 selected clinical contracts, we grouped performance standards contained in each contract’s monitoring plan under the five performance requirement categories used for this analysis—type of provider or care, credentialing and privileging, clinical practice standards, medical record documentation, and access to care (for CBOC contracts only). We analyzed these performance standards using criteria previously identified by GAO. Specifically, that performance standards should have several attributes—including being clearly stated and using measurable targets. We assessed each of the 12 selected contracts from the four VAMCs we visited to determine if the performance standards included in their monitoring plans met these two attributes of successful performance standards. To determine whether performance standards were clearly stated, two analysts independently determined whether or not each performance standard had specified a desired outcome that was clearly stated and understandable. To determine whether performance standards used measurable targets, two analysts independently determined whether or not each performance standard had a numerical target and included information on the frequency and calculation method for this target. Each analyst entered results as complete, partial, or incomplete for each standard and entered a reason for their determination if the result was partial or incomplete. A third analyst reviewed these assessments and reconciled any differences that arose. We administered a data collection instrument to the 40 CORs responsible for managing a clinical contract at the four VAMCs we visited to determine their perspectives on COR training and workload, and to gather information on whether or not they were serving as a COR as a collateral duty. The data collection instrument included questions on each CORs highest training level, assessment of VA COR training, amount of time devoted to COR duties, and primary position title and description. Each COR completed this data collection instrument in the presence of a GAO analyst during our field work at each of our four selected VAMCs. To evaluate VA’s required COR training, three GAO analysts attended an offering of VA’s COR training in September 2012. These analysts reviewed the content of this training to determine if it met previously identified criteria for successful training—that well-designed training and development programs are linked to both agency goals and to the organizational, occupational, and individual skills and competencies To determine if these needed for the agency to perform effectively.criteria were met, we reviewed the content of this course to determine if it included information that was linked to VA’s agency goals and the organization, occupational, and individual skills needed for a COR monitoring clinical contractors in a VAMC. In addition to the contact named above, Marcia A. Mann, Assistant Director; A. Elizabeth Dobrenz; Pamela Dooley; Carolyn Garvey; Katherine Nicole Laubacher; Laurie Pachter; Said Sariolghalam; Jennifer Whitworth; and Malissa G. Winograd made key contributions to this report. | VA must frequently contract with non-VA health care providers so that clinical providers are available to meet veterans' health care needs. While recent studies have disclosed problems with VA's development of contracts for clinical services, there has been little scrutiny of how VA monitors and evaluates the care contract providers give to veterans. GAO was asked to review VA's efforts to monitor clinical contractors working in VA facilities. This report examines the extent to which VA establishes complete performance requirements for contract providers, challenges VA staff encounter in monitoring contract providers' performance, and the extent to which VA oversees VAMC staff responsible for monitoring contract providers. GAO reviewed VA acquisition regulations and other guidance. In addition, GAO visited four VAMCs that varied in geographic location and selected a nongeneralizable sample of three types of clinical contracts from each of the four VAMCs to review. GAO discussed how VAMC and VISN staff monitor and oversee these contracts and reviewed contract monitoring documentation. All 12 contracts GAO reviewed from the four Department of Veterans Affairs' (VA) medical centers (VAMC) visited contained performance requirements consistent with VA acquisition policy. However, the performance requirements lacked detail in six categories: type of provider or care; credentialing and privileging; clinical practice standards; medical record documentation; business processes; and access to care. GAO identified these categories from reviews of VA acquisition regulations, VA policies, and hospital accreditation standards; and VA officials verified that these six categories were an accurate reflection of performance requirements that should be in VA clinical contracts. GAO found, for example, one VAMC cardiothoracic contract that had detailed performance requirements while another VAMC's cardiothoracic contract did not contain a statement describing the contract provider's responsibilities for reporting and responding to adverse events and patient complaints. GAO also found that contracting officials lack tools, such as standard templates, that provide examples of the performance requirements that should be included in common types of clinical contracts. Such tools would help ensure consistency in requirements across contracts. Contracting officer's representatives (COR) cited two main challenges in monitoring contract providers' performance--too little time to monitor clinical contractors' performance effectively and inadequate training. Most of the 40 CORs at the four VAMCs in GAO's review said that their clinical contract monitoring duties were a collateral duty and that they had other primary responsibilities, such as serving as a business manager or administrative officer for a specialty clinic within the VAMC. GAO found that, on average, each of these 40 CORs spent about 25 percent of their time monitoring an average of 12 contracts. CORs said the demands of their primary positions at times prevented them from fully monitoring contract providers' performance. Further, VA's current guidance related to COR responsibilities does not include any information on how VAMCs are to determine the feasibility of whether a COR's workload--including both COR and primary position responsibilities--will allow them to carry out their tasks as CORs for monitoring contract provider performance. GAO also found that current VA COR training programs focus on contracts that buy goods, not clinical services, and include little information on monitoring responsibilities. CORs questioned the usefulness of the COR training VA uses to prepare them for monitoring clinical contracts. VA Central Office conducts limited oversight of COR and contract monitoring activities. VA Central Office reviews of COR clinical contractor monitoring activities are limited to a small number of annual file reviews that focus on verifying the presence of required documentation only and do not assess the quality of CORs' monitoring activities. Since implementing the program in March 2013 these reviews have been conducted in 4 of 21 network contracting offices and as of August 2013 none of the 4 offices has received feedback on these reviews. Without a robust monitoring system, VA cannot ensure that all CORs in its VAMCs are properly monitoring, evaluating, and documenting the performance of contract providers caring for veterans. GAO recommends that VA develop and disseminate standard templates that provide examples of performance requirements for clinical contracts, revise guidance for CORs to include workload information, modify COR training, and improve the monitoring and oversight of clinical contracts. VA concurred with GAO's recommendations. |
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As part of its ongoing business systems modernization program, and consistent with our past recommendation, DOD has created an inventory of its existing and new business system investments. As of October 2002, DOD reported that this inventory consisted of 1,731 systems and system acquisition projects across DOD’s functional areas. In particular, DOD reported that it had 374 separate systems to support its civilian and military personnel function, 335 systems to perform finance and accounting functions, and 221 systems that support inventory management. Table 1 presents the composition of DOD business systems by functional area. As we have previously reported, this systems environment is not the result of a systematic and coordinated departmentwide strategy, but rather is the product of unrelated, stovepiped initiatives to support a set of business operations that are nonstandard and duplicative across DOD components. Consequently, DOD’s amalgamation of systems is characterized by (1) multiple systems performing the same tasks; (2) the same data stored in multiple systems; (3) manual data entry and reentry into multiple systems; and (4) extensive data translations and interfaces, each of which increases costs and limits data integrity. Further, as we have reported, these systems do not produce reliable financial data to support managerial decisionmaking and ensure accountability. To the department’s credit, it recognizes the need to eliminate as many systems as possible and integrate and standardize those that remain. In fact, three of the four Defense Finance and Accounting Service (DFAS) projects that are the subject of the report being released today were collectively intended to reduce or eliminate all or part of 17 different systems that perform similar functions. For example, the Defense Procurement Payment System (DPPS) was intended to consolidate eight contract and vendor pay systems; the Defense Departmental Reporting System (DDRS) is intended to reduce the number of departmental financial reporting systems from seven to one; and the Defense Standard Disbursing System (DSDS) is intended to eliminate four different disbursing systems. The fourth system, the DFAS Corporate Database/Corporate Warehouse (DCD/DCW), is intended to serve as the single DFAS data store, meaning it would contain all DOD financial information required by DFAS and be the central point for all shared data within DFAS. For fiscal year 2003, DOD has requested approximately $26 billion in IT funding to support a wide range of military operations and business functions. This $26 billion is spread across the military services and defense agencies—each receiving its own allocation of IT funding. The $26 billion supports three categories of IT—business systems, business systems infrastructure, and national security systems—the first two of which comprise the earlier cited 1,731 new and existing business systems projects. At last year’s hearing, DOD was asked about the makeup of its $26 billion in IT funding, including what amounts relate to business systems and related infrastructure, at which time answers were unavailable. As we are providing in the report being released today and as shown in figure 1, approximately $18 billion—about $5.2 billion for business systems and $12.8 billion for business systems infrastructure—relates to the operation, maintenance, and modernization of the 1,731 business systems that DOD reported having in October 2002. Figure 2 provides the allocation of DOD’s business systems modernization budget for fiscal year 2003 budget by component. However, recognizing the need to modernize and making funds available are not sufficient for improving DOD’s current systems environment. Our research of successful modernization programs in public and private- sector organizations, as well as our reviews of these programs in various federal agencies, has identified a number of IT disciplines that are necessary for successful modernization. These disciplines include having and implementing (1) an enterprise architecture to guide and constrain systems investments; (2) an investment management process to ensure that systems are invested in incrementally, are aligned with the enterprise architecture, and are justified on the basis of cost, benefits, and risks; and (3) a project oversight process to ensure that project commitments are being met and that needed corrective action is taken. These institutionalized disciplines have been long missing at DOD, and their absence is a primary reason for the system environment described above. The future of DOD’s business systems modernization is fraught with risk, in part because of longstanding and pervasive modernization management weaknesses. As we have reported, these weaknesses include (1) lack of an enterprise architecture; (2) inadequate institutional and project-level investment management processes; and (3) limited oversight of projects’ delivery of promised system capabilities and benefits on time and within budget. To DOD’s credit, it recognizes the need to address each of these weaknesses and has committed to doing so. Effectively managing a large and complex endeavor requires, among other things, a well-defined and enforced blueprint for operational and technological change, commonly referred to as an enterprise architecture. Developing, maintaining, and using architectures is a leading practice in engineering both individual systems and entire enterprises. Government- wide requirements for having and using architectures to guide and constrain IT investment decisionmaking are also addressed in federal law and guidance. Our experience has shown that attempting a major systems modernization program without a complete and enforceable enterprise architecture results in systems that are duplicative, are not well integrated, are unnecessarily costly to maintain and interface, do not ensure basic financial accountability, and do not effectively optimize mission performance. In May 2001, we reported that DOD had neither an enterprise architecture for its financial and financial-related business operations nor the management structure, processes, and controls in place to effectively develop and implement one. Further, we stated that DOD’s plans to continue spending billions of dollars on new and modified systems independently from one another, and outside the context of a departmental modernization blueprint, would result in more systems that are duplicative, noninteroperable, and unnecessarily costly to maintain and interface; moreover, they would not address longstanding financial management problems. To assist the department, we provided a set of recommendations on how DOD should approach developing its enterprise architecture. In September 2002, the Secretary of Defense designated improving financial management operations (including such business areas as logistics, acquisition, and personnel management) as one of the department’s top 10 priorities. In addition, the Secretary established a program to develop an enterprise architecture, and DOD plans to have the architecture developed by May 2003. Subsequently, the National Defense Authorization Act for Fiscal Year 2003 directed DOD to develop, by May 1, 2003, an enterprise architecture, including a transition plan for its implementation. The act also defined the scope and content of the enterprise architecture and directed us to submit to congressional defense committees an assessment of DOD’s actions to develop the architecture and transition plan no later than 60 days after their approval. Finally, the act prohibited DOD from obligating more than $1 million on any financial systems improvement until the DOD comptroller makes a determination regarding the necessity or suitability of such an investment. In our February 2003 report on DOD enterprise architecture efforts, we stated our support for the Secretary’s decision to develop the architecture and recognized that DOD’s architecture plans were challenging and ambitious. However, we also stated that despite taking a number of positive steps toward its architecture goals, such as establishing a program office responsible for managing the enterprise architecture, the department had yet to implement several key recommendations and certain leading practices for developing and implementing architectures. For example, DOD had yet to (1) establish the requisite architecture development governance structure needed to ensure that ownership of and accountability for the architecture is vested with senior leaders across the department; (2) develop and implement a strategy to effectively communicate the purpose and scope, approach to, and roles and responsibilities of stakeholders in developing the enterprise architecture; and (3) fully define and implement an independent quality assurance process. We concluded that not implementing these recommendations and practices increased DOD’s risk of developing an architecture that would be limited in scope, would be resisted by those responsible for implementing it, and would not support effective systems modernization. To assist the department, we made additional recommendations with which DOD agreed. We plan to continue reviewing DOD’s efforts to develop and implement this architecture pursuant to our mandate under the fiscal year 2003 defense authorization act. The Clinger-Cohen Act, federal guidance, and recognized best practices provide a framework for organizations to follow to effectively manage their IT investments. Collectively, this framework addresses IT investment management at the institutional or corporate level, as well as the individual project or system level. The former involves having a single, corporate approach governing how the organization’s portfolio of IT investments is selected, controlled, and evaluated across its various components, including assuring that each investment is aligned with the organization’s enterprise architecture. The latter involves having a system/project-specific investment approach that provides for making investment decisions incrementally and ensuring that these decisions are economically justified on the basis of current and credible analyses. Corporate investment management approach: DOD has yet to establish and implement an effective departmentwide approach to managing its business systems investment portfolio. In May 2001, we reported that DOD did not have a departmentwide IT investment management process through which to assure that its enterprise architecture, once developed, could be effectively implemented. We therefore recommended that DOD establish a system investment selection and control process that treats compliance with the architecture as an explicit condition to meet at key decision points in the system’s life cycle and that can be waived only if justified by compelling written analysis. Subsequently, in February 2003, we reported that DOD had not yet established the necessary departmental investment management structure and process controls needed to adequately align ongoing investments with its architectural goals and direction. Instead, the department continued to allow its component organizations to make their own parochial investment decisions, following different approaches and criteria. In particular, DOD had not established and applied common investment criteria to its ongoing IT system projects using a hierarchy of investment review and funding decisionmaking bodies, each composed of representatives from across the department. DOD also had not yet conducted a comprehensive review of its ongoing IT investments to ensure that they were consistent with its architecture development efforts. We concluded that until it takes these steps, DOD will likely continue to lack effective control over the billions of dollars it is currently spending on IT projects. To address this, we recommended that DOD create a departmentwide investment review board with the responsibility and authority to (1) select and control all DOD financial management investments and (2) ensure that its investment decisions treat compliance with the financial management enterprise architecture as an explicit condition for investment approval that can be waived only if justified by a compelling written analysis. DOD concurred with our recommendations and is taking steps to address them. Project/system-specific investment management: DOD has yet to ensure that its investments in all individual systems or projects are economically justified and that it is investing in each incrementally. In particular, none of the four DFAS projects addressed in the report being issued today had current and reliable economic justifications to demonstrate that they would produce value commensurate with the costs and risks being incurred. For example, we found that although DCD was initiated to contain all DOD financial data required by DFAS systems, planned DCD capabilities had since been drastically reduced. Despite this, DFAS planned to continue investing in DCD/DCW without having an economic justification showing whether its revised plans were cost effective. Moreover, DOD planned to continue investing in the three other projects even though none had current economic analyses that reflected material changes to costs, schedules, and/or expected benefits since the projects’ inception. For example, the economic analysis for DSDS had not been updated to reflect material changes in the project, such as changing the date for full operational capability from February 2003 to December 2005—a schedule change of almost 3 years that affected delivery of promised benefits. Similarly, the DPPS economic analysis had not been updated to recognize an estimated cost increase of $274 million and schedule slip of almost 4 years. After recently reviewing this project’s change in circumstances, the DOD Comptroller terminated DPPS after 7 years of effort and an investment of over $126 million, citing poor program performance and increasing costs. Table 2 highlights the four projects’ estimated cost increases and schedule delays. Our work on other DOD projects has shown a similar absence of current and reliable economic justification for further system investment. For example, we reported that DOD’s ongoing and planned investment in its Standard Procurement System (SPS) was based on an outdated and unreliable economic analysis, and even this flawed analysis did not show that the system was cost beneficial, as defined. As a result, we recommended that investment in future releases or major enhancements to the system be made conditional on the department’s first demonstrating that the system was producing benefits that exceeded costs and that future investment decisions be made on the basis of complete and reliable economic justifications. DOD is currently in the process of addressing this recommendation. Beyond not having current and reliable economic analyses for its projects, DOD has yet to adopt an incremental approach to economically justifying and investing in all system projects. For example, we have reported that although DOD had divided its multiyear, billion-dollar SPS project into a series of incremental releases, it had not treated each of these increments as a separate investment decision. Such an incremental approach to system investment helps to prevent discovering too late that a given project is not cost beneficial. However, rather than adopt an incremental approach to SPS investment management, the department chose to treat investment in SPS as one, monolithic investment decision, justified by a single, all-or-nothing economic analysis. This approach to investing in large systems, like SPS, has proven ineffective in other federal agencies, resulting in huge sums being invested in systems that do not provide commensurate value, and thus has been abandoned by successful organizations. We also recently reported that while DOD’s Composite Health Care System II had been structured into a series of seven increments (releases), the department had not treated the releases to date as separate investment decisions supported by incremental economic justification. In response to our recommendations, DOD committed to changing its strategy for future releases to include economically justifying each release before investing in and verifying each release’s benefits and costs after deployment. The Clinger-Cohen Act of 1996 and federal guidance emphasize the need to ensure that IT projects are being implemented at acceptable costs and within reasonable and expected timeframes and that they are contributing to tangible, observable improvements in mission performance (that is, that projects are meeting the cost, schedule, and performance commitments upon which their approval was justified). They also emphasize the need to regularly determine each project’s progress toward expectations and commitments and to take appropriate action to address deviations. Our work on specific DOD projects has shown that such oversight does not always occur, a multi-example case in point being the four DFAS accounting system projects that are the subject of our report being released today. For these four projects, oversight responsibility was shared by the DOD comptroller, DFAS, and the DOD chief information officer (CIO). However, these oversight authorities have not ensured, in each case, that the requisite analytical basis for making informed investment decisions was prepared. Moreover, they have not regularly monitored system progress toward expectations so that timely action could have been taken to correct deviations, even though each case had experienced significant cost increases and schedule delays (see table 2). Their respective oversight activities are summarized below: DOD Comptroller—Oversight responsibility for DFAS activities, including system investments, rests with the DOD Comptroller. However, DOD Comptroller officials were not only unaware of cost increases and schedule delays on these four projects, they also told us that they do not review DFAS system investments to ensure that they are meeting cost, schedule, and performance commitments because this is DFAS’s responsibility. DFAS—This DOD agency has established an investment committee to, among other things, oversee its system investments. However, the committee could not provide us with any evidence demonstrating meaningful oversight of these four projects, nor could it provide us with any guidance describing the committee’s role, responsibilities, and authorities, and how it oversees projects. DOD CIO—Oversight of the department’s “major” IT projects, of which two of the four DFAS projects (DCD/DCW and DPPS) qualify, is the responsibility of DOD’s CIO. However, this organization did not adequately fulfill this responsibility on either project because, according to DOD CIO officials, they have little practical authority in influencing component agency-funded IT projects. Thus, the bad news is that these three oversight authorities have jointly permitted approximately $316 million to be spent on the four accounting system projects without knowing if material changes to the projects’ scopes, costs, benefits, and risks warranted continued investment. The good news is that the DOD Comptroller recently terminated one of the four (DPPS), thereby avoiding throwing good money after bad, and DOD has agreed to implement the recommendations contained in our report released today, which calls for DOD to demonstrate that the remaining three projects will produce benefits that exceed costs before further investing in each. Our work on other DOD projects has shown similar voids in oversight. For example, we reported that SPS’s full implementation date slipped by 3 ½ years, with further delays expected, and the system’s life-cycle costs grew by 23 percent, from $3 billion to $3.7 billion. However, none of the oversight authorities responsible for this project, including the DOD CIO, had required that the economic analysis be updated to reflect these changes and thereby provide a basis for informed decisionmaking on the project’s future. To address this issue, we recommended, among other things, that the lines of oversight responsibility and accountability of the project be clarified and that further investment in SPS be limited until such investment could be justified. DOD has taken steps to address some of our recommendations. For example, it has clarified organizational accountability and responsibility for the program. However, much remains to be done before the department will be able to make informed, data- driven decisions about whether further investment in the system is justified. We have made numerous recommendations to DOD that collectively provide a valuable roadmap for improvement as the department attempts to create the management infrastructure needed to effectively undertake a massive business systems modernization program. This collection of recommendations is not without precedent, as we have provided similar ones to other federal agencies, such as the Federal Aviation Administration, the Internal Revenue Service, and the former U.S. Customs Service, to aid them in building their respective capacities for managing modernization programs. In cases where these recommendations have been implemented properly, we have observed improved modernization management and accountability. Our framework for DOD provides for developing a well-defined and enforceable DOD-wide enterprise architecture to guide and constrain the department’s business system investments, including specific recommendations for successfully accomplishing this, such as creating an enterprise architecture executive committee whose members are singularly and collectively responsible and accountable for delivery and approval of the architecture and a proactive enterprise architecture marketing and communication program to facilitate stakeholder understanding, buy-in, and commitment to the architecture. Our recommendations also provide for establishing a DOD-wide investment decisionmaking structure that consists of a hierarchy of investment boards that are responsible for ensuring that projects meet defined threshold criteria and for reviewing and deciding on projects’ futures on the basis of a standard set of investment criteria, two of which are alignment with the enterprise architecture and return on investment. In addition, our recommendations include ensuring that return on investment is analytically supported by current and reliable economic analyses showing that benefits are commensurate with costs and risks, and that these analyses and associated investment decisions cover incremental parts of each system investment, rather than treating the system as one, all-or-nothing, monolithic pursuit. Further, our recommendations provide clear and explicit lines of accountability for project oversight and continuous monitoring and reporting of progress against commitments to ensure that promised system capabilities and benefits are being delivered on time and within budget. | The Department of Defense's (DOD) management of its business systems modernization program has been an area of longstanding concern to Congress and one that GAO has designated as high risk since 1995. Because of this concern, GAO was requested to testify on (1) DOD's current inventory of existing and new business systems and the amount of funding devoted to this inventory; (2) DOD's modernization management capabilities, including weaknesses and DOD's efforts to address them; and (3) GAO's collective recommendations for correcting these weaknesses and minimizing DOD's exposure to risk until they are corrected. In developing this testimony, GAO drew from its previously issued reports on DOD's business systems modernization efforts, including one released today on four key Defense Finance and Accounting Service (DFAS) projects. As of October 2002, DOD reported that its business systems environment consisted of 1,731 systems and system acquisition projects spanning about 18 functional areas. This environment is the product of unrelated, stovepiped initiatives supporting nonstandard, duplicative business operations across DOD components. For fiscal year 2003, about $18 billion of DOD's IT funding relates to operating, maintaining, and modernizing these nonintegrated systems. To DOD's credit, it recognizes the need to modernize, eliminating as many of these systems as possible. The future of DOD's business systems modernization is fraught with risk because of longstanding and pervasive modernization weaknesses, three of which are discussed below. GAO's report on four DFAS systems highlights some of these weaknesses, and GAO's prior reports have identified the others. DOD has stated its commitment to addressing each and has efforts under way that are intended to do so. Lack of departmentwide enterprise architecture: DOD does not yet have an architecture, or blueprint, to guide and constrain its business system investments across the department. Nevertheless, DOD continues to spend billions of dollars on new and modified systems based the parochial needs and strategic direction of its component organizations. This will continue to result in systems that are duplicative, are not integrated, are unnecessarily costly to maintain and interface, and will not adequately address longstanding financial management problems. Lack of effective investment management: DOD does not yet have an effective approach to consistently selecting and controlling its investments as a portfolio of competing department options and within the context of an enterprise architecture. DOD is also not ensuring that it invests in each system incrementally and on the basis of reliable economic justification. For example, for the four DFAS projects, DOD spent millions of dollars without knowing whether the projects would produce value commensurate with costs and risks. Thus far, this has resulted in the termination of one of the projects after about $126 million and 7 years of effort was spent. Lack of effective oversight: DOD has not consistently overseen its system projects to ensure that they are delivering promised system capabilities and benefits on time and within budget. For example, for the four DFAS projects, oversight responsibility is shared by the DOD Comptroller, DFAS, and the DOD chief information officer. However, these oversight authorities have largely allowed the four to proceed unabated, even though each was experiencing significant cost increases, schedule delays, and/or capability and scope reductions and none were supported by adequate economic justification. As a result, DOD invested approximately $316 million in four projects that may not resolve the very financial management weaknesses that they were initiated to address. |
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According to a 1995 World Health Organization (WHO) report, the three major threats to the survival of children under age 5 in developing countries are diarrheal dehydration, acute respiratory infections (e.g., pneumonia), and vaccine-preventable diseases. WHO’s 1995 report stated that 13.3 million children under age 5 died in developing countries in 1985 and that 12.2 million children under age 5 died in 1993. Figure 1 shows the causes of death for children under age 5 in developing countries, and figure 2 shows 1994 mortality rates for children under age 5 worldwide. Since 1954, USAID and its predecessor agencies have been involved in activities to improve child survival in the developing countries. Since the passage of Public Law 480 in 1954, U.S. food assistance has been provided to children and pregnant and lactating women. In the 1960s, USAID began building health clinics and funding research on treatments for diarrheal disease and the prevention of malaria. One of the specific objectives of the Foreign Assistance Act of 1961, the primary legislation governing U.S. foreign aid, was to reduce infant mortality. In the 1970s, USAID began to focus on providing appropriate health interventions for common health problems in communities with the greatest needs. Activities related to child health included field studies on oral rehydration and vitamin A therapy and malaria research. “In carrying out the purposes of this subsection, the President shall promote, encourage, and undertake activities designed to deal directly with the special health needs of children and mothers. Such activities should utilize simple, available technologies which can significantly reduce childhood mortality, such as improved and expanded immunization programs, oral rehydration to combat diarrhoeal diseases, and education programs aimed at improving nutrition and sanitation and at promoting child spacing.” Because the statutory language is broad and emphasizes but does not limit USAID to the specified interventions, USAID has considerable latitude in developing child survival activities appropriate to the community being served. In February 1985, in response to the authorizing legislation, some of USAID’s ongoing child health efforts were consolidated into a child survival program. USAID provided mission-level child survival assistance to 31 countries in 1985, but it placed special emphasis on 22 countries that had especially high mortality rates. For each of these 22 countries, USAID developed a detailed child survival strategy, in cooperation with the host government, to deal with the country’s specific needs and circumstances. USAID’s policy was to sustain bilateral child survival funding in these countries for at least 3 to 5 years and provide technical support and training on a priority basis. Over the years, the congressional appropriations committees have continued to emphasize the importance of the basic interventions mentioned in the authorizing statute, particularly immunizations and oral rehydration therapy. In some years, the committees have also directed USAID to support particular activities, including the promotion of breastfeeding, research and development of vaccines, and prevention of vitamin A and other micronutrient deficiencies through food fortification, tablets, and injections. USAID’s child survival program has evolved in the 1990s to where it no longer is a separate program, but is encompassed within USAID’s sustainable development strategy as a component of its population, nutrition, and health sector. (See app. I for a more detailed description of USAID’s current child survival objectives and approach.) Between fiscal years 1985 and 1995, USAID reported that it obligated over $2.3 billion for the child survival program. Child survival projects and other activities attributed to child survival may be funded through USAID’s overseas missions directly or through its four regional bureaus or its central bureaus (see table 1). The number of countries receiving mission-level child survival assistance in a single fiscal year increased from 31 in 1985 to about 43 in 1995. During this 11-year period, USAID provided mission-level assistance on a continuing basis for some countries, such as Egypt, whereas other countries received funding in only 1 year. A total of 83 developing countries received some mission-level child survival funding during this period. The amounts ranged from $9,000 for Oman to $137 million for Egypt. As shown in table 2, of the 10 countries that have received the most child survival assistance from USAID missions, 5 were in the Latin America and Caribbean region, 4 were in the Asia and Near East region, and 1 was in the Africa region. USAID provides funding to other organizations to implement health and population services. USAID guidance states that U.S. assistance must help build the capacity to develop and sustain host country political commitment to health and population programs, as well as enhance the ability of local organizations to define policies and design and manage their own programs. USAID’s policy is to involve both the public and private sectors and give special attention to building, supporting, and empowering nongovernmental organizations (NGO) wherever feasible. USAID-supported child survival activities involve U.S. and foreign not-for-profit NGOs, including private voluntary organizations (PVO); universities; for-profit contractors; multilateral organizations; and U.S. and foreign government agencies. Figure 3 shows that U.S. NGOs received about 45 percent of fiscal year 1994 child survival funding. At least 35 U.S. PVOs and 22 other U.S. NGOs participated in USAID’s child survival programs during that year as primary grantees. For-profit businesses and host country governments together accounted for another one-quarter of the funding. The remainder went to multilateral organizations, such as UNICEF; U.S. government agencies, including the Centers for Disease Control and Prevention; and indigenous NGOs. For-profit firms ($35.1 million) Host country government agencies ($32.7 million) USAID generally uses the different types of organizations for different purposes or for implementing different types of activities. No one single group or organization typically performs the full range of activities that the agency sponsors. For example, in all the countries we visited, PVOs were involved at the community level with direct delivery of some of the basic health interventions. In Guatemala, a for-profit contractor provided technical assistance for the computer hardware and software programs that USAID installed in the Ministry of Health to computerize its health data. Between 1985 and 1995, activities related to the three major causes of death among young children—acute respiratory infections, diarrheal diseases, and vaccine-preventable diseases—received about $972 million, or 41 percent of the child survival funds. Table 3 shows funding levels attributed to child survival by type of activity from 1985 to 1995. USAID is unable to determine with any degree of precision how much funding is actually being used for child survival activities because (1) of the way Congress has directed funding; (2) USAID guidance allows considerable flexibility and variation in attributing child survival funds; (3) the amounts reported are based on estimated percentages of projected budgets, which sometimes are not adjusted at the end of the year to reflect any changes that may have occurred; and (4) the amounts reported are not directly based on specific project expenditures. USAID plans a new information management system that may improve the precision of the data for its child survival activities. From fiscal year 1985, when the child survival program officially began, through fiscal year 1995, appropriations statutes have mandated spending of at least $1.8 billion for child survival activities. From fiscal years 1985 to 1991, funds appropriated by Congress for child survival went into a separate functional account under USAID’s development assistance account. Additionally, for several years prior to fiscal year 1992, the appropriations laws not only earmarked money for child survival, but the appropriations committees’ reports also expressed the intention that other accounts within the development assistance account should provide substantially more money for child survival activities. Beginning in fiscal year 1992, the functional account was eliminated and subsequent laws appropriating moneys to USAID contained an earmark for child survival activities that could be drawn from any USAID assistance account. Since 1991, Congress has substantially increased the level of funds designated for child survival through earmarks (from $100 million in direct appropriations in fiscal year 1991 to $250 million in fiscal year 1992). USAID issued guidance in 1992 and 1996 about the types of activities that were allowed to be attributed to child survival. Additionally, the agency’s budget office issues annual instructions for reporting on project activities. These instructions name types of activities that may be attributed to child survival and give broad discretion to USAID officials to determine the percentage of funding that can be reported as child survival. However, the instructions do not provide specific indicators for determining attribution, such as the percent of children in the population served for water projects. Moreover, some mission officials responsible for recording project activities told us that the guidance for making attributions was not clear to them. In our discussions with USAID officials, we found that the process of attributing funds to child survival activities was imprecise and that mistakes occurred. As a result, the percentage of funds designated as child survival varied widely for similar activities. For example, USAID used child survival funds for the construction of water systems in all four countries we visited. USAID guidance suggested 30 percent of the total budget of water and sewerage projects as an appropriate level to attribute to child survival, but child survival funds comprised from 3 to 100 percent of the funding for some of these projects. According to an official at the USAID mission in Egypt, the mission has a policy of attributing 3 percent of sewerage projects and 6 percent of water projects to child survival. In contrast, the Health Sector II project in Honduras attributed 70 percent of the $16.9 million water and sanitation component to child survival. According to a mission official, the justification for this level of attribution was that children under age 5 comprised approximately 70 percent of the deaths due to water-borne diseases in rural areas. Another activity funded by this project was the construction of area warehouses. About $72,000, which was 26 percent of the cost, was attributed to child survival. The justification USAID provided for this attribution was that these warehouses, which were used to store medical supplies, have contributed to the decline in the infant mortality rate in Honduras. The funding amounts reported as child survival are based on estimated percentages of total project obligations for types of child survival activities carried out under individual projects. These estimates are made by project or budget officers and are supposed to be based on a knowledge of project plans and activities. However, mission officials told us that they generally did not change the activity assignments or percentages, even though changes in available funding or project plans may occur during the year. For example, $800,000 in child survival funding was attributed to a basic education project in Ethiopia in 1994. A mission official told us that the child survival activity did not actually take place, but the reports provided to us by USAID included child survival funding for this project. USAID reports on funds attributed to child survival and other activities are not based on expenditures. USAID stated that its activity reporting system was never intended to track expenditures for programs and that Congress was aware that reported funding represented estimates of obligations. However, according to USAID officials, a new information system is underway that will link budgets, obligations, and expenditures and enable the agency to track funds more accurately. USAID officials said that the new system would be able to link some child survival assistance with actual expenditures in cases in which a distinct child survival activity has been defined. However, in other cases, reported funding will continue to be based on the project manager’s estimate of the percentage of funding attributable to child survival. USAID began implementing the new system in July 1996 for all new commitments made at headquarters, and it plans to extend the system to the overseas missions by October 1996. USAID has made significant contributions, in collaboration with other donors, in reducing under-5 mortality rates. Among the 10 countries receiving the most USAID mission-level child survival assistance, all but one improved their under-5 mortality rate between 1980 and 1994. Five countries achieved the World Summit goal of 70 or fewer deaths per 1,000 live births. The number of deaths from the three major causes of under-5 mortality declined during this time, but the largest decrease was for vaccine-preventable diseases. USAID can claim some far-reaching accomplishments in immunizations. Between 1985 and 1994, 26 of the 59 countries that received some mission-level assistance specifically for immunization activities achieved USAID’s goal of 80-percent immunization rates. Through collaboration with the Pan American Health Organization (PAHO), UNICEF, Rotary International, other international organizations, and the individual countries, USAID helped to bring about the eradication of poliomyelitis in the Americas. USAID’s Children’s Vaccine Initiative project supports a revolving fund, called the Vaccine Independence Initiative, that is managed by PAHO and UNICEF. This fund, which received $3.8 million of child survival funding between 1992 and 1995, is used to help developing countries purchase vaccines. One of USAID’s most important accomplishments in diarrheal disease control occurred before 1985 with the discovery that oral rehydration salts could be used to treat the dehydration that occurs with diarrheal diseases and causes death. USAID has also had positive results in efforts to increase usage of oral rehydration therapy, although only four countries where USAID has provided mission-level child survival assistance have usage rates above 80 percent. USAID’s recent diarrheal disease control efforts have been aimed at promoting sustainability by transferring technology to developing countries so that they can manufacture the salts. USAID has also contributed to research on the importance of vitamin A supplementation and efforts to incorporate vitamin A into local food supplies around the world. USAID’s Center for Development Information and Evaluation (CDIE) concluded in a 1993 report that USAID’s child survival activities had achieved many successes and made a significant contribution in expanding child survival services and reducing infant mortality in many countries. The CDIE report cited the importance of USAID’s role in vaccinations and stated that the agency had supported other major donors, such as UNICEF, through coordination and the provision of needed resources. Another evaluation conducted independently by RESULTS Educational Fund and the Bread for the World Institute concluded in a January 1995 report that USAID’s child survival activities had made an important contribution to reducing deaths among children under age 5 in countries receiving USAID assistance. In the four countries we visited, USAID’s contributions through child survival activities were evident. For example, in Mozambique, USAID supports PVOs that provide child survival services and other types of humanitarian and development assistance. We visited several sites where World Vision Relief and Development was implementing a child survival project. Among the activities we observed were vaccinations for children under age 3, monitoring of children’s growth, prenatal examinations, and the construction of latrines. In Bolivia, PROSALUD health clinics we visited offered general medical services; childbirth and pediatric care; immunizations; family planning; and dental, pharmacy, and laboratory services. PROSALUD is a Bolivian private, nonprofit organization initiated and operated with USAID child survival funds. Between 1991 and 1996, USAID provided the PROSALUD project with $6.5 million, of which $6.2 million, or 95 percent, was attributed to child survival. The 26 PROSALUD clinics and its hospital charge small user fees that enable the organization to partially self-finance its operations. We also visited Andean Rural Health Care, a U.S. PVO that provides community health care in Bolivia through clinics and volunteers. The volunteers are trained at the health centers on how to make home visits to (1) provide families with oral rehydration salts, (2) treat diarrheal diseases and acute respiratory infections, (3) promote vaccinations by health center staff, and (4) monitor the growth and health of family members (see fig. 4). In Guatemala, we visited a clinic operated by APROFAM, which is a private, nonprofit organization that provides family planning services as well as selected maternal-child health services, such as pre- and postnatal care, child growth monitoring, and oral rehydration therapy. Under the current USAID grant, APROFAM received about $2.5 million in child survival funding, representing 15 percent of its total USAID funds. We also visited a pharmaceutical plant in Guatemala where USAID provided equipment and technical assistance to manufacture packets of oral rehydration salts used in the treatment of diarrheal disease dehydration (see fig. 5). The packets are to be distributed through Ministry of Health facilities. This plant was a component of USAID’s $20 million child survival project started in 1985 to assist the Ministry of Health. In Egypt, we visited urban and rural health clinics that administered vaccinations and oral rehydration therapy and had laboratories that were equipped to perform medical tests. According to USAID officials, these health clinics also provided treatment for acute respiratory infections and family planning activities. For fiscal years 1993-95, USAID reportedly spent about $478.9 million, or 58 percent of child survival funding, on interventions that directly address the causes of death of children under the age of 5—immunizations, diarrheal disease control, nutrition, and acute respiratory infections. However, the amounts used for immunizations and diarrheal disease control were less in 1994 and 1995 than they had been in 1993. During the same period, USAID spent about $341.5 million on such areas as health systems development, health care financing, water quality, and environmental health (a new area). In Mozambique, USAID attributed child survival funds for the construction of a water supply system in Chimoio by the Adventist Development and Relief Agency to serve as many as 25,000 residents (see fig. 6). About $2.5 million, or 40 percent, of the project’s almost $6.2 million cost was attributed to child survival. USAID described this project as an exception where such infrastructure activities would be appropriately attributed to child survival. Since 1992, the USAID mission in Egypt has designated as child survival about $6.5 million for water and wastewater infrastructure development.Egypt’s sewerage projects include the design, construction, and operation of wastewater treatment plants and systems, and water projects include the construction of water treatment plants, which provide potable water to urban areas. The 1993 USAID/CDIE report recommended that water infrastructure projects not be funded as child survival because child survival resources were not considered adequate to construct enough water systems to have a measurable impact on national health indicators. The report also stated that the results of other child survival interventions appear to be greater than the results obtained from investing in water and sanitation and that oral rehydration therapy and interventions related to acute respiratory infections should be given higher priority. In Mozambique, reconstruction of a railroad bridge crossing the Zambezi River between Sena and Mutarara was considered child survival (see fig. 7). The goal of this project was to rehabilitate roads so that land movement of food and other relief assistance, the return of displaced persons and refugees, and drought recovery activities could occur. The railroad bridge was modified to accommodate vehicles and pedestrian traffic. Of the project’s $10.8 million budget, $1.9 million was attributed to child survival as nutrition in 1993 and 1994. Although the railroad bridge in Mozambique was considered a nutrition intervention, other infrastructure projects that have used child survival funding were classified as water quality/health, health systems development, and health care financing. Between 1993 and 1995, USAID attributed about $38.6 million in child survival funds to water quality/health, $113.5 million to health systems development, and $24.6 million to health care financing. Examples of activities related to health systems development include the construction of warehouses for government medical supplies in Honduras. An example of a health care financing activity in Bolivia is PROSALUD, which USAID established to be a self-financing health care provider. USAID attributed $30 million of the international disaster assistance funds to child survival in fiscal year 1995. The projects that USAID’s budget office counted as child survival included activities that benefited children, such as health and winterization activities in the former Yugoslavia, a water drilling program in northern Iraq, an emergency medical and nutrition project for displaced persons in Sudan, the purchase of four water purification/chlorination systems in Djibouti, and community health care in two regions of Somalia. Additionally, the conference report accompanying the fiscal year 1996 foreign operations appropriations act authorized USAID to attribute $30 million of disaster assistance funding to child survival. USAID’s guidance states that child survival assistance will be provided to countries with mortality rates for children under age 5 at or above 150 per 1,000 live births. However, USAID does not provide assistance to some of the 30 countries with the most serious under-5 mortality problems. For example, many countries in sub-Saharan Africa, which have the most serious child survival problems, do not receive USAID child survival assistance for mission-level projects. According to USAID, the agency does not have a mission in these countries, had closed out assistance, or was in the process of closing out assistance because of budgetary or legal reasons or because sustainable development programs were not considered feasible. (See app. II for details regarding under-5 mortality rates and amounts of USAID mission-level assistance for developing countries.) On the other hand, USAID attributes mission-level child survival funds to activities in 17 countries that have a mortality rate of 70 or fewer deaths per 1,000 live births. In fiscal year 1995, USAID used about $89.5 million of child survival funding for activities in these 17 countries. Among these countries were several in the former Soviet Union, including Georgia, which had an under-5 mortality rate of 27 per 1,000 live births. By contrast, in fiscal year 1995, USAID used $53.4 million of child survival funding in 15 of the 30 countries that had the most serious problems with under-5 mortality—rates above 150 per 1,000 live births. In 1995, Egypt continued to have the largest share of mission-level assistance attributed to child survival ($27 million), as it has over the last decade. UNICEF reported Egypt’s under-5 mortality rate in 1994 as 52; however, USAID indicated that its most recent data showed that the rate was 80.6. In commenting on a draft of this report, USAID indicated that it focused its child survival efforts in countries with high rates of under-5 mortality and other factors that indicated a great need for assistance. USAID stated that (1) national mortality rates are averages that often mask pockets of high child mortality, (2) the achievement of a target mortality rate is not a reason to stop support of efforts because gains need to be sustainable, and (3) child survival programs are not in some of the most needy countries because of legal, budgetary, and sustainability reasons. USAID issued new guidance in April 1996 that indicates that infrastructure is not generally considered to be an appropriate use of child survival funds. USAID stated that the infrastructure cases we cited, all of which began before April 1996, were isolated examples. USAID further stated that the bridge rehabilitation and water works construction projects in Mozambique were needed to reduce child mortality after the civil turmoil in that country. USAID also commented that its current financial reporting system was never intended to be used to track any program area on an expenditure basis. USAID indicated that a new information management system that is being implemented has been designed to track funding for each activity by linking budgets, obligations, procurements, and expenditures. After reviewing USAID’s comments, we have deleted the recommendations that we presented in our draft report. In its comments and subsequent discussions, USAID provided us with sufficiently detailed information to adequately explain the reasons why some countries with very severe child mortality problems do not receive direct U.S. aid and others with lower mortality rates do. USAID’s new operating procedures have the potential to address, for the most part, how its child survival activities will be linked to USAID’s objectives and how its project activities will be measured. Our concern that USAID’s new information management system provide accurate obligation and expenditure data is being addressed by USAID. We are still concerned, however, about the clarity of the guidance provided to USAID’s activity managers for determining the percentage of funding and expenditures attributable to child survival when a broader activity contributes to USAID’s child survival objectives. We are, however, making no specific recommendations in these areas. USAID also provided clarifications and corrections to the draft, and we have incorporated these changes where appropriate. USAID’s comments are in appendix III. To understand the extent, nature, and progress of USAID’s child survival activities, we reviewed the authorizing and appropriations legislation for 1985-95 and the accompanying committee reports and selected USAID project documents, including planning and program implementation documents, internal and external project evaluations, funding reports, health activity reports, and project files. We also held extensive discussions with officials from USAID, WHO, PAHO, UNICEF, USAID contractors, PVOs, and host governments and program beneficiaries. We visited USAID missions in Bolivia, Egypt, Guatemala, and Mozambique to directly observe the nature of USAID’s child survival activities being implemented in the field. We selected these countries because they received significant child survival funding, had various types of child survival projects, and provided regional differences. During our fieldwork, we analyzed data for most of the USAID missions’ ongoing projects and visited 63 project sites. In addition to the fieldwork, we also talked with USAID project officers in two other countries. We analyzed USAID strategic objectives, program goals, and funding documentation to determine the linkage between funds attributed to child survival and USAID’s child survival objectives. We analyzed the most recent data on USAID funding attributed to child survival for 1985-95, which we obtained from the contractor that operates USAID’s Center for International Health Information. At the time of our review, obligation data for fiscal year 1995 were not fully validated; therefore, some of the fiscal year 1995 obligation data are subject to change. According to USAID officials, the 1995 data had to be recoded, and the process was not completed by August 1996. We conducted our review between May 1995 and August 1996 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no distribution of this report until 30 days after the date of this letter. We will then send copies of this report to the Administrator, USAID; the Director, Office of Management and Budget; the Secretary of State; and other interested congressional committees. We will also make copies available to others on request. Please contact me at (202) 512-4128 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV. In February 1985, in response to the legislation authorizing child survival activities, the U.S. Agency for International Development (USAID) established the child survival program to consolidate some of the agency’s ongoing efforts related to reducing deaths among children in developing countries. Although USAID provided mission-level child survival assistance to 31 countries in 1985, it placed special emphasis on 22 countries that had especially high mortality rates. The child survival program for these 22 countries was originally guided by USAID’s Child Survival Task Force. This task force helped to develop a detailed child survival strategy for each country, in cooperation with the host government, to deal with the country’s specific needs and circumstances. USAID’s policy was to sustain mission-level child survival funding in these countries for at least 3 to 5 years and provide technical support and training on a priority basis. Special attention was also to be given to program monitoring and evaluation and coordination with private voluntary organizations (PVO), international organizations, and other U.S. agencies. From 1985 to 1991, child survival appropriations went into a functional account for child survival set up under an overall development assistance account. Beginning in fiscal year 1992, Congress designated a specific amount for child survival, which could be drawn from any USAID appropriation. In the 1990s, child survival was incorporated into USAID’s broad strategy for development assistance. According to the agency’s 1995 Guidelines for Strategic Plans, USAID’s current emphasis is on sustainable and participatory development, partnerships, and the use of integrated approaches. The agency’s five goals are to encourage broad-based economic growth, build democracy, stabilize world population and protect human health, protect the environment, and provide humanitarian assistance. USAID’s population, health, and nutrition sector has priority objectives in four areas: family planning, child survival, maternal health, and reducing sexually transmitted diseases and human immunodeficiency virus (HIV)/acquired immune deficiency syndrome (AIDS). Agency guidelines indicate that the core of the sector is family planning but that balanced strategies are encouraged. USAID’s guidance on child survival states that activities are to focus on the principal causes of death and severe lifelong disabilities, and programmatic emphasis should be on children under the age of 3. Further, the guidance states that child survival service delivery is to be focused on the community; the primary health care system; and, to a limited extent, the first-level hospitals. Emphasis is to be on enabling caretakers to take effective action on behalf of their children’s well-being and ensuring gender equity in children’s access to preventive and curative health. Although USAID considers health and population services to be important, the agency does not provide them directly; instead, it tries to improve the capacity, infrastructure, systems, and policies that support these services in a sustainable way. In its 1994 Strategies for Sustainable Development, USAID stated that the agency’s population and health programs would concentrate on countries that contribute the most to global population and health problems and have population and health conditions that impede sustainable development. Agency guidance states that any of the following key factors indicate the need to consider developing strategic objectives that address family planning, child survival, maternal health, and reduction of sexually transmitted diseases and HIV/AIDS: annual total gross domestic product growth less than 2 percent higher than annual population growth over the past 10 years, unmet need for contraception at or above 25 percent of married women of childbearing age, total fertility rate above 3.5 children per woman, mortality rate for children under age 5 at or above 150 per 1,000 live births, stunting in at least 25 percent of children under age 5, maternal mortality rate at or above 200 deaths per 100,000 live births, and prevalence of sexually transmitted diseases at or above 10 percent among women aged 15 to 30. Because USAID has identified global population growth as an issue of strategic priority agencywide, guidance states that strategies directed at family planning, child survival, maternal health, and reduction of sexually transmitted diseases and HIV/AIDS—all of which must be considered together—will receive particular attention in those countries where the unmet need for contraception is the greatest. USAID stated that other concerns would also include under-5 mortality, maternal mortality, prevalence of sexually transmitted diseases, and stunting. USAID’s long-term goal is to contribute to a cooperative global effort to stabilize world population growth and protect human health. Its anticipated near-term results over a 10-year period are (1) significant improvement in women’s health, (2) a reduction in child mortality by one-third, (3) a reduction of maternal mortality rates by one-half, and (4) a decrease in the rate of new HIV infections. USAID issued guidance in 1992 and 1996 about the types of activities that are allowable uses of child survival funds. The guidance named specific types of activities that may be considered to fall under the child survival program and gave broad discretion to USAID officials to determine the proportion of funding that could be reported as child survival. The annual instruction manual for coding activities and special interests further specifies how activities are to be reported. According to agency guidance and instructions, some activities are automatically funded in their entirety as child survival. These activities are diarrheal disease control and related research, immunization and child-related vaccine research, child spacing/high-risk births, acute respiratory infection, vitamin A, breastfeeding promotion, growth monitoring and weaning foods, micronutrients, and orphans and displaced children. Other activities can be partially funded as child survival. USAID’s guidance stated that project managers could decide the percentage for the following activities that could be reported as child survival, even though suggested percentages were provided for some: health systems development; nutrition management, planning, and policy; other nutrition activities; health care financing; environmental health; vector control; water and sanitation; women’s health; and malaria research and control. 1994 Under-5 population (in millions) (continued) 1994 Under-5 population (in millions) (continued) 1994 Under-5 population (in millions) (continued) 1994 Under-5 population (in millions) (Table notes on next page) 1 USAID has a presence in the country and a child survival program. 2 USAID has a presence in the country, but no activities were attributed to child survival in fiscal year 1995. 3 USAID had no presence in the country and supported no mission-level programs, as of August 1996, although some funding may be provided through regional or other mechanisms. 4 USAID was legally restricted from operating in these countries as of 1996. The following is GAO’s comment on USAID’s letter dated July 23, 1996. 1. We have revised this report since the time we provided it to USAID for comment. As a result, there are some instances in which the information discussed in USAID’s letter is no longer included in our report. Richard Seldin 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. | Pursuant to a congressional request, GAO reviewed the U.S. Agency for International Development's (AID) child survival activities and accomplishments, focusing on how child survival funds are being used to support AID objectives. GAO found that: (1) since 1985, AID has classified obligations totalling over $2.3 billion for activities in at least 83 countries as child survival; however, due to the way Congress directs funding to child survival, particularly since 1992, and AID's approach to tracking and accounting for such funds, it is not possible to determine precisely how much is actually being spent on child survival activities; (2) between 1985 and 1995, AID reported that it spent about $1.6 billion, or 67 percent of the child survival funds, for four types of activities: immunizations, diarrheal disease control, nutrition, and health systems development; (3) AID also reported that about 41 percent of the total amount identified as child survival has been used to address the three major threats to children under age 5 in the developing countries: diarrheal dehydration, acute respiratory infections, and vaccine-preventable diseases; (4) during GAO's field visits, it also noted that part of the cost of rehabilitating a railroad bridge and constructing a water tower in Mozambique and carrying out urban sewerage projects in Egypt were identified as child survival expenditures; (5) AID said the projects in Mozambique were critical for reducing child mortality because they supported access to water, food, and health services; (6) AID and other donors have made important contributions toward improving child mortality rates in many countries; (7) in 9 of the 10 countries receiving the most AID mission-level child survival assistance since 1985, mortality rates for children age 5 and under have dropped; (8) in addition, 5 of these 10 countries achieved mortality rates by 1994 of 70 or fewer deaths per 1,000 live births, a goal set for the year 2000 at the World Summit for Children; (9) both AID and independent evaluations have pointed out successes, such as collaboration with other donors to immunize children and promote oral rehydration therapy in the treatment of diarrheal disease; (10) in fiscal year 1995, AID's child survival funding was used in 17 countries that had an under-5 mortality rate of 70 or fewer deaths per 1,000 live births; (11) AID mission-level funding for child survival in these countries was $89.5 million, or 31 percent of the total child survival funding obligated in that year; (12) on the other hand, many countries that were far from achieving the goal, did not receive assistance for child survival; and (13) according to AID, most of these countries did not receive assistance because AID did not have a program in the country, had closed out assistance, or was in the process of closing out assistance due to budgetary or legal reasons or because sustainable development programs were not considered feasible. |
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Financial planning typically involves a variety of services, including preparing financial plans for clients based on their financial circumstances and objectives and making recommendations for specific actions clients may take. In many cases, financial planners also help implement these recommendations by, for example, providing insurance products, securities, or other investments. Individuals who provide financial planning services may call themselves a variety of different titles, such as financial planner, financial consultant, financial adviser, trust advisor, or wealth manager. In addition, many financial planners have privately conferred professional designations or certifications, such as Certified Financial Planner®, Chartered Financial Consultant®, or Personal Financial Specialist. The number of financial planners in the United States rose from approximately 94,000 in 2000 to 208,400 in 2008, according to the Bureau of Labor Statistics. The bureau projects the number will rise to 271,200 by 2018 because of the need for advisers to assist the millions of workers expected to retire in the next 10 years. According to the bureau, 29 percent of financial planners are self-employed and the remaining 71 percent are employees of firms, some of them large entities with offices nationwide that provide a variety of financial services. The median annual wage for financial planners was $68,200 in May 2009. According to an analysis of the 2007 Survey of Consumer Finances, the most recent year for which survey results are available, in 2007 about 22 percent of U.S. households used a financial planner for investment and saving decisions and about 12 percent of U.S. households used a financial planner for making credit and borrowing decisions. Those households most likely to use a financial planner were those with higher incomes. For example, 37 percent of households in the top income quartile used a financial planner to make investment and saving decisions compared to 10 percent of households in the bottom quartile. Financial planners are primarily regulated by federal and state investment adviser laws, because planners typically provide advice about securities as part of their business. In addition, financial planners that sell securities or insurance products are subject to applicable laws governing broker- dealers and insurance agents. Certain laws and regulations can also apply to the use of the titles, designations, and marketing materials that financial planners use. There is no specific, direct regulation of “financial planners” per se at the federal or state level. However, the activities of financial planners are primarily regulated under federal and state laws and regulations governing investment advisers—that is, individuals or firms that provide investment advice about securities for compensation. According to SEC staff, financial planning normally includes making general or specific recommendations about securities, insurance, savings, and anticipated retirement. SEC has issued guidance that broadly interprets the Investment Advisers Act of 1940 (Advisers Act) to apply to most financial planners, because the advisory services they offer clients typically include providing advice about securities for compensation. Similarly, NASAA representatives told us that states take a similar approach on the application of investment adviser laws to financial planners and, as a result, generally register and oversee financial planners as investment advisers. As investment advisers, financial planners are subject to a fiduciary standard of care when they provide advisory services, so that the planner “ held to the highest standards of conduct and must act in the best interest of clients.” SEC and state securities departments share responsibility for the oversight of investment advisers in accordance with the Advisers Act. Under that act, SEC generally oversees investment adviser firms that manage $25 million or more in client assets, and the states that require registration oversee those firms that manage less. However, as a result of section 410 of the Dodd-Frank Act, as of July 2011 the states generally will have registration and oversight responsibilities for investment adviser firms that manage less than $100 million in client assets, instead of firms that manage less than $25 million in assets as under current law. This will result in the states gaining responsibility for firms with assets under management between $25 million and $100 million. As shown in figure 1, as of October 2010, of the approximately 16,000 investment adviser firms providing financial planning services, the states were overseeing about 11,100 firms and SEC was overseeing about 4,900 such firms. However, in July 2011 about 2,400 of investment adviser firms that provided financial planning services (15 percent of the 16,000 firms) may shift from SEC to state oversight. SEC’s supervision of investment adviser firms includes evaluating their compliance with federal securities laws by conducting examinations of firms—including reviewing disclosures made to customers—and investigating and imposing sanctions for violations of securities laws. According to SEC staff, in its examinations, the agency takes specific steps to review the financial planning services of investment advisers. For example, SEC may review a sample of financial plans that the firm prepared for its customers to check whether the firm’s advice and investment recommendations are consistent with customers’ goals, the contract with the firm, and the firm’s disclosures. However, the frequency with which SEC conducts these examinations varies, largely because of resource constraints faced by the agency. SEC staff told us that the agency examined only about 10 percent of the investment advisers it supervises in 2009. In addition, they noted that generally an investment adviser is examined, on average, every 12 to 15 years, although firms considered to be of higher risk are examined more frequently. In 2007, we noted that harmful practices could go undetected because investment adviser firms rated lower-risk are unlikely to undergo routine examinations within a reasonable period of time, if at all. According to NASAA, state oversight of investment adviser firms generally includes activities similar to those undertaken by SEC, including taking specific steps to review a firm’s financial planning services. According to NASAA, states generally register not just investment adviser firms but also investment adviser representatives—that is, individuals who provide investment advice and work for a state- or federally registered investment adviser firm. In addition to providing advisory services, such as developing a financial plan, financial planners generally help clients implement the plan by making specific recommendations and by selling securities, insurance products, and other investments. SEC data show that, as of October 2010, 19 percent of investment adviser firms that provided financial planning services also provided brokerage services, and 27 percent provided insurance. Financial planners that provide brokerage services, such as buying or selling stocks, bonds, or mutual fund shares, are subject to broker-dealer regulation at the federal and state levels. At the federal level, SEC oversees U.S. broker-dealers, and SEC’s oversight is supplemented by self- regulatory organizations (SRO). The primary SRO for broker-dealers is FINRA. State securities offices work in conjunction with SEC and FINRA to regulate securities firms. Salespersons working for broker-dealers are subject to state registration requirements, including examinations. About half of broker-dealers were examined in 2009 by SEC and SROs. Under broker-dealer regulation, financial planners are held to a suitability standard of care when making a recommendation to a client to buy or sell a security, meaning that they must recommend those securities that they reasonably believe are suitable for the customer. Financial planners that sell insurance products, such as life insurance or annuities, must be licensed by the states to sell these products and are subject to state insurance regulation. In contrast to securities entities (other than national banks) that are subject to dual federal and state oversight, the states are generally responsible for regulating the business of insurance. When acting as insurance agents, financial planners are subject to state standard of care requirements, which can vary by product and by state. As of October 2010, 32 states had adopted a previous version of the NAIC Suitability in Annuities Transactions Model Regulation, according to NAIC. In general, this regulation requires insurance agents to appropriately address consumers’ insurance needs and financial objectives at the time of an annuity transaction. Thirty-four states had also adopted the Life Insurance Disclosure Model Regulation in a uniform and substantially similar manner as of July 2010, according to NAIC. This regulation does not include a suitability requirement, although it does require insurers to provide customers with information that will improve their ability to select the most appropriate life insurance plan for their needs and improve their understanding of the policy’s basic features. Financial planners that sell variable insurance products, such as variable life insurance or variable annuities, are subject to both state insurance regulation and broker-dealer regulation, because these products are regulated as both securities and insurance products. When selling variable insurance, financial planners are subject to FINRA sales practice standards requiring that such sales be subject to suitability standards. In addition, other FINRA rules and guidance, such as those governing standards for communication with the public, apply to the sale of variable insurance products. In addition, as previously discussed, 32 states also generally require insurance agents and companies to appropriately address a consumer’s insurance needs and financial objectives at the time of an annuity transaction. However, in the past, we have reported that the effectiveness of market conduct regulation—that is, examination of the sales practices and behavior of insurers—may be limited by a lack of reciprocity and uniformity, which may lead to uneven consumer protection across states. At the federal level, SEC and FINRA have regulations on advertising and standards of communication that apply to the strategies investment adviser firms and broker-dealers use to market their financial planning services. For example, SEC-registered investment advisers must follow SEC regulations on advertising and other communications, which prohibit false or misleading advertisements, and these regulations apply to investment advisers’ marketing of financial planning services. FINRA regulations on standards for communication with the public similarly prohibit false, exaggerated, unwarranted, or misleading statements or claims by broker-dealers, and broker-dealer advertisements are subject to additional approval, filing, and recordkeeping requirements and review procedures. According to many company officials we spoke with, their companies responded to these requirements by putting procedures in place to determine which designations and titles their registered representatives may use in their marketing materials, such as business cards. SEC and state securities regulators also regulate information that investment advisers are required to disclose to their clients. In the Uniform Application for Investment Adviser Registration (Form ADV), regulators have typically required investment adviser firms to provide new and prospective clients with background information, such as the basis of the advisory fees, types of services provided (such as financial planning services), and strategies for addressing conflicts of interest that may arise from their business activities. Recent changes to Form ADV are designed to improve the disclosures that firms provide to clients. For example, firms must now provide clients with information about the advisory personnel on whom they rely for investment advice, including the requirements and applicability of any professional designations or certifications advisers may choose to include in their background information. Most states regulate the use of the title “financial planner,” and state securities and insurance laws can apply to the misuse of this title and other titles. For example, according to NASAA, at least 29 states specifically include financial planners in their definition of investment adviser. According to NAIC, in many states, regulators can use unfair trade practice laws to prohibit insurance agents from holding themselves out as financial planners when in fact they are only engaged in the sale of life or annuity insurance products. However, as noted earlier, the effectiveness of the regulation of insurers’ market conduct varies across states. In particular, in 2010 we noted inconsistencies in the state regulation of life settlements, a potentially high-risk transaction in which financial planners may participate. In addition, we were told some states had adopted regulations limiting the use of “senior-specific designations”—that is, designations that imply expertise or special training in advising senior citizen or elderly investors. According to NAIC, as of December 2010, 25 states had adopted in a uniform and substantially similar manner the NAIC Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities, which limits the use of senior- specific designations by insurance agents. According to NASAA, as of December 2010, 31 states had adopted—and at least 9 other states were planning to adopt—the NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations, which prohibits the misleading use of senior-specific designations by investment adviser representatives and other financial professionals. The regulatory system for financial planners covers most activities in which they engage. However, enforcement of regulation may be inconsistent and some questions exist about consumers’ understanding of the roles, standards of care, and titles and designations that a financial planner may have. The ability of regulators to identify potential problems is limited because they do not specifically track complaints, inspections, and enforcement actions specific to financial planning services. Although there is no single stand-alone regulatory body with oversight of financial planners, the regulatory structure for financial planners covers most activities in which they engage. As discussed earlier, and summarized in figure 2, the primary activities a financial planner performs are subject to existing regulation at the federal or state level, primarily through regulation pertaining to investment advisers, broker-dealers, and insurance agents. As such, SEC, FINRA, and NASAA staff, a majority of state securities regulators, financial industry representatives, consumer groups, and academic and subject matter experts with whom we spoke said that, in general, they believe the regulatory structure for financial planners is comprehensive, although, as discussed below, the attention paid to enforcing existing regulation has varied. As noted earlier, the activities a financial planner normally engages in generally include advice related to securities—and such activities make financial planners subject to regulation under the Advisers Act. One industry association and an academic expert noted that it would be very difficult to provide financial planning services without offering investment advice or considering securities. SEC staff told us that financial planners holding even broad discussions of securities—for example, what proportion of a portfolio should be invested in stocks—would be required to register as investment advisers or investment adviser representatives. In theory, a financial planner could offer only services that do not fall under existing regulatory regimes—for example, advice on household budgeting—but such an example is likely hypothetical and such a business model may be hard to sustain. SEC and NASAA staff, a majority of the state securities regulators we spoke with, and many representatives of the financial services industry told us that they were not aware of any individuals serving as financial planners who were not regulated as investment advisers or regulated under another regulatory regime. Some regulators and industry representatives also said that, to the extent that financial planners offered services that did not fall under such regulation, the new Bureau of Consumer Financial Protection potentially could have jurisdiction over such services. However, not everyone agreed that regulation of financial planners was comprehensive. One group, the Financial Planning Coalition, has argued that a regulatory gap exists because no single law governs the delivery of the broad array of financial advice to the public. According to the coalition, the provision of integrated financial advice—which would cover topics such as selecting and managing investments, income taxes, saving for college, home ownership, retirement, insurance, and estate planning— is unregulated. Instead, the coalition says that there is patchwork regulation of financial planning advice, and it views having two sets of laws—one regulating the provision of investment advice and another regulating the sale of products—as problematic. In addition, although the regulatory structure itself for financial planners may generally be comprehensive, attention paid to enforcing existing statute and regulation has varied. For example, as noted earlier, due to resource constraints, the examination of SEC-supervised investment advisers is infrequent. Further, as also noted earlier, market conduct regulation of insurers—which would include the examination of the sales practices and behavior of financial planners selling insurance products— has been inconsistent. Some representatives of industry associations told us that they believed that a better alternative to additional regulation of financial planners would be increased enforcement of existing law and regulation, particularly related to fraud and unfair trade practices. Certain professionals—including attorneys, certified public accountants, broker-dealers, and teachers—who provide financial planning advice are exempt from regulation under the Advisers Act if such advice is “solely incidental” to their other business activities. According to an SEC staff interpretation, this exemption would not apply to individuals who held themselves out to the public as providing financial planning services, and would apply only to individuals who provided specific investment advice on anything other than “rare, isolated and non-periodic instances.” Banks and bank employees are also excluded from the Advisers Act and are subject to separate banking regulation. The American Bankers Association told us that the financial planning activities of bank employees such as trust advisors or wealth managers were typically utilized by clients with more than $5 million in investable assets. The association noted that these activities were subject to a fiduciary standard and the applicable supervision of federal and state banking regulators. Most regulators and academic experts and many financial services industry representatives we spoke with told us that there is some overlap in the regulation of individuals who serve as financial planners because such individuals might be subject to oversight by different regulatory bodies for the different services they provide. For example, a financial planner who recommends and sells variable annuities as part of a financial plan is regulated as a registered representative of a broker-dealer as well as an insurance agent under applicable federal and state laws. However, some state regulators we spoke with told us that such overlap may be appropriate since the regulatory regimes cover different functional areas. As seen in figure 3, financial planners are subject to different standards of care in their capacities as investment advisers, broker-dealers, and insurance agents. Fiduciary Standard of Care: As noted earlier, investment advisers are subject to a fiduciary standard of care—that is, they must act in their client’s best interest, ensure that recommended investments are suitable for the client, and disclose to the client any material conflicts of interest. According to SEC and NASAA representatives, the fiduciary standard applies even when investment advisers provide advice or recommendations about products other than securities, such as insurance, in conjunction with advice about securities. Suitability Standard of Care When Recommending Security Products: FINRA regulation requires broker-dealers to adhere to a suitability standard when rendering investment recommendations—that is, they must recommend only those securities that they reasonably believe are suitable for the customer. Unlike the fiduciary standard, suitability rules do not necessarily require that the client’s best interest be served. According to FINRA staff, up-front general disclosure of a broker-dealer’s business activities and relationships that may cause conflicts of interest is not required. However, according to SEC, broker-dealers are subject to many FINRA rules that require disclosure of conflicts in certain situations, although SEC staff also note that those rules may not cover every possible conflict of interest, and disclosure may occur after conflicted advice has already been given. Suitability Standard of Care When Recommending Insurance Products: Standards of care for the recommendation and sale of insurance products vary by product and by state. For example, as seen earlier, NAIC’s model regulations on the suitability standard for annuity transactions, adopted by some states but not others, require consideration of the insurance needs and financial objectives of the customer, while NAIC’s model regulation for life insurance does not include a suitability requirement per se. Conflicts of interest can exist when, for example, a financial services professional earns a commission on a product sold to a client. Under the fiduciary standard applicable to investment advisers, financial planners must mitigate any potential conflicts of interest and disclose any that remain. But under a suitability standard applicable to broker-dealers, conflicts of interest may exist and generally may not need to be disclosed up-front. For example, as confirmed by FINRA, financial planners functioning as broker-dealers may recommend a product that provides them with a higher commission than a similar product with a lower commission, as long as the product is suitable and the broker-dealer complies with other requirements. Because the same individual or firm can offer a variety of services to a client—a practice sometimes referred to as “hat switching”—these services could be subject to different standards of care. As such, representatives of consumer groups and others have expressed concern that consumers may not fully understand which standard of care, if any, applies to a financial professional. As shown above, the standards of care—and the extent to which conflicts of interest must be disclosed—can vary depending on the capacity in which the individual serves. A 2007 report by the Financial Planning Association stated that “it would be difficult, if not impossible, for an individual investor to discern when the adviser was acting in a fiduciary capacity or in a non-fiduciary capacity.” A 2008 SEC study conducted by the RAND Corporation, consisting of a national household survey and six focus group discussions with investors, found that consumers generally did not understand not only the distinction between a suitability and fiduciary standard of care but also the differences between broker-dealers and investment advisers. Similarly, a 2010 national study of investors found that most were confused about which financial professionals are required to operate under a fiduciary standard that requires professionals to put their client’s interest ahead of their own. Representatives of financial services firms that provide financial planning told us they believe that clients are sufficiently informed about the differing roles and accompanying standards of care that a firm representative may have. They noted that when they provide both advisory and transactional services to the same customer, each service—such as planning, brokerage, or insurance sales—is accompanied by a separate contract or agreement with the customer. These agreements disclose that the firm’s representatives have different obligations to the customer depending on their role. In addition, once a financial plan has been provided, some companies told us that they have customers sign an additional agreement stating that the financial planning relationship with the firm has ended. Recent revisions by SEC to Form ADV disclosure requirements were designed to address, among other things, consumer understanding of potential conflicts of interest by investment advisers and their representatives. Effective October 12, 2010, SEC revised Form ADV, Part 2, which financial service firms must provide to new and prospective clients. The new form, which must be written in plain English, is intended to help consumers better understand the activities and affiliations of their investment adviser. It requires additional disclosures about a firm’s conflicts of interest, compensation, business activities, and disciplinary information that is material to an evaluation of the adviser’s integrity. Similarly, in October 2010 FINRA issued a regulatory notice requesting comments on a concept proposal regarding possible new disclosure requirements that would, among other things, detail for consumers in plain English the conflicts of interest that broker-dealers may have associated with their services. Section 913 of the Dodd-Frank Act requires SEC to study the substantive differences between the applicable standards of care for broker-dealers and investment advisers; the effectiveness of the existing legal or regulatory standards of care for brokers, dealers, and investment advisers; and consumers’ ability to understand the different standards of care. SEC will also consider the potential impact on retail customers of imposing the same fiduciary standard that now applies to investment advisers on broker-dealers when they provide personalized investment advice. Under the act, SEC may promulgate rules to address these issues and is specifically authorized to establish a uniform fiduciary duty for broker- dealers and investment advisers that provide personalized investment advice about securities to customers. As a result, further clarification of these standards may be forthcoming. FINRA officials told us that they support a fiduciary standard of care for broker-dealers when they provide personalized investment advice to retail customers. Consumer confusion on standards of care may also be a source of concern with regard to the sale of some insurance products. A 2010 national survey of investors found that 60 percent mistakenly believed that insurance agents had a fiduciary duty to their clients. Some insurance products, such as annuities, are complex and can be difficult to understand, and annuity sales practices have drawn complaints from consumers and various regulatory actions from state regulators as well as SEC and FINRA for many years. According to NAIC, many states have requirements that insurance salespersons sell annuities only if the product is suitable for the customer. However, NAIC notes that some states do not have a suitability requirement for annuities. Consumer groups and others have stated that high sales commissions on certain insurance products, including annuities, may provide salespersons with a substantial financial incentive to sell these products, which may or may not be in the consumer’s best interest. As a result of section 989J of the Dodd-Frank Act, one type of annuity—the indexed annuity—is to be regulated by states as an insurance product, rather than regulated by SEC as a security, under certain conditions. SEC’s pending study related to the applicable standards of care for broker- dealers and investment advisers will not look at issues of insurance that fall outside of SEC’s jurisdiction. NAIC has not undertaken a similar study regarding consumer understanding of the standard of care for insurance agents. As we reported in the past, financial markets function best when consumers understand how financial service providers and products work and know how to choose among them. Given the evidence of consumer confusion about differing standards of care and given the increased risks that certain insurance products can pose, there could be benefits to an NAIC review of consumers’ understanding of standards of care for high- risk insurance products. Individuals who provide financial planning services may use a variety of titles when presenting themselves to the public, including financial planner, financial consultant, and financial adviser, among many others. However, evidence suggests that the different titles financial professionals use can be confusing to consumers. The 2008 RAND study found that even experienced investors were confused about the titles used by broker- dealers and investment advisers, including financial planner and financial adviser. Similarly, in consumer focus groups of investors conducted by SEC in 2005 as part of a rulemaking process, participants were generally unclear about the distinctions among titles, including broker, investment adviser, and financial planner. In addition, a representative of one consumer advocacy group has expressed concern that some financial professionals may use as a marketing tool titles suggesting that they provide financial planning services, when in fact they are only selling products. One industry group, the Financial Planning Coalition, also has noted that some individuals may hold themselves out as financial planners without meeting minimum training or ethical requirements. Federal and state regulators told us they generally focused their oversight and enforcement actions on financial planners’ activities rather than the titles they use. Moreover, NASAA has said that no matter what title financial planners use, most are required to register as investment adviser representatives and must satisfy certain competency requirements, including passing an examination or obtaining a recognized professional designation. Financial planners’ professional designations are typically conferred by a professional or trade organization. These designations may indicate that a planner has passed an examination, met certain educational requirements, or had related professional experience. Some of these designations require extensive classroom training and examination requirements and include codes of ethics with the ability to remove the designation in the event of violations. State securities regulators view five specific designations as meeting or exceeding the registration requirements for investment adviser representatives, according to NASAA, and allow these professional designations to satisfy necessary competency requirements for prospective investment adviser representatives. For example, one of these five designations requires a bachelor’s degree from an accredited college or university, 3 years of full-time personal financial planning experience, a certification examination, and 30 hours of continuing education every 2 years. The criteria used by organizations that grant professional designations for financial professionals vary greatly. FINRA has stated that while some designations require formal certification procedures, including examinations and continuing professional education credits, others may merely signify that membership dues have been paid. The Financial Planning Coalition and The American College, a nonprofit educational institution that confers several financial designations, similarly told us that privately conferred designations range from those with rigorous competency, practice, and ethical standards and enforcement to those that can be obtained with minimal effort and no ongoing evaluation. As noted earlier, designations that imply expertise or special training in advising senior citizen or elderly investors have received particular attention from regulators. A joint report of SEC, FINRA, and NASAA described cases in which financial professionals targeted seniors by using senior-specific designations that implied that they had a particular expertise for senior investors, when in fact they did not; as noted earlier, NASAA and NAIC have developed a model rule to address the issue. The report also noted these professionals targeted seniors through the use of so-called free-lunch seminars, where free meals are offered in exchange for attendance of a financial education seminar. However, the focus of the seminars was actually on the sale of products rather than the provision of financial advice. Given the large number of designations financial planners may use, concerns exist that consumers may have difficulty distinguishing among them. To alleviate customer confusion, FINRA has developed a Web site for consumers that provides the required qualifications and other information about the designations used by securities professionals. The site lists more than 100 professional designations, 5 of which include the term “financial planner,” and 24 of which contain comparable terms such as financial consultant or counselor. The American College told us that it had identified 270 financial services designations. Officials from NASAA, NAIC, and a consumer advocacy organization told us that consumers might have difficulty distinguishing among the various designations. Officials from The American College told us that the number of designations itself was not necessarily a cause for concern, but rather consumers’ broadly held misperception that all designations or credentials are equal. To help address these concerns, FINRA plans to expand its Web site on professional designations to include several dozen additional designations related to insurance. However, FINRA officials noted that consumers’ use of this tool has been limited. For example, in 2009, the site received only 55,765 visits. A recent national study of the financial capability of American adults sponsored by FINRA found that only 15 percent of adults who had used a financial professional in the last 5 years claimed to have checked the background, registration, or license of a financial professional. In addition, SEC staff acknowledged that there have been concerns about confusing designations, and SEC’s October 2010 changes to investment adviser disclosure requirements mandate that investment adviser representatives who list professional designations and certifications in their background information also provide the qualifications needed for these designations, so that the consumer can understand the value of the designation for the services being provided. Section 917 of the Dodd-Frank Act includes a requirement that SEC conduct a study identifying the existing level of financial literacy among retail investors, including the most useful and understandable relevant information that they need to make informed financial decisions before engaging a financial intermediary. While the section does not specifically mention the issue of financial planners’ titles and designations, the confusion we found to exist could potentially be addressed or mitigated if SEC incorporated this issue into its overall review of financial literacy among investors. SEC staff told us that at this time its review would not likely address this issue, although it would address such things as the need for conducting background checks on financial professionals. Financial markets function best when consumers have information sufficient to understand and assess financial service providers and products. Including financial planners’ use of titles and designations in SEC’s financial literacy review could provide useful information on the implications of consumers’ confusion on this issue. Available data do not show a large number of consumer complaints and enforcement actions involving financial planners, but the exact extent to which financial planners may be a source of problems is unknown. We were able to find limited information on consumer complaints from various agencies. For example, representatives of FTC and the Better Business Bureau said that they had received relatively few complaints related to financial planners. FTC staff told us that a search in its Consumer Sentinel Network database for the phrase “financial planner” found 141 complaints in the 5-year period from 2005 through 2010 but that only a handful of these appeared to actually involve activity connected to the financial planning profession. The staff added that additional searches on other titles possibly used by financial planners, such as financial consultant and personal financial adviser, did not yield significant additional complaints. In addition, a representative of the Better Business Bureau told us that it had received relatively few complaints related to financial planners, although the representative noted that additional complaints might exist in broader categories, such as “financial services.” Consumer complaint data may not be an accurate gauge of the extent of problems. Complaints may represent only a small portion of potential problems and complaints related to “financial planners” may not always be recorded as such. As we have previously reported, consumers also may not always know where they can report complaints. At the same time, some complaints that are made may not always be valid. SEC has limited information on the extent to which the activities of financial planners may be causing consumers harm. The agency does record and track whether federally and state-registered investment adviser firms provide financial planning services, but its data tracking systems for complaints, examination results, and enforcement actions are not programmed to readily determine and track whether the complaint, result, or action was specifically related to a financial planner or financial planning service. For example, SEC staff told us the number of complaints about financial planners would be undercounted in their data system that receives and tracks public inquiries, known as the Investor Response Information System, because this code would likely be used only if it could not be identified whether the person (or firm) was an investment adviser or broker-dealer. In addition, the data system that SEC uses to record examination results, known as the Super Tracking and Reporting System, does not allow the agency to identify and extract examination results specific to the financial planning services of investment advisers. However, SEC staff told us that a review of its Investor Response Information System identified 51 complaints or inquiries that had been recorded using their code for issues related to “financial planners” between November 2009 and October 2010. SEC staff told us that the complaints most often involved allegations of unsuitable investments or fraud, such as misappropriation of funds. A review of a separate SEC database called Tips, Complaints, and Referrals—an interim system that was implemented in March 2010—found 124 allegations of problems possibly related to financial planners from March 2010 to October 2010. SEC staff told us that they did not have comprehensive data on the extent of enforcement activities related to financial planners per se. In addition, NASAA said that states generally do not track enforcement data specific to financial planners. At our request, SEC and NASAA provided us with examples of enforcement actions related to individuals who held themselves out as financial planners. Using a keyword search, SEC identified 10 such formal enforcement actions between August 2009 and August 2010. According to SEC documents, these cases involved allegations of such activities as defrauding clients through marketing schemes, receiving kickbacks without making proper disclosures, and misappropriation of client funds. Although NASAA also did not have comprehensive data on enforcement activities involving financial planners, representatives provided us with examples of 36 actions brought by 30 states from 1986 to 2010. These cases involved allegations of such things as the sale of unsuitable products, fraudulent misrepresentation of qualifications, failure to register as an investment adviser, and misuse of client funds for personal expenses. Because of limitations in how data are gathered and tracked, SEC and state securities regulators are not currently able to readily determine the extent to which financial planning services may be causing consumers harm. NASAA officials told us that, as with SEC, state securities regulators did not typically or routinely track potential problems specific to financial planners. SEC and NASAA representatives told us that they had been meeting periodically in recent months to prepare for the transition from federal to state oversight of certain additional investment adviser firms, as mandated under the Dodd-Frank Act, but they said that oversight of financial planners in particular had not been part of these discussions. SEC staff have noted that additional tracking could consume staff time and other resources. They also said that because there are no laws that directly require registration, recordkeeping, and other responsibilities of “financial planners” per se, tracking such findings relating to those entities would require expenditure of resources on something that SEC does not have direct responsibility to oversee. Yet as we have reported in the past, while we recognize the need to balance the cost of data collection efforts against the usefulness of the data, a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking. Given the significant growth in the financial planning industry, ongoing concerns about potential conflicts of interest, and consumer confusion about standards of care, regulators may benefit from identifying ways to get better information on the extent of problems specifically involving financial planners and financial planning services. Over the past few years, a number of stakeholders—including consumer groups, FINRA, and trade associations representing financial planners, securities firms, and insurance firms—have proposed different approaches to the regulation of financial planners. Following are four of the most prominent approaches, each of which has both advantages and disadvantages. In 2009, the Financial Planning Coalition—comprised of the Certified Financial Planner Board of Standards, Financial Planning Association, and the National Association of Personal Financial Advisors—proposed that Congress establish a professional standards-setting oversight board for financial planners. According to the coalition, its proposed legislation would establish federal regulation of financial planners by allowing SEC to recognize a financial planner oversight board that would set professional standards for and oversee the activities of individual financial planners, although not financial planning firms. For example, the board would have the authority to establish baseline competency standards in the areas of education, examination, and continuing education, and would be required to establish ethical standards designed to prevent fraudulent and manipulative acts and practices. It would also have the authority to require registration or licensing of financial planners and to perform investigative and disciplinary actions. Under the proposal, states would retain antifraud authority over financial planners as well as full oversight for financial planners’ investment advisory activity. However, states would not be allowed to impose additional licensing or registration requirements for financial planners or set separate standards of conduct. Supporters of a new oversight board have noted that its structure and governance would be analogous to the Public Company Accounting Oversight Board, a private nonprofit organization subject to SEC oversight that in turn oversees the audits of public companies that are subject to securities laws. According to the Financial Planning Coalition, a potential advantage of this approach is that it would treat financial planning as a distinct profession and would regulate across the full spectrum of activities in which financial planners may engage, including activities related to investments, taxes, education, retirement planning, estate planning, insurance, and household budgeting. Proponents argue that a financial planning oversight board would also help ensure high standards and consistent regulation for all financial planners by establishing common standards for competency, professional practices, and ethics. However, many securities regulators and financial services trade associations with whom we spoke said that they believe such a board would overlap with and in many ways duplicate existing state and federal regulations, which already cover virtually all of the products and services that a financial planner provides. Some added that the board would entail unnecessary additional financial costs and administrative burdens for the government and regulated entities. In addition, some opponents of this approach question whether “financial planning” should be thought of as a distinct profession that requires its own regulatory structure, noting that financial planning is not easily defined and can span multiple professions, including accounting, insurance, investment advice, and law. One consumer group also noted that the regulation of individuals and professions is typically a state rather than a federal responsibility. Finally, we note that the analogy to the Public Company Accounting Oversight Board may not be apt. That board was created in response to a crisis involving high-profile bankruptcies and investor losses caused in part by inadequacies among public accounting firms. In the case of financial planners, there is limited evidence of an analogous crisis or, as noted earlier, of severe harm to consumers. A number of proposals over the years have considered having FINRA or a newly created SRO supplement SEC oversight of investment advisers. These proposals date back to at least 1963, when an SEC study recommended that all registered investment advisers be required to be a member of an SRO. In 1986, the National Association of Securities Dealers, a predecessor to FINRA, explored the feasibility of examining the investment advisory activities of members who were also registered as investment advisers. The House of Representatives passed a bill in 1993 that would have amended the Advisers Act to authorize the creation of an “inspection only” SRO for investment advisers, although the bill did not become law. In 2003, SEC requested comments on whether one or more SROs should be established for investment advisers, citing, among other reasons, concerns that the agency’s own resources were inadequate to address the growing numbers of advisers. However, SEC did not take further action. Section 914 of the Dodd-Frank Act required SEC to issue a study in January 2011 on the extent to which one or more SROs for investment advisers would improve the frequency of examinations of investment advisers. According to FINRA, the primary advantage of augmenting investment adviser oversight with an SRO is that doing so would allow for more frequent examinations, given the limited resources of states and SEC. The Financial Services Institute, an advocacy organization for independent broker-dealers and financial advisers, has stated that an industry-funded SRO with the resources necessary to appropriately supervise and examine all investment advisers would close the gap that exists between the regulation of broker-dealers and investment advisers. FINRA said that it finds this gap troubling given the overlap between the two groups (approximately 88 percent of all registered advisory representatives are also broker-dealer representatives). FINRA adds that any SRO should operate subject to strong SEC oversight and that releasing SEC of some of its responsibilities for investment advisers would free up SEC resources for other regulatory activities. However, NASAA, some state securities regulators, and one academic with whom we spoke opposed adding an SRO component to the regulatory authority of investment advisers. NASAA said it believed that investment adviser regulation is a governmental function that should not be outsourced to a private, third-party organization that lacks the objectivity, independence, expertise, and experience of a government regulator. Further, NASAA said it is concerned with the lack of transparency associated with regulation by SROs because, unlike government regulators, they are not subject to open records laws through which the investing public can obtain information. Two public interest groups, including the Consumer Federation of America, have asserted that one SRO—FINRA— has an “industry mindset” that has not always put consumer protection at the forefront. In addition, the Investment Adviser Association and two other organizations we interviewed have noted that funding an SRO and complying with its rules can impose additional costs on a firm. Proposals have been made to extend coverage of the fiduciary standard of care to all those who provide financial planning services. Some consumer groups and others have stated that a fiduciary standard should apply to anyone who provides personalized investment advice about securities to retail customers, including insurance agents who recommend securities. The Financial Planning Coalition has proposed that the fiduciary standard apply to all those who hold themselves out as financial planners. Proponents of extending the fiduciary standard of care, which also include consumer groups and NASAA, generally maintain that consumers should be able to expect that financial professionals they work with will act in their best interests. They say that a fiduciary standard is more protective of consumers’ interests than a suitability standard, which requires only that a product be suitable for a consumer rather than in the consumer’s best interest. In addition, the Financial Planning Coalition notes that extending a fiduciary standard would somewhat reduce consumer confusion about financial planners that are covered by the fiduciary standard in some capacities (such as providing investment advice) but not in others (such as selling a product). However, some participants in the insurance and broker-dealer industries have argued that a fiduciary standard of care is vague and undefined. They say that replacing a suitability standard with a fiduciary standard could actually weaken consumer protections since the suitability of a product is easier to define and enforce. Opponents also have argued that complying with a fiduciary standard would increase compliance costs that in turn would be passed along to consumers or otherwise lead to fewer consumer choices. The American College has proposed clarifying the credentials and standards of financial professionals, including financial planners. In particular, it has proposed creating a working group of existing academic and practice experts to establish voluntary credentialing standards for financial professionals. As noted previously, consumers may be unable to distinguish among the various financial planning designations that exist and may not understand the requirements that underpin them. Clarifying the credentials and standards of financial professionals could conceivably take the form of prohibiting the use of certain designations, as has been done for senior-specific designations in some states, or establishing minimum education, testing, or work experience requirements needed to obtain a designation. The American College has stated that greater oversight of such credentials and standards could provide a “seal of approval” that would generally raise the quality and competence of financial professionals, including financial planners, help consumers distinguish among the various credentials, and help screen out less qualified or reputable players. However, the ultimate effectiveness of such an approach is not clear, since the extent to which consumers take designations into account when selecting or working with financial planners is unknown, as is the extent of the harm caused by misleading designations. In addition, implementation and ongoing monitoring of financial planners’ credentials and standards could be challenging. Further, the issue of unclear designations has already been addressed to some extent—for example, as noted earlier, some states regulate the use of certain senior-specific designations and allow five professional designations to satisfy necessary competency requirements for prospective investment adviser representatives. State securities regulators also have the authority to pursue the misleading use of credentials through their existing antifraud authority. In general, a majority of the regulatory agencies, consumer groups, academics, trade associations, and individual financial services companies with which we spoke did not favor substantial structural change in the regulation of financial planners. In particular, few supported an additional oversight body, which was generally seen as duplicative of existing regulation. Some stakeholders in the securities and insurance industries noted that given the dynamic financial regulatory environment under way as a result of the Dodd-Frank Act—such as creation of a new Bureau of Consumer Financial Protection—more time should pass before additional regulatory changes related to financial planning services were considered. Several industry associations also noted that opportunities existed for greater enforcement of existing law and regulation, as discussed earlier. Existing statutes and regulations appear to cover the great majority of financial planning services, and individual financial planners nearly always fall under one or more regulatory regimes, depending on their activities. While no single law governs the broad array of activities in which financial planners may engage, given available information, it does not appear that an additional layer of regulation specific to financial planners is warranted at this time. At the same time, as we have previously reported, more robust enforcement of existing laws could strengthen oversight efforts. In addition, there are some actions that can be taken that may help address consumer protection issues associated with the oversight of financial planners. First, as we have reported, financial markets function best when consumers understand how financial providers and products work and know how to choose among them. Yet consumers may be unclear about standards of care that apply to financial professionals, particularly when the same individual or firm offers multiple services that have differing standards of care. As such, consumers may not always know whether and when a financial planner is required to serve their best interest. While SEC is currently addressing the issue of whether the fiduciary standard of care should be extended to broker-dealers when they provide personalized investment advice about securities, the agency is not addressing whether this extension should also apply to insurance agents, who generally fall outside of SEC’s jurisdiction. Sales practices involving some high-risk insurance products, such as annuities, have drawn attention from federal and state regulators. A review by NAIC of consumers’ understanding of the standards of care with regard to the sale of insurance products could provide information on the extent of consumer confusion in the area and actions needed to address the issue. Second, we have seen that financial planners can adopt a variety of titles and designations. The different designations can imply different types of qualifications, but consumers may not understand or distinguish among these designations, and thus may be unable to properly assess the qualifications and expertise of financial planners. SEC’s recent changes in this area—requiring investment advisers to disclose additional information on professional designations and certifications they list—should prove beneficial. Another opportunity lies in SEC’s mandated review of financial literacy among investors. Incorporating issues of consumer confusion about financial planners’ titles and designations into that review could assist the agency in assessing whether any further changes are needed in disclosure requirements or other related areas. Finally, SEC has limited information about the nature and extent of problems specifically related to financial planners because it does not track complaints, examination results, and enforcement activities associated with financial planners specifically, and distinct from investment advisers as a whole. However, a regulatory system should have data sufficient to identify risks and problem areas and support decisionmaking. SEC staff have noted that additional tracking could require additional resources, but other opportunities may also exist to gather additional information on financial planners. Because financial planning is a growing industry and has raised certain consumer protection issues, regulators could potentially benefit from better information on the extent of problems specifically involving financial planners and financial planning services. We recommend that the National Association of Insurance Commissioners, in concert with state insurance regulators, take steps to assess consumers’ understanding of the standards of care with regard to the sale of insurance products, such as annuities, and take actions as appropriate to address problems revealed in this assessment. We also recommend that the Chairman of the Securities and Exchange Commission direct the Office of Investor Education and Advocacy, Office of Compliance Inspections and Examinations, Division of Enforcement, and other offices, as appropriate, to: Incorporate into SEC’s ongoing review of financial literacy among investors an assessment of the extent to which investors understand the titles and designations used by financial planners and any implications a lack of understanding may have for consumers’ investment decisions; and Collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services, and take actions to address any problems that are identified. We provided a draft of this report for review and comment to FINRA, NAIC, NASAA, and SEC. These organizations provided technical comments, which we incorporated, as appropriate. In addition, NAIC provided a written response, which is reprinted in appendix II. NAIC said it generally agreed with the contents of the draft report and would give consideration to our recommendation regarding consumers’ understanding of the standards of care with regard to the sale of insurance products. NASAA also provided a written response, which is reprinted in appendix III. In its response, NASAA said it agreed that a specific layer of regulation for financial planners was unnecessary and provided additional information on some aspects of state oversight of investment advisers. NASAA also said that it welcomed the opportunity to continue to collaborate with SEC to identify methods to better understand and address problems specifically involving financial planners, as we recommended. In addition, NASAA expanded upon the reasons for its opposition to proposals that would augment oversight of investment advisers with an SRO. We are sending copies of this report to interested congressional committees, the Chief Executive Officer of FINRA, Chief Executive Officer of NAIC, Executive Director of NASAA, and the Chairman of SEC. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our reporting objectives were to address (1) how financial planners are regulated and overseen at the federal and state levels, (2) what is known about the effectiveness of regulation of financial planners and what regulatory gaps or overlap may exist, and (3) alternative approaches for the regulation of financial planners and the advantages and disadvantages of these approaches. For background information, we obtained estimates for 2000 and 2008, and projections for 2018, from the Bureau of Labor Statistics on the number of individuals who reported themselves as “personal financial advisers,” a term that the agency said was interchangeable with “financial planner.” The bureau derived these estimates from the Occupational Employment Statistics survey and the Current Population Survey. According to the bureau, the Occupational Employment Statistics’ estimates for financial planners have a relative standard error of 1.9 percent, and the median wage estimate for May 2009 has a relative standard error of 1.5 percent. Because the overall employment estimates used are developed from multiple surveys, it was not feasible for the bureau to provide the relative standard errors for these financial planner employment statistics. To estimate the number of households that used financial planners, we analyzed 2007 data from the Board of Governors of the Federal Reserve’s Survey of Consumer Finances. This survey is conducted every three years to provide detailed information on the finances of U.S. households. Because the survey is a probability sample based on random selections, the sample is only one of a large number of samples that might have been drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 2.5 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn. In this report, for this survey, all percentage estimates have 95 percent confidence intervals that are within plus or minus 2.5 percentage points from the estimate itself. To identify how financial planners are regulated and overseen at the federal and state levels, we identified and reviewed, on the federal level, federal laws, regulations, and guidance applicable to financial planners, the activities in which they engage, and their marketing materials, titles, and designations. We also reviewed relevant SEC interpretive releases, such as IA Rel. No. 1092, Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services. We also discussed the laws and regulations relevant to financial planners in meetings with staff of the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), Department of Labor, and Internal Revenue Service. We also interviewed two legal experts and reviewed a legal compendium on the regulation of financial planners. At the state level, we interviewed representatives from the North American Securities Administrators Association (NASAA) and the National Association of Insurance Commissioners (NAIC) and reviewed model regulations developed by these agencies. In addition, we selected five states—California, Illinois, North Carolina, Pennsylvania, and Texas—for a more detailed review. We chose these states because they had a large number of registered investment advisers and varying approaches to the regulation of financial planners, and represented geographic diversity. For each of these states, we reviewed selected laws and regulations related to financial planners, which included those related to senior-specific designations and insurance transactions, and we interviewed staff at each state’s securities and insurance agencies. To identify what is known about the effectiveness of the regulation of financial planners and what regulatory gaps or overlap may exist, we reviewed relevant federal and state laws, regulations and guidance. In addition, we spoke with representatives of the federal and state agencies cited above, as well as FINRA and organizations that represent or train financial planners, including the Financial Planning Coalition, The American College, and the CFA Institute; organizations that represent the financial services industry, including the Financial Services Institute, Financial Services Roundtable, Securities Industry and Financial Markets Association, Investment Advisers Association, American Society of Pension & Professional Actuaries, National Association of Insurance and Financial Advisors, American Council of Life Insurers, Association for Advanced Life Underwriting, American Institute of Certified Public Accountants, American Bankers Association; and organizations representing consumer interests, including the Consumer Federation of America and AARP. We also spoke with selected academic experts knowledgeable about these issues. In addition, we reviewed relevant studies and other documentary evidence, including a 2008 study of the RAND Corporation that was commissioned by SEC, “Investor and Industry Perspectives on Investment Advisers and Broker-Dealers”; “Results of Investor Focus Group Interviews About Proposed Brokerage Account Disclosures,” sponsored by SEC; results of the FPA Fiduciary Task Force, “Final Report on Financial Planner Standards of Conduct”; “U.S. Investors & The Fiduciary Standard: A National Opinion Survey,” sponsored by AARP, the Consumer Federation of America, the NASAA, the Investment Adviser Association, the Certified Financial Planner Board of Standards, the Financial Planning Association, and the National Association of Personal Financial Advisors; and the 2009 National Financial Capability Study, commissioned by FINRA. We determined that the reliability of these studies was sufficient for our purposes. In addition, we reviewed relevant information on the titles and designations used by financial planners, including FINRA’s Web site that provides the required qualifications and other information about the designations used by securities professionals. We also obtained and reviewed available data on complaints and selected enforcement actions related to financial planners from the Federal Trade Commission, Better Business Bureau, and SEC. We collected from the Federal Trade Commission complaint data from its Consumer Sentinel Network database, using a keyword search of the term “financial planner” for complaints filed from 2005 to 2010. From the Better Business Bureau, we collected the number of complaints about the financial planning industry received in 2009. From SEC, we collected complaints from the agency’s Investor Response Information System that had been coded as relating to “financial planners” from November 2009 to October 2010. We also reviewed data from SEC’s Tips, Complaints, and Referrals database that resulted from a keyword search for the terms “financial planner,” “financial adviser,” “financial advisor,” “financial consultant,” and “financial counselor” from March 2010 to October 2010. In addition, at our request, SEC and NASAA provided us anecdotally with examples of enforcement actions related to individuals who held themselves out as financial planners. SEC identified 10 formal enforcement actions between August 2009 and August 2010 and NASAA provided us selected examples of state enforcement actions involving financial planners from 1986 to 2010 from 30 states. We gathered information on SEC- and state-registered investment advisers from SEC’s Investment Adviser Registration Database. FINRA did not provide us with data on complaints, examination results, or enforcement actions specific to financial planners; FINRA officials told us they do not track these data specific to financial planners. To identify alternative approaches for the regulation of financial planners and their advantages and disadvantages, we conducted a search for legislative and regulatory proposals related to financial planners, which have been made by Members of Congress, consumer groups, and representatives of the financial planning, securities, and insurance industries. We identified and reviewed position papers, studies, public comment letters, congressional testimonies, and other documentary sources that address the advantages and disadvantages of these approaches. In addition, we solicited views on these approaches from representatives of the wide range of organizations listed above, including organizations that represent financial planners, financial services companies, and consumers, as well as state and federal government agencies and associations and selected academic experts. We conducted this performance audit from June 2010 through January 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 contact named above, Jason Bromberg (Assistant Director), Sonja J. Bensen, Jessica Bull, Emily Chalmers, Patrick Dynes, Ronald Ito, Sarah Kaczmarek, Marc Molino, Linda Rego, and Andrew Stavisky made key contributions to this report. | Consumers are increasingly turning for help to financial planners-- individuals who help clients meet their financial goals by providing assistance with such things as selecting investments and insurance products, and managing tax and estate planning. The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the oversight of financial planners. This report examines (1) how financial planners are regulated and overseen at the federal and state levels, (2) what is known about the effectiveness of this regulation, and (3) the advantages and disadvantages of alternative regulatory approaches. To address these objectives, GAO reviewed federal and state statutes and regulations, analyzed complaint and enforcement activity, and interviewed federal and state government entities and organizations representing financial planners, various other arms of the financial services industry, and consumers. There is no specific, direct regulation of "financial planners" per se at the federal or state level, but various laws and regulations apply to most of the services they provide. Financial planners are primarily regulated as investment advisers by the Securities and Exchange Commission (SEC) and the states, and are subject to laws and regulation governing broker-dealers and insurance agents when they act in those capacities. Federal and state agencies have regulations on marketing and the use of titles and designations that also can apply to financial planners. The regulatory structure applicable to financial planners covers the great majority of their services, but the attention paid to enforcing existing regulation can vary and certain consumer protection issues remain. First, consumers may be unclear about when a financial planner is required to serve the client's best interest, particularly when the same financial planner provides multiple services associated with different standards of care. SEC is studying these issues with regard to securities transactions, but no complementary review is under way by the National Association of Insurance Commissioners (NAIC) related to the sale of high-risk insurance products. Second, financial planners can adopt numerous titles and designations, which vary greatly in the expertise or training that they signify, but consumers may not understand or be able to distinguish among them. SEC has a mandated review under way on financial literacy among investors and incorporating this issue into that review could assist in assessing further changes that may be needed. Finally, the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints, examination results, and enforcement activities associated with financial planners specifically, and distinct from investment advisers as a whole. A regulatory system should have data to identify risks and problem areas, and given that financial planning is a growing industry that has raised certain consumer protection issues, regulators could benefit from better information on the extent of problems specifically involving financial planning services. A number of stakeholders have proposed different approaches to the regulation of financial planners, including (1) creation of a federally chartered board overseeing financial planners as a distinct profession; (2) augmenting oversight of investment advisers with a self-regulatory organization; (3) extending the fiduciary standard of care to more financial services professionals; and (4) specifying standards for financial planners and the designations that they use. While the views of stakeholder interests vary, a majority of the regulatory agencies and financial services industry representatives GAO spoke with did not favor significant structural change to the overall regulation of financial planners because they said existing regulation provides adequate coverage of most financial planning activities. Given available information, an additional layer of regulation specific to financial planners does not appear to be warranted at this time. GAO recommends that (1) NAIC assess consumers' understanding of the standards of care associated with the sale of insurance products, (2) SEC assess investors' understanding of financial planners' titles and designations, and (3) SEC collaborate with the states to identify methods to better understand problems associated specifically with the financial planning activities of investment advisers. NAIC said it would consider GAO's recommendation and SEC provided no comments. |
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the University of California had inadequate work controls at one of its laboratory facilities, resulting in eight workers being exposed to airborne plutonium and five of those workers receiving detectable intakes of plutonium. This was identified as one of the 10 worst radiological intake events in the United States in over 40 years. DOE assessed, but cannot collect, a penalty of $605,000 for these violations. University of Chicago had violated the radiation protection and quality assurance rules, leading to worker contamination and violations of controls intended to prevent an uncontrolled nuclear reaction from occurring. DOE assessed, but cannot collect, a penalty of $110,000 for these violations. DOE has cited two other reasons for continuing the exemption, but as we indicated in our 1999 report, we did not think either reason was valid: DOE said that contract provisions are a better mechanism than civil penalties for holding nonprofit contractors accountable for safe nuclear practices. We certainly agree that contract mechanisms are an important tool for holding contractors accountable, whether they earn a profit or not. However, since 1990 we have described DOE’s contracting practices as being at high risk for fraud, waste, abuse, and mismanagement. Similarly, in November 2000, the Department’s Inspector General identified contract administration as one of the most significant management challenges facing the Department. We have noted that, recently, DOE has been more aggressive in reducing contractor fees for poor performance in a number of areas. However, having a separate nuclear safety enforcement program provides DOE with an additional tool to use when needed to ensure that safe nuclear practices are followed. Eliminating the exemption enjoyed by the nonprofit contractors would strengthen this tool. DOE said that its current approach of exempting nonprofit educational institutions is consistent with Nuclear Regulatory Commission’s (NRC) treatment of nonprofit organizations because DOE issues notices of violation to nonprofit contractors without collecting penalties but can apply financial incentives or disincentives through the contract. However, NRC can and does impose monetary penalties for violations of safety requirements, without regard to the profit-making status of the organization. NRC sets lower penalty amounts for nonprofit organizations than for- profit organizations. The Secretary could do the same, but does not currently take this approach. Furthermore, both NRC and other regulatory agencies have assessed and collected penalties or additional administrative costs from some of the same organizations that DOE exempts from payment. For example, the University of California has made payments to states for violating environmental laws in California and New Mexico because of activities at Lawrence Livermore and Los Alamos National Laboratories. The enforcement program appears to be a useful and important tool for ensuring safe nuclear practices. Our 1999 review of the enforcement program found that, although it needed to be strengthened, the enforcement program complemented other contract mechanisms DOE had to help ensure safe nuclear practices. Advantages of the program include its relatively objective and independent review process, a follow-up mechanism to ensure that contractors take corrective action, and the practice of making information readily available to the contractor community and the public. Modifications to H.R. 723 Could Help Clarify and Strengthen the Penalty Provisions H.R. 723 eliminates both the exemption from paying the penalties provided by statute and the exemption allowed at the Secretary’s discretion. While addressing the main problems we discussed in our 1999 report, we have several observations about clarifications needed to the proposed bill. The “discretionary fee” referred to in the bill is unclear. H.R. 723, while eliminating the exemption, limits the amount of civil penalties that can be imposed on nonprofit contractors. This limit is the amount of "discretionary fees" paid to the contractor under the contract under which the violation occurs. The meaning of the term “discretionary fee” is unclear and might be interpreted to mean all or only a portion of the fee paid. In general, the total fee—that is, the amount that exceeds the contractor’s reimbursable costs—under DOE’s management and operating contracts consists of a base fee amount and an incentive fee amount. The base fee is set in the contract. The amount of the available incentive fee paid to the contractor is determined by the contracting officer on the basis of the contractor’s performance. Since the base fee is a set amount, and the incentive fee is determined at the contracting officer's discretion, the term “discretionary fee” may be interpreted to refer only to the incentive fee and to exclude the base fee amount. However, an alternate interpretation also is possible. Certain DOE contracts contain a provision known as the “Conditional Payment of Fee, Profit, Or Incentives” clause. Under this contract provision, on the basis of the contractor’s performance, a contractor’s entire fee, including the base fee, may be reduced at the discretion of the contracting officer. Thus, in contracts that contain this clause, the term “discretionary fee” might be read to include a base fee. If the Congress intends to have the entire fee earned be subject to penalties, we suggest that the bill language be revised to replace the term “discretionary fee” with “total amount of fees.” If, on the other hand, the Congress wants to limit the amount of fee that would be subject to penalties to the performance or incentive amount, and exclude the base fee amount, we suggest that the bill be revised to replace the term “discretionary fee” with “performance or incentive fee.” Limiting the amount of any payment for penalties made by tax-exempt contractors to the amount of the incentive fee could have unintended effects. Several potential consequences could arise by focusing only on the contractor’s incentive fee. Specifically: Contractors would be affected in an inconsistent way. Two of the nonprofit contractors—University Research Associates at the Fermi National Accelerator Laboratory and Princeton University—do not receive an incentive fee (they do receive a base fee). Therefore, depending on the interpretation of the term “discretionary fee” as discussed above, limiting payment to the amount of the incentive fee could exempt these two contractors from paying any penalty for violating nuclear safety requirements. Enforcement of nuclear safety violations would differ from enforcement of security violations. The National Defense Authorization Act for Fiscal Year 2000 established a system of civil monetary penalties for violations of DOE regulations regarding the safeguarding and security of restricted data. The legislation contained no exemption for nonprofit contractors but limited the amount of any payment for penalties made by certain nonprofit contractors to the total fees paid to the contractor in that fiscal year. In contrast, these same contractors could have only a portion of their fee (the “discretionary fee”) at risk for violations of nuclear safety requirements. It is not clear why limitations on the enforcement of nuclear safety requirements should be different than existing limitations on the enforcement of security requirements. Disincentives could be created if the Congress decides to limit the penalty payment to the amount of the incentive fee. We are concerned that contractors might try to shift more of their fee to a base or fixed fee and away from an incentive fee, in order to minimize their exposure to any financial liability. Such an action would have the effect of undermining the purpose of the penalty and DOE’s overall emphasis on performance-based contracting. In fact, recent negotiations between DOE and the University of California to extend the laboratory contracts illustrate this issue. According to the DOE contracting officer, of the total fee available to the University of California, more of the fee was shifted from incentive fee to base fee during recent negotiations because of the increased liability expected from the civil penalties associated with security violations. If a nonprofit contractor’s entire fee was subject to the civil penalty, the Secretary has discretion that should ensure that no nonprofit contractor’s assets are at risk because of having to pay the civil penalty. This is because the Secretary has considerable latitude to adjust the amount of any civil penalty to meet the circumstances of any specific situation. The Secretary can consider factors such as the contractor’s ability to pay and the effect of the penalty on the contractor’s ability to do business. Preferential treatment would be expanded to all tax-exempt contractors. Under the existing law, in addition to the seven contractors exempted by name in the statute, the Secretary was given the authority to exempt nonprofit educational institutions. H.R. 723 takes a somewhat different approach by exempting all tax-exempt nonprofit contractors whether or not they are educational institutions. This provision would actually reduce the liability faced by some contractors. For example, Brookhaven Science Associates, the contractor at Brookhaven National Laboratory, is currently subject to paying civil penalties for nuclear safety violations regardless of any fee paid because, although it is a nonprofit organization, it is not an educational institution. Under the provisions of H.R. 723, however, Brookhaven Science Associates would be able to limit its payments for civil penalties. This change would result in a more consistent application of civil penalties among nonprofit contractors. Some contractors might not be subject to the penalty provisions until many years in the future. As currently written, H.R. 723 would not apply to any violation occurring under a contract entered into before the date of the enactment of the act. Thus, contractors would have to enter into a new contract with DOE before this provision takes effect. For some contractors that could be a considerable period of time. The University of California, for example, recently negotiated a 4-year extension of its contract with DOE. It is possible, therefore, that if H.R. 723 is enacted in 2001, the University of California might not have to pay a civil penalty for any violation of nuclear safety occurring through 2005. In contrast, when the Congress set up the civil penalties in 1988, it did not require that new contracts be entered into before contractors were subject to the penalty provisions. Instead, the penalty provisions applied to the existing contracts. In reviewing the fairness of this issue as DOE prepared its implementing regulations, in 1991 DOE stated in the Federal Register that a contractor’s obligation to comply with nuclear safety requirements and its liability for penalties for violations of the requirements are independent of any contractual arrangements and cannot be modified or eliminated by the operation of a contract. Thus, DOE considered it appropriate to apply the penalties to the contracts existing at the time. | This testimony discusses GAO's views on H.R. 723, a bill that would modify the Atomic Energy Act of 1954 by changing how the Department of Energy (DOE) treats nonprofit contractors who violate DOE's nuclear safety requirements. Currently, nonprofit contractors are exempted from paying civil penalties that DOE assesses under the act. H.R. 723 would remove that exemption. GAO supports eliminating the exemption because the primary reason for instituting it no longer exists. The exemption was enacted in 1988 at the same time the civil monetary penalty was established. The purpose of the exemption was to ensure that the nonprofit contractors operating DOE laboratories who were being reimbursed only for their costs, would not have their assets at risk for violating nuclear safety requirements. However, virtually all of DOE's nonprofit contractors have an opportunity to earn a fee in addition to payments for allowable costs. This fee could be used to pay the civil monetary penalties. GAO found that DOE's nuclear safety enforcement program appears to be a useful and important tool for ensuring safe nuclear practices. |
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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. 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A recorded menu will provide information on how to obtain these lists. | 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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Two offices within SBA are primarily responsible for the contracting assistance and business development programs discussed in this report. SBA’s Office of Government Contracting administers the prime contracting and subcontracting assistance programs through SBA headquarters and six area offices located across the country. A goal of these programs is to increase business opportunities for small businesses and ensure that small businesses receive a fair and equitable opportunity to participate in federal prime contracts and subcontracts. Area office directors are responsible for supervising these programs in the field; the Office of Government Contracting staff in the area offices that conduct contracting program activities are PCRs and CMRs. PCRs help increase the small business share of federal procurement awards by initiating small business set-aside contracts (set-asides); reserving procurements for competition among small businesses; and identifying federal agencies with small business sources for goods and services. PCRs also conduct surveillance reviews, which are used to assess federal agencies’ management of their small business programs and compliance with regulations and published policies and procedures. CMRs conduct compliance reviews of prime contractors, counsel small businesses on how to obtain subcontracts, conduct and participate in “matchmaking” activities to facilitate subcontracting with small businesses, and provide orientation and training on the subcontracting assistance program for both large and small businesses. SBA’s Office of Business Development administers the 8(a) program. BDSs, who work directly with 8(a) firms, are located in SBA’s 68 district offices. They are required to assist firms with preparing a business plan, conduct annual reviews of the firms’ progress in implementing these plans, provide technical assistance, analyze year-end financial statements for certain compliance requirements, and coordinate additional assistance and training for firms through another SBA program. Additionally, BDSs may have responsibilities related to other SBA programs such as coordinating with resource partners that provide counseling, training, and other assistance to small businesses. Furthermore, SBA enters into partnership agreements with government agencies to award contracts to qualified 8(a) firms. In order to do so, SBA developed partnership agreements with 39 federal agencies, which delegate SBA’s contract execution authority to the agencies. According to SBA, the purpose of the partnership agreement is to streamline the contract execution process so that 8(a) firms may have more procurement opportunities. Without the partnership agreements, all federal agencies would be required to involve SBA from start to finish in the procurement process when 8(a) firms were the providers of goods and services. The partnership agreement requires that both SBA and the partner agency share the responsibilities of contract execution and oversight, monitoring, and compliance with procurement laws and regulations governing 8(a) contracts. In 2007, the partnership agreements were revised to clarify each agency’s role. SBA also plans to revise the agreements in 2009 to make further clarifications on subcontracting requirements. To qualify for the 8(a) program, a firm must be at least 51 percent owned and controlled by an individual who meets SBA’s criteria of socially and economically disadvantaged. Socially disadvantaged individuals include certain members of designated groups, such as Black Americans or Hispanic Americans and individuals who are not members of designated groups. Economically disadvantaged firms include those whose primary owner(s) has $250,000 or less in personal net worth, adjusted to exclude personal residence and business assets. In addition, a firm must demonstrate its potential for success by being in business for 2 years or meet waiver provisions (a waiver requires the applicant to present copies of contracts or invoices demonstrating performance of work in the industry for which the applicant seeks 8(a) certification). The 8(a) program lasts 9 years and once completed, a firm cannot reapply. However, all 8(a) firms automatically are certified as SDBs and SDB firms can reapply for certification every 3 years. Firms in the 8(a) program are eligible to receive competitive and sole- source set-asides. Competitive contracts can be awarded to 8(a) firms if there is a reasonable expectation that at least two 8(a) firms will submit offers and the award can be made at a fair price. Sole-source contracts can be awarded when the dollar thresholds are $5.5 million or less for acquisitions involving manufacturing and $3.5 million or less for all other acquisitions. SBA considers such factors as prior-year goal achievement when setting contracting goals for federal agencies; goal achievement among federal agencies varied from 2000 through 2006. Currently, SBA emphasizes quantitative measures for goal setting. For the 2008-2009 goal-setting cycle, SBA reviewed contracting trends at agencies, prior-year goal achievement, and the impact of each agency’s goals on the government-wide average. In fiscal year 2006, SBA began using a scorecard to evaluate contracting efforts at 24 agencies; 7 agencies received the highest rating, 5 received the middle rating, and 12 received the lowest rating. In a subsequent review, agency ratings showed improvement, with four agencies receiving the lowest rating. While officials from all agencies we reviewed cited challenges with the goal-setting process, such as limitations in negotiating and appealing their goals, federal agencies collectively have achieved or come close to achieving the government-wide goal of 23 percent, but individual agency performance varied. Federal agencies had a similarly varied record for other small business goals such as the SDB goal and 8(a) negotiated goal. According to SBA and OSDBU officials, many factors can influence an agency’s ability to achieve socioeconomic goals, such as a lack of small business firms that can meet specialized procurement needs or fluctuations in an agency’s procurement cycle. SBA is required to report on contracting goal achievements of federal agencies in an effort to meet the statutory government-wide goal of awarding 23 percent of contracting dollars to small businesses and goals established for four socioeconomic categories (see table 1). In previous years, SBA negotiated annual procurement goals with each federal agency so that, cumulatively, the government-wide goal was met or exceeded. Each agency submitted proposed goals to SBA; SBA then adjusted the goals to meet, in aggregate, the statutorily assigned levels. For fiscal years 2008 and 2009, agencies did not submit proposed goals to SBA. Instead, SBA set goals based on trend analysis, prior-year goal achievement, and the impact of each agency’s goals on the national average. Officials from four of the agencies we reviewed cited challenges with the goal-setting process such as limitations in negotiating and appealing their goals. Two agencies said that the goal-setting process was not a negotiation and that SBA did not factor in changes in the agencies’ contracting priorities in its goal setting. For example, one agency saw significant increases in information technology spending, which typically involves large contracts for which small businesses might not be competitive, but the small business goal did not reflect this change. Agency officials explained that efforts to appeal the goals were lengthy, resource-intensive, and unsuccessful. SBA officials explained that they were constrained in their ability to negotiate anything less than full government-wide compliance with the statutory 23 percent goal. They said that in some cases, SBA has reconsidered an agency’s request to lower its annual goals but requires the reconsideration to be both unique and compelling. For example, SBA officials said they adjusted the goal for the Department of Health and Human Services in the middle of a fiscal year because the department’s contracting priorities shifted to accommodate the purchase of vaccines, which generally are produced by large businesses. However, SBA officials explained that other agencies would need to provide more small business contracting opportunities to compensate. Agencies may appeal to SBA if they disagree on the established goals; if they do not reach agreement, they can submit their case to the Office of Federal Procurement Policy (OFPP) for a final determination. The agencies we reviewed did not have experience disputing their goals through OFPP. In addition, according to SBA officials, in October 2007 the agency established an executive subcommittee within the Small Business Procurement Advisory Council to review the current goal-setting process and provide more transparency on the process. For fiscal year 2006, SBA began using a Small Business Procurement Scorecard to help monitor agencies’ small business contracting efforts, including plans and progress in meeting the goals, and to bring greater attention to goal achievement (see fig. 1). SBA officials explained that SBA has limited statutory authority to enforce the goals or impose corrective action on agencies that fail to meet the negotiated small business contracting goals. SBA’s 2006 scorecard consisted of three color ratings. To receive the highest (green) rating, an agency had to have met its overall contracting goal for small business and at least three of the socioeconomic goals, shown progress in meeting the remaining two socioeconomic goals, and met the requirements for the middle (yellow) rating. To meet the yellow rating, the agency had to have met two socioeconomic goals, improved in one other goal, and met other criteria that included top-level commitment by agency officials for small business contracting, cooperation with SBA, and timely and accurate reporting. An agency received a low (red) rating if it failed to meet the requirements for the middle (yellow) standards. Although the scorecard reviewed activity in fiscal year 2006, SBA said it did not publish the scorecard until August 2007. At that time, SBA also published ratings on the scorecard for the progress the agencies made on their small business procurement plans through July 25, 2007. Of the 24 agencies SBA rated in the 2006 scorecard, 7 received the highest rating, 5 received the middle rating, and 12 received the lowest rating. For instance, DHS received the highest (green) rating because it met three out of four socioeconomic goals, had an agency strategy to increase the number of competitively awarded contracts to small businesses, and demonstrated commitment to small business contracting at the higher levels of the agency. The Department of Commerce (Commerce) did not meet two of its socioeconomic goals and therefore received a yellow rating. DOD did not meet its small business goal or socioeconomic goals and received a red rating. The Social Security Administration (SSA) also received a red rating for not meeting its goals and several other criteria, including not having an evaluation factor for acquisition professionals on goal achievement, enforcing subcontracting plans, and meeting subcontracting goals. However, many agencies showed improvement on the portion of the scorecard that assessed the agencies’ progress through July 25, 2007. For instance, of the 12 agencies with a low score for fiscal year 2006, 8 moved up to the middle score. All five agencies that previously received a middle score received the highest rating in terms of progress in implementing their small business procurement plans. Of the agencies we reviewed, DHS and SBA maintained the highest score, Commerce and DOD showed improvement, and SSA continued to receive a low rating (see fig. 2). Some agency officials we interviewed expressed dissatisfaction with the fiscal 2006 scorecard. For example, senior officials from three of the four agencies we selected suggested that SBA did not adequately take into account factors that affected their goal achievements, since an agency could receive the lowest category for barely missing its goals. One official suggested that the scorecard could be improved by focusing on outcome- oriented criteria rather than activity-oriented criteria. For example, the official suggested that rather than looking at the number of outreach events in which an agency participated, SBA could assess the agency based on how many firms received a contract as a result of attending the event. Yet, they acknowledged that the scorecard promoted transparency. SBA officials regarded the scorecard as a useful tool. They suggested that the inaugural 2006 scorecard had the effect SBA intended—bringing greater transparency to agencies’ current and future small business contracting efforts. Moreover, agency officials have been incorporating the results of the scorecard into their performance plans. For example, according to SBA officials, some agencies have factored the results of the scorecard into the performance evaluations of procurement officials. SBA said that they had plans to improve the scorecard by providing agencies the opportunity to present their procurement plan for small businesses, progress made toward their plan, and mitigating factors affecting their ability to implement their plan. SBA also is working to better align scorecard reporting time frames toward the earlier part of the fiscal year rather than the end of the fiscal year. In addition, SBA has provided opportunities for agency officials to comment on the scorecard and propose revisions. In July 2008, SBA issued a midyear scorecard that assessed the progress that agencies made on their fiscal year 2008 small business procurement plans. SBA officials explained that as a result of feedback from other federal agencies, SBA included some different elements on this scorecard than on the 2006 scorecard. For example, SBA assessed whether the agency planned significant events to encourage small business participation, planned training for contracting staff and managers, and planned to collaborate on formulating policy. SBA reviewed submissions from the agencies to determine if their plans were “acceptable” or “needed work.” In addition, SBA identified best practices at 16 of the agencies (see fig. 3). The majority of the agencies had plans that SBA considered acceptable, and SBA identified best practices at three of the four agencies we reviewed. For instance, Commerce’s OSDBU director was a member of the Federal Acquisition Regulatory Council and SBA suggested that other agencies could benefit by having their OSDBU director join the council as a way to influence policy initiatives. DOD was cited as having a unique plan that set goals and objectives for small business procurement down to the major department level. SBA noted that DHS had a comprehensive small business program and supported it through outreach activities and a directive that was issued by its top-level management. SBA suggested that SSA could improve its scorecard by demonstrating top-level commitment for small business contracting and developing a plan to submit all strategic plans and reports to SBA. SBA’s small business plan also was cited as needing work because it did not demonstrate that a policy or procedure was in place for subcontracting goals. SBA said it planned to release the second results and progress scorecard, which would be comparable to its inaugural scorecard, by the end of fiscal year 2008. For most fiscal years from 2000 through 2006, federal agencies collectively achieved or came close to achieving the government-wide goal for overall small business contracting. However, government-wide, the federal agencies did not meet or exceed the overall contracting goal of 23 percent in 4 of the 7 years (see fig. 4). At the select agencies we reviewed, goal achievement varied. For instance, DHS consistently has met its SBA- negotiated (SBA-set) goal since 2004. DOD did not meet its goal in any year from 2000 through 2006; however, the agency generally came close each year. DOD’s small business goal was 23 percent each year; its goal achievement ranged from a low in 2001 of 20.5 percent to a high in 2005 of 22.6 percent. Other agencies had mixed outcomes in their goal achievement. For example, Commerce and SSA did not meet their SBA-set small business goals in 1 of the 7 years we reviewed. However, in the years these agencies met their goals, they generally exceeded the goals by large margins. SBA did not meet its goals in 3 years (2002 through 2004), but exceeded its goals in 4 years (2000, 2001, 2005, and 2006). Government-wide, federal agencies exceeded the 5 percent statutory goal for SDBs from 2000 through 2006. However, SBA also set goals above this standard in the years we reviewed (the SBA-set goals, both government- wide and for the selected agencies, are shown in fig. 5). In the years that federal agencies did not meet their goals (2004 and 2005), the SBA-set goal was 8 percent. For the select agencies we reviewed, goal achievement varied. For instance, DHS met its goal in all years we reviewed. DOD also met its SDB goal each year. Other agencies had mixed outcomes. For example, Commerce did not meet its goal in 3 of 7 years; however, in 2006 it missed its goal by a slight margin. SSA met its SDB goal in 2002 and 2003. SBA met its goal in 3 out of 7 years. For more information on contracts awarded to firms with SDB certifications, see appendix II. Although the statutory provision for setting goals for small business participation in federal procurement contains no contracting goal for the 8(a) program, SBA negotiated an annual goal with agencies until 2007. The government-wide goal was met in most years we reviewed, except for 2002 and 2004 (see fig. 6). For the select agencies we reviewed, goal achievement varied. For instance, DHS met its goal in all years we reviewed, but the degree by which it exceeded the goal declined. DOD met SBA’s 8(a) goal in each year except 2002. Commerce met or exceeded its goal in recent years but mostly missed its goal from 2000 through 2004. SSA and SBA also had mixed results and missed their goal in 4 of the 7 years. According to SBA officials and OSDBU directors, many factors can influence an agency’s ability to achieve socioeconomic goals, such as the focus of the agency’s business plan (that is, the type of contracts required), a lack of small business firms that can meet specialized procurement needs, or fluctuations in an agency’s procurement cycle. For example, the Department of Energy relies on a business model that emphasizes large contracts, which can make achievement of small business goals difficult. SBA and DOD officials explained that small businesses do not provide many of the goods and services that DOD purchases, such as airplanes, tanks, and weapons. Commerce officials explained that SBA’s goal-setting process did not adequately take into account the significant increase in spending associated with the decennial census, which generally relies on larger contracts that are not as conducive for small business contracting opportunities. In contrast, SBA officials explained that other agencies might have fewer contract dollars to spend but require more types of services amenable to small business contracting. Finally, SBA officials stated that changes in an agency’s mission and the types of goods and services purchased could present barriers to goal achievement. Resource constraints limit the ability of SBA staff to carry out some of their core responsibilities. SBA staff have advocacy, review, and monitoring roles to facilitate small business contracting at federal agencies. PCRs are procurement analysts who implement SBA’s prime contracting program. They can be located where agencies conduct procurements or off-site at SBA’s offices. More specifically, PCRs review federal agency acquisitions and recommend small business set- asides; can dispute a procurement through informal or formal means with the agency’s procurement officials in instances where an agency does not accept the recommended set-aside; conduct surveillance reviews, which monitor small business contracting at recommend procurement strategies to federal agencies to maximize small business participation in federal contracts; and counsel and train small businesses on obtaining federal contracts. However, PCRs have operated under resource constraints as a consequence of overall agency downsizing and budget reductions. As we previously reported, budget reductions in the 1990s resulted in SBA streamlining its field structure and shifting its workload to district or headquarters offices. During this time, SBA’s workforce declined significantly, from 3,800 to about 3,100 employees (about 19 percent). From 2000 to 2007, SBA restructured its organization and the workforce further decreased by 26 percent. As of September 2007, SBA had 2,166 employees. From our review of SBA’s August 2008 area office directory, most PCRs covered multiple agencies and “buying activities” within agencies. As of August 2008, SBA had 59 PCRs—16 of which also had CMR responsibilities—but expected to increase the number to 66 through additional hiring. Some PCRs were responsible for up to six agencies. Almost all the PCRs (55 out of 59) had responsibilities for buying activities at DOD. Twenty-two were assigned exclusively to DOD and 33 were responsible for overseeing DOD and other agencies. DHS and Commerce were assigned 4 and 2 PCRs, respectively, while SSA and SBA were assigned 1. Our review of the number of buying activities for which a PCR was responsible showed an average of 5 activities per PCR, with the number of buying activities per PCR varying from 1 to 12. SBA officials explained that the amount of work also can vary by agency, partly because some agencies had automated contracting processes while others did not. The reduced staff numbers, multiagency assignments, and other available evidence suggest that PCRs are limited in the extent to which they can carry out some of their responsibilities. According to SBA officials, in 2007, PCRs reviewed about 47,000 new procurement actions of 5.5 million total procurement actions throughout the federal government. In 2002, we also reported that the number of set-aside recommendations that PCRs were making annually decreased by about half, from 529 in fiscal year 1991 to 281 in fiscal year 2001. Reasons for the decline during this period included downsizing (which decreased the number of PCRs), the reassignment of some PCRs to other roles, and the increased size of federal procurements that contributed to fewer set-aside opportunities for small businesses. We had planned to update our 2002 report data on the number of PCR-recommended set-asides for this report, but because SBA no longer collected this information electronically, the most recent data are from 2001. We were able to update information about the number of Form 70s that PCRs issued; the Form 70 reflects some level of discussion or disagreement between agencies and SBA about recommended set- asides. When agency officials reject a set-aside recommendation, PCRs can dispute the procurement through informal or formal means (Form 70s) with the agency’s procurement officials. From fiscal years 2003 through 2007, PCRs generally increased the number of informal Form 70s, except for 2007, and decreased the number of formal Form 70s filed annually. Finally, PCRs participated in 94 surveillance reviews from 2003 to 2007, 59 of which were within one agency (DOD). However, SBA did not conduct any surveillance reviews from 1994 through 2002 because of budget constraints. SBA has recognized that more PCRs are needed and has begun some efforts to streamline some of the PCRs’ responsibilities. For instance, at a congressional hearing in September 2007, SBA’s deputy administrator cited the importance of the PCRs and mentioned SBA’s plan to fund additional PCR positions and fill vacant positions in a timely manner. Further, in February 2008, SBA’s former administrator testified on efforts to refocus the responsibilities of PCRs from working directly with small businesses to directing contracts to small businesses. The BDSs would assume full responsibility for working directly with small businesses. SBA headquarters officials explained efforts were underway for PCRs to coordinate with BDSs when opportunities for small business were identified at federal agencies. In our interviews with PCRs, some mentioned changes in their responsibilities—to interact more with federal agencies to identify small business contracting opportunities and less with small businesses to provide outreach and training on federal contracts— but noted they were still transitioning to their new roles. However, SBA officials also explained that SBA currently has no formal guidance or plan in place to review the workload of PCRs and they made PCR assignments by considering the contracting volume of the buying activities and the level of automation of the contract process at the buying activities. The officials explained that in the future, SBA plans to undertake a business re-engineering process to develop a resource allocation system that incorporates the above factors. According to PCRs and others we interviewed, workload and resource issues have affected their ability to conduct their current work. Officials in three of the four area offices we visited explained PCRs were stretched too thin and were not able to cover all contracting activities effectively. More specifically, five of the eight PCRs we interviewed were finding it difficult to provide adequate coverage to one agency, much less several. Our analysis of the field directory indicated that 17 (29 percent) of 59 PCRs were responsible for six or more buying activities. Further, many PCRs explained they had better results in advocating for small business when they were involved with buying activities on an ongoing basis and available to make informal recommendations and answer questions than when they were not. At two of the four agencies we reviewed, OSDBU officials explained that they rarely interacted with PCRs. In addition, an official from another agency explained they do not rely as much on PCRs for guidance and support since the PCRs appear to be overextended in covering all their responsibilities. Therefore, these agencies may have missed opportunities to identify or advocate small businesses for certain contract opportunities. In addition, an OSDBU official explained that because PCRs were responsible for several agencies they generally had to focus on agencies that were most challenged to reach their small business goals. Moreover, all the area office directors we interviewed explained that a wave of PCR retirements was expected in the near future and it would be difficult to replace the knowledge and relationships of the current PCRs. In addition to PCRs, who review agency acquisitions and recommend contracting opportunities for small businesses, SBA’s CMRs conduct compliance reviews of prime contractors, counsel small businesses on how to obtain subcontracts, conduct and participate in “matchmaking” activities to facilitate subcontracting with small business, and provide orientation and training on the subcontracting assistance program for both large and small businesses. However, the number of staff performing CMR duties has decreased substantially in recent years, as has the number of staff dedicated to performing those duties full time. A 2007 SBA IG report found a significant decrease in the number of full-time CMRs from 24 in 1992 to 3 in 2006 and an increase in the number of part-time CMRs from 3 to 35 over the same period. As of August 2008, SBA had 31 CMRs, 16 of whom had additional job functions such as PCR duties, conducting small business size determinations, and issuing certificates of competency. These additional roles often take higher priority and reduce the amount of time CMRs are able to spend on subcontracting assistance activities. Moreover, the CMRs with whom we spoke had large portfolios, ranging from approximately 90 to 200 prime contractors. The IG recommended that SBA develop a performance plan that addresses how CMRs would be allocated. Although SBA agreed with this recommendation and stated more resources were needed, SBA still does not formally monitor the workload allocations of the CMRs. SBA officials stated that the agency plans to evaluate CMR workloads and possibly centralize some job functions. Furthermore, resource constraints have limited the ability of CMRs to perform a key monitoring function. All of the CMRs we interviewed explained that their increased workload diminished their ability to monitor prime contractors through compliance reviews. For instance, one CMR with whom we spoke had not completed a formal compliance review of a prime contractor in 5 years. Some CMRs also noted that the number of on- site reviews they conducted was limited because of budget constraints. Furthermore, the SBA IG found in fiscal year 2006 that less than half of the 2,200 large prime contractors were monitored and only 24 percent of those monitored had been reviewed on-site. CMRs are responsible for reviewing subcontracting plans of prime contractors once a contract has been issued. CMRs review the plans to see if prime contractors are meeting their subcontracting goals, whether they have a program in place to achieve their goals, and how well the program is being implemented. SBA guidance also states that conducting compliance reviews is one of the CMR’s most important responsibilities. The guidance further states these reviews often are the only formal evaluation of a contractor’s compliance with its subcontracting plan and that CMRs should conduct desk audits and on-site reviews of prime contractors to ensure they are upholding their subcontracting plans. Resource constraints that contributed to extensive workloads and responsibilities encompassing several agencies and activities have hindered the ability of SBA staff to carry out core activities related to monitoring of federal contracting. As a result, SBA has reduced assurance that PCRs and CMRs are ensuring that federal agencies increase their share of federal contracts for small business or are effectively monitoring contracting activity at the federal agencies. SBA faces several challenges in its overall administration of the 8(a) business development program. First, SBA offers voluntary seminars and an assessment tool to help educate applicants on the 8(a) program, but according to SBA officials some applicants still may not understand the program’s purpose and reporting requirements. Second, SBA staff said that the recent emphasis on meeting the long-standing statutory requirement to complete annual reviews of 100 percent of 8(a) firms—which are time- and resource-intensive—has diminished their ability to conduct business development activities. Third, an inefficient termination process may result in noncompliant firms remaining in the program and consuming limited SBA resources that otherwise might be used to provide business development assistance to compliant participants. Finally, a 2006 IG recommendation that SBA regularly conduct surveillance reviews of agency oversight of 8(a) contracting has not been implemented. As a result of SBA not conducting such reviews, it has reduced assurance that agencies met their responsibilities under partnership agreements, including oversight of contracting, for the 8(a) program. The purpose of SBA’s 8(a) program is to help eligible SDBs compete in the economy through business development. Over the course of their 9-year term, 8(a) participants can receive (1) business training, (2) financial assistance, and (3) assistance with forming joint ventures and other strategic agreements. As noted, firms in the 8(a) program also are eligible to receive competitive and sole-source set-aside federal contracts. Because the 8(a) program does not guarantee that participants will receive these contracts, firms in the program have some responsibility for their own success. For example, in all of the locations we visited, district office officials told us that firms with marketing experience and that did significant self-marketing with federal agencies were most successful. Any firm has the right to apply for 8(a) program participation, but 8(a) eligibility requires a firm to have a minimum of 2 years of business experience or meet waiver provisions. Specifically, prospective 8(a) firms must be in business for 2 full years immediately prior to the date of application and present supporting documentation for SBA’s analysis or apply for a waiver to the 2-year rule and demonstrate they meet certain other conditions, including (1) business management experience, (2) technical expertise, (3) adequate capital, (4) a record of successful contract performance, and (5) the ability to obtain the resources necessary to perform contracts. Applicants also must provide documentation on the firm’s business and its owners, including business and personal financial statements and business and personal tax returns. According to SBA, firms were able to submit their applications electronically through its Business Development Management Information System (BDMIS) in 2005, but the system was implemented fully as of July 28, 2008. The system is intended to significantly decrease processing times for 8(a) certifications. SBA’s goal is to complete 8(a) certifications within 90 days. Once approved for the program, participant firms must continue to meet all eligibility criteria (including those for ownership and social and economic disadvantage) and submit documentation that SBA requires to complete mandatory annual reviews. For instance, each year, as part of the annual review, participants must provide SBA with a certification that they continue to meet eligibility requirements as well as financial statements, income tax returns, and a report on all non-8(a) contracts. In conjunction with SBA, each participant also must review its business plan annually and modify the plan as appropriate based on future contract targets and business development needs. Since SBA approves the business plan upon admission, it reviews the plan annually to assess each firm’s growth and progress toward attaining the ability to compete in the open market without SBA assistance. Most annual review documents and the updated business plan are due within 30 days after the close of each firm’s program year and financial statements are due within 90 to 120 days of the close of the reporting period. Participants sign an agreement upon entry to the program that they will submit all required documentation to SBA on time or face termination. The number of applications to the 8(a) program increased sharply in 2002, and remained relatively constant through 2007 (see fig. 7). SBA noted that the numbers could increase during economic downturns or when unexpected events like Hurricane Katrina affected business operations and the applications might be the result of applicants not having a clear understanding of the primary purpose of the 8(a) program as a business development program. That is, firms may have applied to the program because they focused on the contracting preferences they could receive as 8(a) firms and not on the program’s requirements for business development. According to SBA officials, a majority of applications were returned because the firms applying submitted incomplete applications. Figure 7 also illustrates that for each year from 2002 through 2007, the number of applications that were either returned or withdrawn exceeded the numbers of approved applications and declined applications. Some SBA officials also noted that often applicants were not prepared or well- suited for the program. SBA has used several means to educate applicants about the purpose of the 8(a) program and its eligibility and reporting requirements, but none are a prerequisite for program application. SBA offers an information session for firms interested in applying to the 8(a) program, but participation in the session is voluntary. SBA markets these sessions through its resource partners (such as Small Business Development Centers and SCORE) and its Web site, and 8(a) program guidance states that district offices are expected to encourage potential applicants to attend the sessions, which the district offices or resource partners conduct. The purpose of the information session is to educate potential applicants about eligibility and the application process and to assist them in making a determination about participation. For example, topics covered in the session include (1) program background, (2) eligibility requirements, (3) application forms, (4) requirements for participation and continuing eligibility such as annual reviews, and (5) available program resources. According to SBA guidance, information sessions may be conducted as workshops with multiple firms or a one-on-one interview with a single firm. At the four district offices that we visited, the BDSs said that their offices conducted workshops for potential applicants. According to SBA, its district offices held 1,912 8(a) workshops in fiscal year 2008 that were attended by more than 42,000 participants. Forty-seven of the 68 district offices, including the 4 we visited, reported that they held workshops monthly or conducted at least 12 workshops in 2008. SBA officials also explained that in 2007, they developed an online self- assessment tool that firms could use to determine their readiness for the program before they applied. According to the officials, as of October 2008, over 26,000 firms had completed the assessment tool since its inception. The tool includes an audio-visual presentation that provides basic information on the 8(a) program and consists of 23 questions that have accompanying explanations of their relevance to program requirements. For example, SBA asks whether the potential applicant has a current business plan and explains, “Sound business management is core to the success of participating 8(a) certified firms. A key aspect of good management is business planning. Prospective 8(a) firms should have a current, well thought out business plan before applying to the program.” Users’ responses are scored and they receive an assessment profile, which places them in one of seven tracks such as a new business or business with at least 2 years of experience. The assessment results also suggest whether the firm might be a good fit for the program. In addition to the assessment tool, SBA provides a separate informational course, “INSIGHT- Guide to the 8(a) Business Development Program,” to better educate firms about the program. The course is on SBA’s Web site and firms must register basic demographic and business status data prior to taking the course. According to SBA officials, as of October 2008, approximately 30,000 firms had taken the course. As with the information session, the 8(a) assessment tool is voluntary and not a prerequisite to completing an application, although SBA officials said they “highly suggested” that firms use the tool prior to application. In addition, some SBA officials felt it was necessary that firms interested in applying to the program be required to participate in a seminar that—like the voluntary information session—explains the purpose of the program and its reporting requirements. They also hoped that current efforts to educate firms prior to applying for certification might help to reduce the number of applications from unprepared firms or firms not well-suited for the program. As illustrated earlier, 73 percent of applications were returned or withdrawn in 2007. Moreover, certification officials told us that in tracking the results of the assessment tool since inception, they found that approximately 60 percent of firms completing the assessment appeared that they did not qualify for the 8(a) program. Applicants that do not receive adequate information about the program may not be fully aware of their responsibilities for maintaining eligibility and achieving success in the program. Moreover, the lack of a mandatory assessment tool or required educational sessions may have implications for use of SBA resources during a participant’s tenure in the program. That is, firms that do not clearly understand 8(a) eligibility and reporting requirements may increase SBA’s expenditure of resources and staff time. For instance, as discussed in the following sections, firms that did not adhere to (as a result of not understanding) the program requirements may increase SBA’s expenditure of resources and staff time for conducting annual reviews and diminish the time available for other program activities. The purpose of annual reviews is to determine if a firm should be retained, terminated, or graduated early from the 8(a) program. SBA staff (BDSs in district offices) review documentation that participants submit on financial and tax information, contracting activity, and continued eligibility. For example, BDSs review 8(a) firms to determine if they still qualify as economically disadvantaged according to the 8(a) limits on net worth. Annual review documents are due each year, 30 days after a firm’s certification date, and BDSs are required to complete the review 30 days after receiving all required documentation. If, at that time, SBA has not received the required documentation, the firm has two additional opportunities to supply the information. Staff workloads relating to the annual reviews appeared to be heavy. Among the 19 BDSs with whom we spoke during our visits to district offices in Atlanta, Chicago, San Francisco, and Washington, D.C., the number of firms for which they were responsible ranged from 36 to 162, with the majority of BDSs responsible for 90 or more firms. However, portfolio size varies by district office because the concentration of 8(a) firms varies by district office, with the Washington Metropolitan Area district office having the highest number. In 2006, that office covered more than 1,000 firms (of a total of 9,667 firms in the program). SBA has long been required by statute to complete annual reviews of all firms. SBA officials with whom we spoke acknowledged that in past years not all district offices completed all required annual reviews (see table 2). However, meeting statutory requirements such as 8(a) annual reviews became a priority for SBA under the “reform agenda” developed by SBA’s former administrator in 2006. In fiscal year 2007, SBA added this measure to the performance scorecards of district offices as part of the agency’s new emphasis on meeting all of its compliance requirements. District office scorecards outline key annual compliance requirements and loan volume goals. Consequently, to achieve the 100 percent statutory goal, BDSs have devoted significantly more time and resources to this activity. However, SBA also has recognized that staff constraints affected its ability to perform annual reviews. According to its 2006 Performance and Accountability Report, a main contributing factor in the agency’s inability to complete annual reviews of all 8(a) firms was a lack of staff resources in the district offices. In 2006, when the agency began to emphasize meeting all compliance requirements, it also planned to consider reallocating resources to help ensure that staff could comply with the review requirement. However, given the size of some BDS portfolios in the district offices that we visited, we did not see evidence that SBA had begun this effort. Additionally, applicants not submitting required documentation contributed to increasing the time and resources needed to complete annual reviews. SBA officials said that a major challenge with conducting and completing annual reviews was that participants had not submitted the required documentation on time, even though participants signed an agreement upon entry to the program that they would do so. Some officials said they were aware that reporting requirements presented a burden for some firms, particularly those that were smaller or did not have contracts and therefore had less incentive to maintain eligibility. In one location, a BDS provided an example of a firm that withdrew from the program prior to its first annual review because the owner was overwhelmed by the amount of documentation that needed to be submitted. Several SBA officials also said that annual reviews were resource-intensive since they required BDSs to type a significant amount of information into the 8(a) database and to repeatedly attempt to obtain required documentation from noncompliant firms. In our review of 80 files, we saw evidence that some annual reviews had taken several months to complete because of missing documentation. SBA officials said that they anticipate that greater automation, through BDMIS, would reduce the time associated with data input for BDSs and allow more time for the BDSs to provide business development assistance. Delays in completing annual reviews also could result in potentially noncompliant firms receiving contracts. Results from the annual reviews help SBA to fulfill its role in partnership agreements with federal agencies. For instance, SBA must verify that a firm is in compliance before SBA can accept a proposed 8(a) contract from a federal procuring agency. This process is referred to as the “offer and acceptance letter”—an offer letter from the federal agency and an acceptance letter from SBA. Some federal agency contracting officials reported frequent delays in receiving SBA’s acceptance letter. However, SBA officials explained one reason for the delay may be a result of the agency not providing complete information on the offer letter. SBA officials said that if a firm identified in a federal agency’s offer letter had compliance issues, such as missing documentation required for the annual review, they attempted to get the firm back into compliance to accept the offer if the issues were minor and could be resolved within a reasonable time frame. Additionally, SBA headquarters officials explained that in cases where a termination or early graduation was pending, the firm could still receive contracts. In the case of a termination, the firm could still receive contracts during its 45-day appeal period unless SBA had issued a suspension (temporary disqualification) to protect the government’s interests. SBA officials said that the current emphasis on 100 percent compliance for annual reviews combined with limited district office resources diminished the amount of time spent on business development activities. SBA guidance requires business development specialists to be the primary providers in helping firms develop business plans, seek loans, and receive counseling on finances, marketing, and management practices. More specifically, SBA guidance requires that each district office nurture a relationship with its assigned agencies and buying activities to increase the number of 8(a) contracts. In addition, each district office is required to develop an outreach plan that identifies the groups of people, businesses, agencies, and other organizations that will be targeted for outreach during the year. However, some BDSs told us that conducting annual reviews consumed most of their time. In three of the four offices that we visited, the BDSs said they previously conducted more site visits with their firms but resource constraints and the time devoted to annual reviews had limited these visits. Some officials also said that their offices previously held marketing and other events to introduce federal agency contracting officials to small businesses and 8(a) and other small businesses to each other, but that they had discontinued or reduced the number of these events. They said that such events provided opportunities for firms to market their services and “interview” with federal agencies, connect with other firms, and potentially pursue mentor-protégé relationships or joint ventures. The officials also felt that BDSs had fewer opportunities to develop relationships with their firms. Moreover, prior to the efforts to meet the annual review requirements, a 2004 SBA IG audit also found that SBA had not developed program-wide policy and guidance on how it would deliver business development services to 8(a) firms or tracked the services it was providing to firms. Subsequently, SBA began some efforts to create tools or strategies to increase and improve the delivery of business development assistance. In its 2006 Performance and Accountability Report, SBA identified improvements in providing individualized business development assistance as one of several program actions that it would carry out for fiscal year 2007. SBA’s 2007 Annual Performance Report discussed an 8(a) business development plan that includes (1) creating a business development assessment tool that identifies the individual needs of program participants, (2) using SBA’s resource partners to assist in delivering business development, and (3) developing a tracking mechanism to assess firms’ progress in meeting their business development needs. Although these initiatives may help SBA staff to develop and prepare small disadvantaged firms for procurement and other business opportunities in the future, SBA has not completed or implemented the plan. SBA officials explained they were in the process of soliciting feedback on the plan from the resource partners and would then vet the plan within SBA. However, they have not yet established a timetable to complete this process. As a result, BDSs lack some tools that could help them offset existing resource constraints and better provide business development assistance. Participants in the 8(a) program can leave the program in several ways, including voluntary withdrawal and early graduation, prior to completing the 9-year term. SBA also may terminate firms under several conditions, including failure to follow program procedures; maintain eligibility for participation; maintain ownership, management, and control by disadvantaged individuals; or maintain licenses or charters. Although participants can be terminated for several reasons, SBA officials told us that most firms were terminated for not providing required documentation. Table 3 shows the volume of voluntary withdrawals, early graduations, and terminations over time. The BDSs with whom we spoke said that only a small percentage of 8(a) firms graduated early and none of the 19 BDSs with whom we spoke had experience in graduating firms early. According to SBA’s report to Congress, approximately 80 to 150 firms were terminated annually from 1999 through 2007, with the exception of 2006 when the number was more than 300. In one district office that we visited, officials pointed out that the number of firms terminated had increased since SBA had added the goal of completing annual reviews of all 8(a) firms to district office scorecards. Prior to terminating a participant, SBA headquarters requires proof that the participant has received two notifications from the district office about the agency’s intent to terminate. SBA then issues a letter of intent to terminate and provides the participant with an opportunity to respond in writing to justify retention and provide any pertinent documentation. If, following the participant’s response or lack of response, SBA headquarters makes a final determination to terminate the firm, it then issues the participant a notice of termination. The participant has 45 days to appeal the decision. During the appeal period, SBA headquarters also can rescind the decision if the participant provides adequate supporting information. However, because of the lengthy and inefficient termination process, noncompliant firms have remained in the 8(a) program. Results from our review of 80 files provided seven examples of firms that were repeatedly out of compliance at the time of their annual reviews but were not removed from the program. For example, one firm did not provide the required documentation for 5 of the 7 years it was in the program. A total of 25 firms (31 percent of the files we reviewed) were found to be out of compliance. SBA has guidance in place to terminate firms from the program, but SBA officials noted the process could take up to 120 days after a firm was notified of SBA’s intent to terminate. In addition, challenges arose when procedures in place did not apply to certain scenarios and when headquarters delayed completing its own assessment of the termination decision. One BDS told us of an instance where he initiated termination of a newly certified firm that was unresponsive after repeated attempts by the district office to communicate. The BDS conducted a field visit and found no facility at the location the firm provided on its application. However, since the BDS was unable to contact the applicant and was unable to provide the required proof-of-notification to headquarters, headquarters was reluctant to proceed with terminating the firm. Our file review showed a total of three instances where BDSs had difficulties in terminating firms because they were unable to locate the firms with the information they provided to SBA. In such cases, district office staff were limited in their ability to carry out timely terminations and remained responsible for completing an annual review until the firm was formally removed from the program. SBA officials also told us they were revising the 8(a) termination process and that they expect the new process to reduce the time to complete terminations from 120 to 45 days. The officials said that delays under the current process resulted from having to notify firms multiple times—twice by the district office and twice by headquarters. Under the revised process, SBA headquarters would send one notification of SBA’s intent to terminate, rather than two, which could reduce the time to complete the terminations. As part of recent efforts to improve agency performance and ensure that all its programs operate efficiently and effectively, SBA has been revising several of its standard operating procedures (SOP), including the sections of the 8(a) SOP on annual reviews and terminations. However, at the time of our review, SBA had not yet completed changes to the termination process in the 8(a) SOP. As a result of lengthy and sometimes uncompleted terminations, noncompliant firms may continue to participate in the 8(a) program and receive federal contracts. Our file review showed one instance where a noncompliant firm received a contract; however, our sample was not limited to firms that received contracts. The termination process also has consumed scarce SBA resources and may have affected business development activities. For instance, firms that repeatedly were noncompliant would add to the annual review burden of the staff and reduce the time that could be spent on assisting firms that are in compliance. Finally, SBA’s delay in completing revisions that it expects will expedite the termination process limits the ability of district office staff to carry out timely terminations. SBA uses surveillance reviews to monitor small business contracting at federal agencies, but the surveillance reviews have not assessed how agencies administered and oversaw 8(a) contracting. Under partnership agreements, SBA and federal agencies with procurement authority share the responsibilities of contract execution and oversight, monitoring, and compliance with procurement laws and regulations for 8(a) contracts. According to SBA’s current SOP, the scope of a surveillance review includes assessing (1) management of the small business programs, (2) compliance with regulations and published policies and procedures, (3) outreach programs focusing on small businesses, and (4) procurement documentation. However, the SOP does not address specifically the 8(a) program at the federal agencies and does not include procedures to evaluate the program. SBA’s six area offices coordinate with headquarters to determine which contracting activities within agencies will be selected for review during the last quarter of the fiscal year. Criteria used in selecting contracting activities included, among other things, the mission and the workload of the contracting activity, the small business goal achievement and overall level of small business participation over the prior 2 fiscal years, and experience or known problems with the contracting activity. SBA staff conduct surveillance reviews by reviewing contract files and interviewing agency officials. In some instances, the Office of Government Contracting (in which the PCRs and CMRs work) and the Office of Business Development (in which the BDSs work) informally have shared responsibility for conducting surveillance reviews. More specifically, BDSs accompanied PCRs and CMRs on surveillance reviews to provide assistance in reviewing 8(a) contract files and were supposed to report their findings on 8(a) separately. PCRs were primarily responsible for reporting on all other surveillance review findings. However, as identified in a 2006 SBA IG report, SBA’s surveillance reviews did not monitor agencies’ compliance with 8(a) partnership agreements. The IG report also noted that SBA was not aware that the 23 major procuring agencies failed to monitor 8(a) compliance on the contracts they administered and had no requirements for such monitoring. Further, SBA officials could not explain why reviews for the 8(a) program had not been conducted. Our review of reports for 32 surveillance reviews conducted in fiscal years 2006 and 2007 found that 10 assessed 8(a) contract files and that BDSs participated in 8 surveillance reviews. But the BDSs did not report on their findings. The IG report recommended that SBA conduct surveillance reviews on a regular basis to ensure that procuring agencies effectively were monitoring for and enforcing compliance with 8(a) regulations on the contracts they administered. Although SBA agreed with the IG’s recommendations, it has not yet made changes to its guidance for surveillance reviews (that is, the SOP) that would direct these reviews to regularly assess 8(a) contracting activities. As noted, SBA has been revising several of its SOPs and some officials explained that this usually was a lengthy process. But SBA has made some changes as a result of the IG report. According to SBA officials, in 2006, monitoring 8(a) contracting activities during surveillance reviews became the sole responsibility of the Office of Government Contracting. SBA officials said that PCRs and other Government Contracting staff were to complete the reviews, which would increase their efficiency and comprehensiveness because PCRs already conduct (and are experienced in) these reviews. SBA officials explained that by the end of fiscal year 2008, the Office of Government Contracting would begin incorporating the 8(a) program in its surveillance reviews. Since SBA has not updated its guidance in a timely manner to incorporate the 8(a) program into surveillance reviews, SBA does not have procedures to monitor—and has not been monitoring regularly—how agencies with which it has partnership agreements ensure compliance with 8(a) program requirements. As suggested by the SBA IG in 2006, the integrity of the 8(a) program could be undermined if government officials were unaware of firms violating its regulations. As a result, SBA has reduced assurance that agencies have complied with procurement laws and regulations for 8(a) contracts. SBA plays an important role in ensuring that federal agencies achieve small business contracting goals, small businesses gain access to federal contracting opportunities, and eligible socially and economically disadvantaged small businesses can compete in the economy. Although federal agencies have OSDBUs and their own offices in place to assist small businesses in finding contracting opportunities, SBA’s role is to advocate for and review prime and subcontracting opportunities for small businesses through its PCRs and CMRs, respectively. Their multiple responsibilities include recommending contract set-asides, resolving disputed recommendations, conducting surveillance reviews, and reviewing prime contractor plans for subcontracting. However, resource constraints and increased workload have impaired the ability of PCRs and CMRs to carry out these activities. For example, while SBA has recognized that more PCRs are needed to effectively fulfill their responsibilities, which include making set-aside recommendations, SBA has neither tracked such recommendations since 2001 nor developed other measures that could be used to develop a formal plan to better ensure that PCRs can carry out their responsibilities. Further, years of downsizing at SBA have significantly reduced the number of CMRs, with half of the CMRs performing other functions as well. In view of the continuing difficulties that federal agencies can have in consistently meeting goals for small business contracting, SBA has the opportunity to consider ways in which to maximize the effectiveness of its support to agencies for small business contracting. By assessing the workloads of PCRs and CMRs and the extent to which core responsibilities are being fulfilled and developing a strategy to effectively allocate limited resources, SBA could help ensure that the people and the resources necessary to identify and review federal contracting opportunities, and ultimately achieve small business goals, are in place. In addition to reviewing staff responsibilities, SBA also has opportunities to improve some tools and processes that could realize efficiencies that would allow staff to devote more time to core activities such as business development in the 8(a) program. For instance, the 8(a) program does not have a mandatory education requirement such as a seminar or assessment tool for applicants. Consequently, some participants that are not adequately informed about the program’s purpose and requirements may have unrealistic expectations of the program and be unprepared to fulfill their responsibilities, such as providing documentation for annual reviews. SBA currently must complete annual reviews of 100 percent of program participants, but staff cited lengthy, resource-intensive efforts to elicit documents from firms as a major reason for delays in completing the reviews. Better education at the front end of the 8(a) program and management of participant expectations could help reduce problems during program tenure, and thus free SBA staff resources for assisting firms with development activities. As noted above, SBA’s resource limitations have affected the ability of its staff to provide key services to small businesses. In the case of BDSs in the 8(a) program, the recent emphasis on completing required annual reviews has diminished the time and resources they have to provide 8(a) firms with business development support and conduct outreach activities that may increase contracting opportunities for them. While acknowledging the resource constraints that SBA faces and the necessity to comply fully with its statutory obligations, we note that the mission of the 8(a) program is business development. Additionally, SBA guidance requires BDSs to be the primary providers in helping firms develop business plans, seek loans, and receive counseling on finances, marketing, and management practices. Although SBA has recognized some organizational challenges and begun to reallocate resources in some district offices, we did not see evidence of these changes during our site visits. SBA has proposed a plan to provide more business development assistance through the creation of electronic tools to identify individual firms’ needs and greater utilization of SBA’s resource partners in providing assistance to businesses. However, the success of these proposed changes as they relate to the priorities and workload of staff such as the BDSs (and PCRs and CMRs) largely will depend on the timely development and implementation of these improvements. Furthermore, a lengthy and resource-intensive process for terminating noncompliant participants from the program has resulted in inefficient use of SBA’s limited program resources. SBA currently is revising the termination process, but has not developed a timeline for its completion and implementation. Prompt attention to these technological and procedural revisions could allow SBA staff to concentrate more on providing services to eligible firms and help ensure that program funds are targeted to deserving small businesses. Finally, SBA could improve the utility and effectiveness of its surveillance reviews, which monitor small business contracting at federal agencies. However, SBA has not yet implemented changes that its IG recommended for the review process in 2006; notably, that the agency regularly conduct surveillance reviews at the federal agencies with which it has partnership agreements to ensure compliance with regulations for 8(a) contracting. Without information on compliance with small business contracting requirements that such a review provides, SBA and federal agencies could be unaware of violations within 8(a), a key small business program. SBA indicated that it planned to include 8(a) contracting in the surveillance reviews by the end of fiscal year 2008. By revising its guidance to address the IG recommendation, SBA could improve its oversight of contracting activity in the 8(a) program and overall small business contracting. Such monitoring helps to maintain the integrity of the program and contributes to the achievement of small business and socioeconomic contracting goals. To improve its administration of the prime contracting, subcontracting, and 8(a) business development programs, we recommend that the Administrator of SBA take the following four actions: SBA should assess resources allocated for procurement center representative and commercial market representative functions and develop a plan to better ensure that these staff can carry out their responsibilities. To better educate prospective applicants for the 8(a) program and maximize limited SBA resources during program tenure of participants, SBA should take additional steps to ensure that firms applying for the program understand its requirements, and have realistic expectations for participation. Such steps could include an education requirement, such as a seminar or assessment tool. In acknowledgment of the competing demands for business development specialists to complete required annual reviews of 8(a) firms and support the mission of the 8(a) program—that is, develop and prepare small disadvantaged firms for procurement and other business opportunities— SBA should assess the workload of business development specialists to ensure they can carry out their responsibilities. As part of such an assessment, SBA could review the size of the 8(a) portfolio for all business development specialists and determine what mechanisms can be used to prioritize or redistribute their workload; in a timely manner, develop and implement its proposed plan for creating tools that would assist in the provision of business development assistance for 8(a) firms; and develop a timetable for planned changes to the termination process to ensure that staff monitoring 8(a) participants can carry out terminations from the program in a timely manner. To increase the usefulness of surveillance reviews for the 8(a) program, SBA should update its guidance to incorporate regular reviews of 8(a) contracting in the scope of the reviews. We requested SBA’s comments on a draft of this report, and the Deputy Associate Administrator for Government Contracting and Business Development provided written comments that are presented in appendix V. SBA agreed with our recommendations and outlined steps that it has initiated or plans to take to address each recommendation. First, SBA stated that it is assessing statutory requirements and resources for procurement center representatives and commercial market representatives in order to develop a plan that effectively and efficiently fulfills those requirements. Second, with regard to better educating prospective applicants for its 8(a) program and maximizing limited resources, SBA noted its continuing efforts in developing a plan that assesses individual business development needs of 8(a) participants and proposes a tool that tracks and manages 8(a) firms during their 9 years in the program. SBA also discussed its previous efforts in providing an informational course on the 8(a) program and a self-assessment tool for potential 8(a) firms online. In addition, SBA stated that it has assembled a focus group, composed of offices within SBA and its resource partners, to review the plan and provide feedback. While these actions are consistent with our recommendations, we encourage SBA to take additional steps to ensure that firms applying for the program understand the 8(a) program requirements and have realistic expectations for participation. Such steps could include an education requirement, such as a seminar or assessment tool, that must be completed by the prospective applicant. Third, SBA stated it would work with the Office of Human Capital Management to assess the workload of the business development specialists and their knowledge levels and stated this analysis would be completed by the end of the 2009 fiscal year (i.e. September 2009). Once completed, SBA plans to explore the possibility of redistributing certain portfolios. In addition, SBA expects to implement its proposed plan for creating tools that would assist in the provision of business development assistance for 8(a) firms by March 2009. Further, SBA stated that planned changes to its guidance on streamlining the termination process are expected to be issued by December 2008. Finally, SBA noted that its guidance for surveillance reviews was updated on September 26, 2008, to incorporate regular reviews of 8(a) contracting in the scope of the reviews. However, SBA did not disclose how it will monitor the 8(a) program and its partnership agreements with federal agencies. SBA also provided technical comments that we incorporated as appropriate. We also provided copies of the draft report to Commerce, DOD, DHS, and SSA. All four agencies responded that they had no comments on the draft report. We are sending copies of this report to the Ranking Member of the House Subcommittee on Government Management, Organization and Procurement, House Committee on Oversight and Government Reform, as well as the Ranking Member, House Committee on Homeland Security, other interested congressional committees and the Acting Administrator of the Small Business Administration. We are also sending copies to the Secretaries of the Department of Commerce, Defense, and Homeland Security and the Commissioner of the Social Security Administration. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your offices 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. Key contributors to this report are listed in appendix VI. To describe the actions the Small Business Administration (SBA) takes to set small business contracting goals and the extent to which federal agencies have achieved their small business goals in recent years, we reviewed pertinent legislation, guidance issued by SBA, our prior reports, and SBA’s Small Business Procurement Scorecard for fiscal years 2006 and 2008. In addition, we used data from fiscal years 2000 through 2006 on SBA’s negotiated goals with agencies and small business goaling reports to compare the goals of five agencies—the Departments of Commerce (Commerce), Defense (DOD), and Homeland Security (DHS); the Social Security Administration (SSA); and SBA—with the actual dollars awarded for prime contracts and to determine what percentage of their contracting dollars was awarded to small businesses. SBA uses the Federal Procurement Data System-Next Generation (FPDS-NG) to prepare its annual Small Business Goaling Reports, which are used to evaluate the performance of federal agencies in achieving their small business and socioeconomic procurement preference goals. To assess these data, we reviewed related documentation, including the methodology used to create these reports. For the purposes of this report, we found these data to be reliable. We selected the first four agencies—a nongeneralizable sample—based on level of contracting activity and SBA’s assessments of their goal achievement. The four agencies generally obligated larger amounts of contracting dollars to small disadvantaged businesses and, collectively, they received the full range of scores on SBA’s 2006 scorecard. We also included SBA because it sets goals and is responsible for assessing and reporting on goal achievement at federal agencies. We also interviewed officials at SBA, Commerce, DOD, DHS, and SSA. To examine SBA’s role in supporting small business contracting at select agencies, we reviewed our previous reports, relevant policies, procedures, and regulations; obtained information on SBA resources devoted to such activities; interviewed officials from SBA headquarters and from four of its six area offices; and interviewed officials at four selected federal agencies (see above). We also analyzed the SBA field office directory for the six area offices and identified the number of procurement center representatives (PCR) and commercial market representatives (CMR) in the agency as of August 2008. Area offices have responsibility for SBA’s prime contracting and subcontracting assistance programs and their staff can include PCRs and CMRs. We interviewed the 8 PCRs and 5 CMRs who were located in the four area offices we visited (out of an agency total of 59 PCRs and 31 CMRs, respectively). We also reviewed the number of agencies and buying activities assigned to each PCR. Buying activities are agencies or divisions within agencies that purchase goods and services. In addition, we analyzed SBA data on the number of formal and informal Form 70s issued to federal agencies by PCRs. Form 70s are used by PCRs to stop a contract action due to a disagreement between the PCR and contracting officer on a set-aside recommendation for small business. We had planned to update our 2002 report data on the number of PCR- recommended set-asides for this report, but because SBA no longer collects this information electronically, the most recent data are from 2001. For more information, see appendix IV. Further, we interviewed Office of Small and Disadvantaged Business Utilization (OSDBU) directors, acquisition officials, small business specialists, and contracting officers at our selected agencies. OSDBUs were established to advocate for contracting opportunities for small businesses. Small business specialists are responsible for working with OSDBUs and agency contracting officers to advocate for small businesses. To examine SBA’s overall administration of the 8(a) business development program, we reviewed and analyzed 8(a) program regulations, SBA’s procedures for administering the program, and previous SBA Inspector General (IG) reports. We interviewed SBA officials in headquarters program offices, 4 of 6 area offices, 4 of 68 district offices, and 1 of 2 Division of Program Certification and Eligibility (DPCE) offices to obtain their perspectives on certification, monitoring activities, and other aspects of the program. More specifically, we interviewed 19 business development specialists (BDS). We also conducted site visits to SBA offices in Atlanta, Georgia; Chicago, Illinois; San Francisco, California; and Washington, D.C. We selected these locations based on the number of SBA’s total 8(a) firms in each location and for geographic diversity. For each of the district offices that we visited, we reviewed and analyzed a sample of 20 8(a) participant files and additional documentation that SBA provided on the 8(a) program. To select these files, we obtained a list of 8(a) firms within each district office’s portfolio that included information on the year the firm was scheduled to graduate, whether the firm had received a contract, and if the firm was part of SBA’s mentor-protégé program. For each district office, we randomly selected two firms (one that received a contract and one that did not) from each year of the 9-year program and also randomly selected two firms in SBA’s mentor-protégé program. We reviewed the number of 8(a) applications received, approved, declined, and returned or withdrawn from fiscal years 1999 through 2007. We reviewed and assessed the reliability of SBA’s reports to Congress on the 8(a) program from 2001 through 2006. More specifically, we interviewed SBA officials about the data system used and reviewed related documentation. We determined this information was reliable for the purposes of this report. In addition, we reviewed 32 surveillance reviews conducted by the four selected area offices in 2006 and 2007. SBA uses surveillance reviews to assess federal agencies’ management of small business programs and compliance with regulations and published policies and procedures. Furthermore, we interviewed business development specialists and business opportunity specialists about their work and processes related to 8(a) applications, annual reviews, and participant terminations at the district offices we visited. We also interviewed an official from a trade association representing 8(a) and small disadvantaged business (SDB) firms and reviewed documents prepared by other trade associations representing 8(a) and SDB firms. To describe how the use of SDB certification has changed, we reviewed pertinent legislation and regulations, our previous reports, and SBA’s IG report on SDB certification. We also interviewed officials at SBA, Commerce, DOD, DHS, and SSA. In addition, we analyzed data from SBA’s Dynamic Small Business Search and FPDS-NG from fiscal years 2004 through 2007 to determine the number of SDB firms during this time period and the number of socioeconomic designations each SDB firm had. We conducted this performance audit from October 2007 through November 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix describes how the use of the small disadvantaged business (SDB) certification has changed. The certification’s purpose was to assist participating businesses in obtaining federal contracts and subcontracts. The Small Business Administration’s (SBA) Office of Business Development performed SDB certifications for the federal government, but suspended its certification program on October 3, 2008. To qualify for the SDB program, a firm had to be at least 51 percent owned and controlled by one or more individuals who met SBA’s criteria of socially and economically disadvantaged. Socially disadvantaged individuals include certain members of designated groups, such as Black Americans or Hispanic Americans and individuals who are not members of designated groups. Economically disadvantaged firms included those whose primary owner(s) have $750,000 or less in personal net worth, adjusted to exclude personal residence and business assets. Unlike the 8(a) program, firms were not required to demonstrate potential for success (for example, by having been in business at least for 2 years). In contrast to the single 9-year term of the 8(a) program, SDB certifications were valid for 3 years and firms had the option to recertify every 3 years. Benefits of the program originally included contract set-asides. In addition, all 8(a) firms automatically were certified as SDBs. The SDB program was established by the National Defense Authorization Act of 1987 for the Department of Defense (DOD). From 1987 to 1995, SDBs (which were then self-certified) were eligible to receive two main benefits—a 10 percent price evaluation adjustment (PEA) in certain DOD acquisitions, and the ability to compete for contracts set aside for SDBs for certain DOD acquisitions—as well as an evaluation factor or subfactor to credit contractors for the use of SDBs as subcontractors in certain acquisitions. The program was extended to civilian agencies in 1994, but implementation was delayed in the aftermath of a 1995 Supreme Court decision. The decision resulted in changes to the SDB program. Notably, the SDB set-aside was suspended although agencies could still use the PEA and evaluation credits. SBA also began certifying firms as SDBs in 1998, but on October 3, 2008, SBA published an interim final rule stating it would no longer certify SDB firms. For more details, see the following section. The authority of most civilian agencies to use the PEA expired in December 2004. After that time, only DOD, the Coast Guard, and the National Aeronautics and Space Administration (NASA) could use PEA authority in awarding contracts; however, DOD has not used it in recent years. DOD is statutorily required to suspend its use of the PEA for 1 year after any fiscal year in which DOD awards more than 5 percent of its eligible contract dollars to SDBs. Since 1999, DOD has determined that it met this requirement and suspended PEA use. At the subcontracting level, agencies could give credit to prime contractors that use SDBs as subcontractors on certain government contracts. In our January 2001 report on the SDB certification, we reported that several officials cited limitations with the SDB certification because the set-asides or price preferences were not being used. In our recent interviews with SBA and agency officials, officials from all the agencies indicated that the certification was not useful at the prime contract level, and they attributed this to the absence of mechanisms, other than full and open competition, to award contracts to SDBs. According to DOD officials, the SDB certification did not fill a legitimate departmental need and was not useful to the agency. As discussed above, DOD has not used the PEA since 1999. DHS officials we interviewed indicated that the Coast Guard rarely used PEAs to award prime contracts to SDB-certified firms because the agency could reach its 5 percent SDB goal through other small business set-aside programs. The Coast Guard also is proposing to ask for a waiver from Congress on using PEAs because of their limited value to the agency. From the civilian agency perspective, Commerce and SSA officials agreed the SDB certification had limited benefit as a prime contracting tool because their authority to use the PEA expired and due to the absence of a SDB set-aside. They suggested its main benefit was to help firms identify subcontractors. Most agency officials with whom we spoke stated they relied on 8(a) firms to meet their SDB goals. (All 8(a) firms automatically qualify for SDB certification.) SBA officials explained that agencies tended to concentrate on sole-source and set-aside mechanisms in the 8(a), Historically Underutilized Business Zone (HUBZone), and service-disabled veteran-owned business programs, since these provisions make it easier to award contracts to small businesses. SBA officials suggested some firms might continue to pursue the SDB certification not for federal contracts but because of state and local contracting programs that offer reciprocity to firms that are already SDB- or 8(a)-certified. They also noted that many firms had not sought the SDB certification because it was not worthwhile to them. Finally, in its interim final rule, SBA recognized the benefits of the SDB certification had greatly diminished over the past years. SBA has conducted fewer SDB certifications in recent years and we found that few firms that obtained federal contracts had only an SDB certification. Further, as noted above, SBA has stated it will no longer certify SDB firms. To conduct the SDB certifications prior to issuing its interim rule, SBA headquarters reviewed firms’ applications, which had to include evidence demonstrating that the firm was owned and controlled by one or more individuals claiming disadvantaged status, along with certifications or narratives regarding the individuals’ disadvantaged status. The firm also had to submit information necessary for a size determination. According to its implementing regulations, SBA had to tell each applicant whether the application was complete and suitable for evaluation, and, if not, what additional information or clarification was required within 15 days of receipt. If the application was complete, SBA had 30 days (if practicable) to determine whether the applicant met the SDB eligibility criteria. Applicants could appeal SBA’s determinations. The number of SDB firms that SBA certified decreased from fiscal years 1999 through 2007. For example, in fiscal year 2007, SBA certified 436 small businesses as SDBs, down substantially from 734 certified in 2006 and 1,045 in 2005. In general, SBA admitted fewer firms as SDBs than applied, with the majority of applications returned or withdrawn (see fig. 8). SBA officials explained that the decrease could be a result of the expiration of the authority to use the PEA for most civilian agencies in 2004. In our review of Federal Procurement Data System-Next Generation (FPDS-NG) data from fiscal years 2004 through 2007, SDB firms with more than one designation were more successful in receiving federal contracts than firms with only one designation. The majority of SDBs had either one or two additional designations. Fifteen percent (2,416) of the 15,950 SDB- certified firms in that period had only the SDB certification. Of SDBs that received contracts, 8.5 percent were SDB-only firms (meaning they did not have additional certifications). The majority of those firms that received contracts had at least one or two other designations, such as 8(a), HUBZone, or service-disabled veteran-owned (see fig. 9). However, of the 3,546 SDB firms with one other designation that received contracts, 85.9 percent also were designated as 8(a) firms. The results of this analysis suggest few firms relied solely on the SDB certification to obtain federal contracts. In addition to the role of the Small Business Administration (SBA), the Offices of Small Disadvantaged Business Utilization (OSDBU) and federal agency staff have advocacy, review, and liaison roles to facilitate small business contracting at federal agencies. For example, OSDBU officials we interviewed set policy within their agency and functioned as a liaison between small businesses and agency contracting officials. However, the level of involvement the OSDBU directors had in reviewing procurements and acquisition planning differed in the agencies selected for our review, partly reflecting the differing levels of procurement activity in the agencies. For example, the Department of Homeland Security (DHS) and Department of Commerce (Commerce) OSDBU directors were involved in the acquisition planning process with procurement officials, while the Department of Defense (DOD) and Social Security Administration (SSA) OSDBU directors were not. The roles of small business specialists, who report directly to procurement officials at their agencies, also may include being the liaison with SBA and the small business community. The OSDBU directors we interviewed explained their roles included advocating for small business and other socioeconomic contracting programs, not just the 8(a) program. They set policy, participated in outreach activities, attended monthly meetings with other OSDBUs, provided internal training and guidance to agency officials, and acted as liaisons between small businesses and contracting officials, among other things. From our discussions with OSDBU directors at selected agencies, the role of the OSDBU directors differed in the level of involvement in reviewing procurements and acquisition planning. For example, Commerce and SSA have policies that outline when OSDBUs became involved in reviewing procurements at certain procurement thresholds. Commerce and DHS OSDBU directors were involved in the acquisition planning process with procurement officials, while DOD and SSA OSDBU directors were not. Of the agencies we reviewed, the size of the OSDBU office varied from 22 staff members in DOD to 1 staff member at SSA (see table 4). Except for DOD, each agency had only one OSDBU office. DOD has multiple offices for each of the military departments (Air Force, Army, and Navy) and its other agencies. The differences in staff size and budget may be related to the volume of procurement in each agency. As the table illustrates, DOD spends a much larger amount on small business procurement than SSA. The SSA OSDBU director explained the small business specialist works closely with the OSDBU in reviewing acquisitions. The director believed the staffing level supported the workload of the OSDBU office, which in years past, reviewed from approximately 40 to 45 procurements a year, but this may change based on the new procurement center representative (PCR) assigned to SSA in January 2008. In 2003, we reported on the provision in the Small Business Act that requires OSDBU directors to report to agency heads or deputies and how select agencies were complying with this provision. We surveyed 24 agencies and determined 11 did not comply, including Commerce and SSA. For instance, we found that Commerce’s OSDBU director reported to the Chief Financial Officer and Assistant Secretary for Administration. We also found that the SSA OSDBU director reported neither to the Social Security Administration Commissioner nor the Deputy Commissioner. The DOD OSDBU director was exempted from the reporting requirement in 1988 when Congress amended the pertinent section of the Act. Both Commerce and SSA disagreed with our findings and concluded that they were in compliance. Although we did not conduct another evaluation of compliance with this requirement for our selected agencies, we did obtain information on the OSDBU directors’ current reporting structure. The DOD OSDBU director continues to be exempt from the reporting requirement. The Commerce OSDBU director said and their organizational charts indicate that the position reports to the Chief Financial Officer/Assistant Secretary for Administration, which is the same reporting relationship we found in our previous report. The organizational chart for DHS illustrates that the OSDBU director reports to the Deputy Secretary of the agency. SSA officials explained that its OSDBU director reports to the Deputy Commissioner for Budget, Finance, and Management, which is a similar reporting position identified in our previous report. Small business specialists (SBS) at federal agencies also promote the use of small businesses and reviewed procurements. SBSs at the agencies we reviewed (Commerce, DOD, DHS, and SSA) did not report to OSDBUs, but worked with them to implement their small business procurement policies. SBS roles in federal procurement include making sure contracting officers take small businesses into consideration when awarding contracts as required by regulation; maintaining a liaison with SBA and the small business community to ensure small businesses have access to procurement opportunities; helping small businesses tailor their marketing materials for an agency’s conducting outreach and advocacy efforts; and conducting internal and external training. The number of SBSs in an agency varied based on agency size; the differences in staff size also may be related to the volume of procurement in each agency. For example, DOD had approximately 500 SBSs and SSA had 1. Three of the four agencies we reviewed assigned SBSs to their bureaus and departments or divisions; however, SSA had one SBS for all divisions within the agency. In discussing their work, procurement officials cited some challenges they faced within their agencies to increase opportunities for small business procurement. For example, some officials explained that convincing agency program officials of the benefits of using small business contractors could be difficult because some program officials were risk- averse and perceived costs to be higher when using small business contractors. Some officials explained that training and educating program officials generally helped with this challenge, as did having support from top-level management. In addition, some officials noted that their interaction with SBA staff was limited. For instance, OSDBU officials we interviewed at two agencies explained that they rarely interacted with SBA’s PCRs, whose responsibilities include reviewing proposed agency acquisitions and recommending small business set-asides. SBA assesses how federal agencies promote small business goal attainment through its procurement scorecard. The scorecard evaluates factors such as goals met, progress shown, agency strategies, and top-level commitment to meeting goals. SBA’s inaugural scorecard ratings were based on fiscal year 2006 activities; SBA subsequently reviewed agencies’ progress in implementing procurement plans through July 25, 2007, and appended additional ratings to the scorecard. The scorecard relates to the roles of OSDBUs and SBSs through some of the elements reviewed, such as agency plans and internal policy setting, collaboration on the formation of small business procurement policy, and training provided to contracting staff on small business practices. To meet the agency’s small business goals, some federal agencies have developed their own programs and contracting mechanisms to promote small business participation in federal procurement. For example, DOD and DHS have mentor-protégé programs, administered through their OSDBUs, in which selected firms provide support and guidance for new firms entering the federal contracting arena. In return, at DOD, the mentor may receive monetary compensation or contracting incentives and at DHS, the mentor may receive contracting incentives. SBA also has a mentor- protégé program that is specific to the 8(a) program and administered by the Office of Business Development and SBA’s district offices. To promote greater competition within small business procurement, several agencies explained that they created internal contracting mechanisms. For example, DOD-Navy created the SEAPORT-e initiative, which is a rolling admission program in which firms compete for contracts in 22 types of naval services within seven geographic regions. DHS and Commerce developed contracting vehicles to enhance small business participation in information technology contracts. At Commerce-Census, Census officials explained they took specific efforts to involve small businesses as subcontractors in the upcoming 2010 decennial census by requiring prospective prime contractors to submit a subcontract participation plan. As stated previously in this report, the responsibilities of the Small Business Administration’s (SBA) procurement center representatives (PCR) include recommending that contracts be set aside for eligible small businesses. In 2002, we reported that the number of set-aside recommendations that PCRs were making decreased by half from fiscal years 1991 through 2001. Reasons for the decline during this period included downsizing (which decreased the number of PCRs), the reassignment of some PCRs to other roles, and the increased size of federal procurements that contributed to fewer set-aside opportunities for small businesses. We planned to update our 2002 report; however, SBA stated they no longer electronically collected information on the number of set-asides. We were able to update information about the number of Form 70s and appeals that PCRs filed; the Form 70 reflects some level of discussion or disagreement between agencies and SBA about recommended set-asides. In instances where an agency does not accept a PCR’s recommendation for a small business set-aside, the PCR may dispute the procurement through informal or formal means to the agency’s procurement official. A PCR generally will issue an informal Form 70 after discussing the set-aside and reaching an agreement with the contracting officer to accept the recommended set-aside. If the PCR and contracting officer do not reach an agreement, the PCR submits a formal Form 70 to the contracting officer, which effectively stops the contract action, pending further consideration. If the procurement official refuses to accept the recommended set aside addressed in the Form 70, SBA can appeal the rejection first to the head of the contracting activity (the division within the agency purchasing the goods or services), then to the agency head (known as a secretarial appeal). From fiscal years 2003 through 2007, the number of informal form 70s increased approximately 71 percent and the number of formal form 70s decreased approximately 60 percent (see table 5). SBA officials explained their goal was to promote productive relationships with federal agencies and using informal complaints was more conducive to achieving this end. In addition to the contact named above, Paul Schmidt (Assistant Director), Bernice Benta, Paula Braun, Tania Calhoun, Nadine Garrick, Fred Jimenez, Julia Kennon, Amanda Miller, Marc Molino, Barbara Roesmann, and William Woods made key contributions to this report. | The Small Business Administration (SBA) helps small businesses gain access to federal contracting opportunities and helps socially and economically disadvantaged small businesses, known as 8(a) firms, by providing management and contracting assistance. SBA negotiates agency-specific goals to ensure that the federal government meets the statutory goal of awarding 23 percent of contract dollars to small businesses. GAO was asked to (1) describe how SBA sets small business contracting goals and the extent to which federal agencies met these goals; (2) examine the role of SBA staff in supporting small business contracting at selected federal agencies; and (3) examine SBA's overall administration of the 8(a) program. To address these objectives, GAO reviewed SBA guidance and SBA Inspector General (IG) reports, interviewed SBA and other federal officials, and conducted site visits and file reviews at four SBA locations. SBA reviews prior year goal achievement and other factors to set individual contracting goals necessary for federal agencies to achieve the governmentwide goal of awarding 23 percent of federal contract dollars to small businesses. Individual agency results varied in fiscal years 2000 through 2006, although the agencies collectively achieved or came close to the 23 percent goal. In fiscal year 2006, SBA began using a scorecard to help monitor agencies' small business contracting efforts. Of the 24 agencies rated, half received the lowest rating (for failing to meet at least two contracting goals and other criteria). SBA later reviewed agency progress in implementing small business procurement plans and many agencies improved their ratings. SBA staff advocate, review, and monitor small business contracting at federal agencies, but resource constraints have limited the ability of staff to fulfill these responsibilities. SBA's procurement center representatives (PCR) work with federal agencies by reviewing proposed acquisitions, recommending contract set-asides, and performing surveillance reviews (which monitor small business contracting at federal agencies). As of August 2008, SBA had 59 PCRs, with many responsible for multiple agencies. SBA has recognized that more PCRs are needed, but has not developed a formal plan to align staff resources with program objectives. Resource constraints also affected SBA's commercial market representatives (CMR), who monitor subcontracting plans. For fiscal year 2006, the SBA IG reported that CMRs monitored less than half of the 2,200 large prime contractors. These resource constraints reduced assurances that SBA can monitor contracting effectively. SBA's administration of the 8(a) business development program is challenged by several factors, including some participants not understanding the program's purpose and requirements, its staff's diminished ability to conduct business development activities, an inefficient process to terminate firms, and a lack of routine surveillance reviews specific to the program. While SBA has controls in place to determine if firms are eligible to enter the program, firms do not have to participate in an information session or complete an assessment that rates their suitability for the program. Thus, some firms may have entered the program with unrealistic expectations or not clearly understood program requirements. SBA officials said that an emphasis on completing annual reviews of 100 percent of 8(a) firms, which are time intensive, and an inefficient termination process for noncompliant 8(a) firms diminished the time its business development specialists had for providing business development assistance. Delays in terminating firms also could result in noncompliant firms obtaining contracts. Finally, in 2006, the SBA IG recommended that SBA regularly conduct surveillance reviews for the 8(a) program. However, SBA has not yet implemented this recommendation. As a result, SBA has reduced assurances that agencies have complied with monitoring requirements for the 8(a) program. |
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Within USDA, FSA has the overall administrative responsibility for implementing agricultural programs. FSA is responsible for, among other things, stabilizing farm income, helping farmers conserve environmental resources, and providing credit to new or disadvantaged farmers. FSA’s management structure is highly decentralized; the primary decision-making authority for approving loans and applications for a number of agricultural programs rests in its county and district loan offices. In county offices, for example, committees, made up of local farmers, are responsible for deciding which farmers receive funding for the Agricultural Conservation Program (ACP). Similarly, FSA officials in district loan offices decide which farmers receive direct loans. These FSA officials are federal employees. Under the ACP, FSA generally paid farmers up to 75 percent of a conservation project’s cost, up to a maximum of $3,500 annually. FSA allocated funds annually to the states on the basis of federally established priorities. The states in turn distributed funds to the county committees on the basis of the states’ priorities. Farmers could propose projects at any time during the fiscal year, and the county committees could approve the proposals at any time after the funds became available. Consequently, county committees often obligated their full funding allocation before receiving all proposals for the year. The district loan offices administer the direct loan program, which provides farm ownership and operating loans to individuals who cannot obtain credit elsewhere at reasonable rates and terms. Each district loan office is responsible for one or more counties. The district loan office’s agricultural credit manager is responsible for approving and servicing these loans. FSA accepts a farmer’s loan application documents, reviews and verifies these documents, determines the applicant’s eligibility to participate in the loan program, and evaluates the applicant’s ability to repay the loan. In servicing these loans, FSA assists in developing farm financial plans, collects loan payments, and restructures delinquent debt. For both the ACP and the direct loan program, as well as other programs, farmers may appeal disapproval decisions to USDA’s National Appeals Division (NAD). FSA’s efforts to achieve equitable treatment for minority farmers are overseen by the agency’s Civil Rights and Small Business Development Staff through three separate activities. First, the Staff investigates farmers’ complaints of discrimination in program decisions through its Civil Rights and Small Business Development Staff. During fiscal years 1995 and 1996, the Staff closed 28 cases in which discrimination was alleged on the basis of race or national origin. In 26 of these cases, the Staff found no discrimination. In the other two cases, the Staff found that FSA employees had discriminated on the basis of race in one case and national origin in the other. At the time of review, USDA had not resolved how it would deal with the employees and compensate the affected farmers. As of January 7, 1997, the Staff had 110 cases of discrimination alleged on the basis of race or national origin under investigation. Ninety-one percent of these cases were filed since January 1, 1995. Second, the Staff conducts management evaluations of FSA’s field offices to ensure that procedures designed to protect civil rights are being followed. During fiscal years 1995 and 1996, the Staff evaluated management activities within 13 states. None of the evaluations concluded that minority farmers were being treated unfairly. And third, the Staff provides equal employment opportunity (EEO) and civil rights training to its employees. Beginning in 1993, the Staff began to present revised EEO and civil rights training to all FSA state and county employees. About half of the FSA employees have been trained, according to the Staff, and all are scheduled to complete this training by the end of 1997. The training covers such areas as civil rights (program delivery) and EEO counseling, mediation, and complaints. In addition to these activities, FSA has specific efforts to increase minority farmers’ participation in agricultural programs. For example, since September 1993, the Small Farmer Outreach Training and Technical Assistance Program has assisted small and minority farmers in applying for loans. Over 2,500 FSA borrowers have been served by these efforts. FSA has also assisted Native American farmers by establishing satellite offices on reservations. More recently, in July 1996, FSA created an outreach office to increase minority farmers’ knowledge of, and participation in, the Department’s agricultural programs. In the 101 counties with the highest numbers of minority farmers, representing 34 percent of all minority farmers in the nation, FSA employees and county committee members were often members of a minority group. As of October 1996, 32 percent of FSA’s employees serving the 101 counties were members of a minority group. In the offices serving 77 of these counties, at least one staff member was from a minority group. Moreover, 89 percent of these minority employees were either county executive directors or program assistants. Minority farmers make up about 17 percent of the farmer population in these 101 counties. In addition, 7 of the 10 county and district loan offices we visited had at least one minority employee. The executive directors of two county offices, Holmes, Mississippi, and Duval, Texas, were members of a minority group, as were the managers of two district loan offices, Elmore, Alabama, and Jim Wells, Texas, and the deputy managers of three district loan offices, Holmes, Jim Wells, and Byron, Georgia. The number of minority employees could change as FSA continues its current reorganization. FSA plans to decrease its field structure staff from 14,683 in fiscal year 1993 to 11,729 in fiscal year 1997—a change of about 20 percent. We do not know how this reduction will affect the number of minority employees in county and district loan offices. We found that for the 101 counties with the highest numbers of minority farmers, 36 had at least one minority farmer on the county committee. In the five county offices we visited, two committees had minority members and the other three had minority advisers. We have previously reported on this issue. In March 1995, in Minorities and Women on Farm Committees (GAO/RCED-95-113R, Mar. 1, 1995), we reported that minority farm owners and operators, nationwide, accounted for about 5 percent of those eligible to vote for committee members, and about 2 percent of the county committee members came from a minority group. According to FSA’s data, applications for the ACP for fiscal year 1995 and for the direct loan program from October 1994 through March 1996 were disapproved at higher rates nationwide for minority farmers than for nonminority farmers. To develop an understanding of the reasons for disapprovals, we examined the files for applications submitted under both programs during fiscal years 1995 and 1996 in five county and five district loan offices. We chose these offices because they had higher disapproval rates for minority farmers or because they were located in areas with large concentrations of farmers from minority groups. We chose the ACP and the direct loan program because decisions on participation in these programs are made at the local level. In addition, nationally, these programs have higher disapproval rates for minority farmers than for nonminority farmers. Nationally, during fiscal year 1995, the disapproval rates for applications for ACP funds were 33 percent for minority farmers and 27 percent for nonminority farmers. We found some differences in the disapproval rates for different minority groups. Specifically, 25 percent of the ACP applications from Native American and Asian American farmers were disapproved, while 34 percent and 36 percent of the applications from African American and Hispanic American farmers, respectively, were disapproved. To develop an understanding of the reasons why disapprovals occurred, we examined the ACP applications for fiscal years 1995 and 1996 at five county offices. (See attachment I for the number of ACP applications during this period from minority and nonminority farmers in each of the five counties, as well as the number and percent of applications that were disapproved.) When ACP applications were received in the county offices we visited, they were reviewed first for compliance with technical requirements. These requirements included such considerations as whether the site was suitable for the proposed project or practice, whether the practice was still permitted, or whether the erosion rate at the proposed site met the program’s threshold requirements. Following this technical evaluation, if sufficient funds were available, the county committees approved all projects that met the technical evaluation criteria. This occurred for all projects in Dooly County and for a large majority of the projects in Glacier County. In Holmes County, the county committee ranked projects for funding using a computed cost-per-ton of soil saved, usually calculated by the Department’s local office of the Natural Resources Conservation Service. The county committee then funded projects in order of these savings until it had obligated all funds. In the remaining two counties, Russell and Duval, the county committees, following the technical evaluations, did not use any single criterion to decide which projects to fund. For example, according to the county executive director in Russell County, the committee chose to fund several low-cost projects submitted by both minority and nonminority farmers rather than one or two high-cost projects. It also considered, and gave higher priority to, applicants who had been denied funds for eligible projects in previous years. In contrast, the Duval county committee decided to support a variety of farm practices. Therefore, it chose to allocate about 20 percent of its funds to projects that it had ranked as having a medium priority. These projects were proposed by both minority and nonminority farmers. In the aggregate, 98 of 271 applications from minority farmers were disapproved in the five county offices we visited. Thirty-three were disapproved for technical reasons and 62 for lack of funds. FSA could not find the files for the remaining three minority applicants. We found that the applications of nonminority farmers were disapproved for similar reasons. Of the 305 applications for nonminority farmers we reviewed, 106 were disapproved. Fifty-three were disapproved for technical reasons and 52 for lack of funds. FSA could not find the file for the remaining applicant. Approval and disapproval decisions were supported by material in the application files, and the assessment criteria used in each location were applied consistently to applications from minority and nonminority farmers. Nationally, the vast majority of all applicants for direct loans have their applications approved. However, the disapproval rate for minority farmers is higher than for nonminority farmers. From October 1994 through March 1996, the disapproval rate was 16 percent for minority farmers and 10 percent for nonminority farmers. We found some differences in the disapproval rates for different minority groups. Specifically, 20 percent of the loan applications from African American farmers, 16 percent from Hispanic American farmers, 11 percent from Native American farmers, and 7 percent from Asian American farmers, were disapproved. To assess the differences in disapproval rates, we examined the direct loan applications for fiscal years 1995 and 1996 at five district loan offices. (See attachment II for more detailed information on direct loan disapproval rates in five district offices.) Our review of the direct loan program files in these locations showed that FSA’s decisions to approve and disapprove applications appeared to follow USDA’s established criteria. These criteria were applied to the applications of minority and nonminority farmers in a similar fashion and were supported by materials in the files. The process for deciding on loan applications is more uniform for the direct loan program than for the ACP. The district loan office first reviews a direct loan application to determine whether the applicant meets the eligibility criteria, such as being a farmer in the district, having a good credit rating, and demonstrating managerial ability. Farmers who do not demonstrate this ability may take a course, at their own expense, to meet this standard. If the applicant meets these criteria, the loan officer determines whether the farmer meets the requirements for collateral and has sufficient cash flow to repay the loan. These decisions are based on the Farm and Home Plan—the business operations plan for the farmer—prepared by the loan officer with information provided by the farmer. If the collateral requirements and the cash flow are sufficient, the farmer generally receives the loan. In the five district loan offices we visited, 22 of the 115 applications from minority farmers were disapproved. Twenty were disapproved because the applicants had poor credit ratings or inadequate cash flow. One was disapproved because the applicant was overqualified and was referred to a commercial lender. In the last case, the district loan office was unable to locate the loan file because it was apparently misplaced in the departmental reorganization. However, correspondence dealing with this applicant’s appeal to NAD indicates that the application was disapproved because the applicant did not meet the eligibility criterion for recent farming experience. NAD upheld the district loan office’s decision. The Department allows all farmers to appeal adverse program decisions made at the local level through NAD. The division conducts administrative hearings on program decisions made by officers, employees, or committees of FSA and other USDA agencies. The applications of nonminority farmers that we reviewed were disapproved for similar reasons. Of the 144 applications from nonminority farmers we reviewed, 15 were disapproved. Nine were disapproved because of poor credit ratings or inadequate cash flow; five were disapproved because the applicants did not meet eligibility criteria; and one was disapproved because of insufficient collateral. Additionally, in reviewing the 129 approved applications of nonminority farmers, we did not find any that were approved with evidence of poor credit ratings or insufficient cash flow. We also wanted to obtain information on whether FSA was more likely to foreclose on loans to minority farmers while restructuring or writing down loans to nonminority farmers. Between October 1, 1994, and March 31, 1996, we found only one foreclosed loan for a—nonminority farmer—in the five district loan offices we reviewed. We also found 62 cases in which FSA restructured delinquent loans. Twenty-two of these were for minority farmers. Finally, the amount of time FSA takes to process applications from minority and nonminority farmers is about the same. Nationwide, from October 1994 through March 1996, FSA took an average of 86 days to process the applications of nonminority farmers and an average of 88 days to process those of minority farmers. More specifically, for African Americans, FSA took 82 days; for Hispanic Americans and Native Americans, 94 days; and for Asian Americans, 97 days. This completes my prepared statement. I will be happy to respond to any questions you may have. 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A recorded menu will provide information on how to obtain these lists. | GAO discussed its work on the U.S. Department of Agriculture's (USDA) efforts to achieve equitable treatment of minority farmers, focusing on the: (1) Farm Service Agency's (FSA) efforts to treat minority farmers in the same way as nonminority farmers in delivering program services; (2) representation of minorities in county office staffing and on county committees in the counties with the highest number of minority farmers; and (3) disposition of minority and nonminority farmers' applications for participation in the Agricultural Conservation Program (ACP) and the direct loan program at the national level and in five county and five district loan offices for fiscal years 1995 and 1996. GAO noted that: (1) FSA's Civil Rights and Small Business Development Staff oversees the agency's efforts to achieve fair treatment for minority farmers; (2) in fiscal years 1995 and 1996, the Staff closed 28 complaints of discrimination against farmers on the basis of race or national origin and found discriminatory practices in 2 of the 28 cases; (3) the Staff also conducted 13 management reviews of field offices and found no evidence of unfair treatment; (4) finally, according to the Staff, they are in the midst of training all FSA personnel on civil rights matters and the Staff projects that this training will be completed by the end of 1997; (5) GAO did not evaluate the quality and thoroughness of the Staff's activities; (6) with respect to the representation of minority employees in FSA's field offices, USDA's database showed that, as of October 1996, 32 percent of the employees serving the 101 counties with the highest number of minority farmers are members of a minority group; (7) moreover, for the same period, 89 percent of these minority employees were either county executive directors or program assistants; (8) minority farmers makeup about 17 percent of the farmer population in these counties; (9) furthermore, in 36 of the 101 counties, at least one minority farmer is a member of the county committee; (10) the applications of minority farmers for ACP for fiscal year 1995 and for the direct loan program from October 1994 through March 1996 were disapproved at a higher rate nationwide than for nonminority farmers; (11) GAO found that disapproval rates for minority farmers were also higher at three of the five county offices and three of the five district loan offices it visited; and (12) however, GAO's review of the information in the application files at these offices showed that decisions to approve or disapprove applications were supported by information in the files and that decisionmaking criteria appeared to be applied to minority and nonminority applicants in a similar fashion. |
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As previously stated, TSA’s 2008 regulation requires passenger rail agencies to report potential threats and significant security concerns to the TSOC. According to the regulation, potential threats and significant security concerns (rail security incidents) include, but are not limited to, the following: 1) interference with the train or transit vehicle crew; 2) bomb threats, specific and non-specific; 3) reports or discovery of suspicious items that result in the disruption of rail operations; 4) suspicious activity occurring onboard a train or transit vehicle or inside the facility of a passenger railroad carrier or rail transit system that results in a disruption of rail operations; 5) suspicious activity observed at or around rail cars or transit vehicles, facilities, or infrastructure used in the operation of the passenger railroad carrier or rail transit system; 6) discharge, discovery, or seizure of a firearm or other deadly weapon on a train or transit vehicle or in a station, terminal, facility, or storage yard, or other location used in the operation of the passenger railroad carrier or rail transit system; 7) indications of tampering with passenger rail cars or rail transit vehicles; 8) information relating to the possible surveillance of a passenger train or rail transit vehicle or facility, storage yard, or other location used in the operation of the passenger railroad carrier or rail transit system; 9) correspondence received by the passenger railroad carrier or rail transit system indicating a potential threat to rail transportation; and 10) other incidents involving breaches of the security of the passenger railroad carrier or the rail transit system operations or facilities. The regulation also authorizes TSA officials to view, inspect, and copy rail agencies’ records as necessary to enforce the rail security incident reporting requirements. This regulatory authority is supported by TSA policies and guidance, including the Transportation Security Inspector Inspections Handbook, the National Investigations and Enforcement Manual, and the Compliance Work Plan for Transportation Security Inspectors. Within TSA, different offices have responsibilities related to implementing and enforcing the rail security incident reporting requirement. The TSOC, managed by TSA’s Office of Law Enforcement/Federal Air Marshal Service, is the TSA entity primarily responsible for collecting and disseminating information about rail security incidents. Once notified of a rail security incident, TSOC officials are responsible for inputting the incident information into their incident management database known as WebEOC, and for disseminating incident reports that they deem high priority or significant to select TSA officials; other federal, state, and local government officials; and select rail agencies’ law enforcement officials. TSA’s Office of Intelligence and Analysis is responsible for analyzing threat information for all modes of transportation, including information related to passenger rail. TSA’s Office of Security Policy and Industry Engagement is responsible for using incident reports and analyses, among other things, to develop strategies, policies, and programs for rail security, including operational security activities, training exercises, public awareness, and technology. Figure 1 shows the intended steps and responsibilities of TSA components involved in the rail security incident reporting process. TSA’s Office of Security Operations is responsible for overseeing and enforcing the incident reporting requirement. Responsible for managing TSA’s inspection program for the aviation and surface modes of transportation, the Office of Security Operations’ Surface Compliance Branch deploys approximately 400 transportation security inspectors- surface (TSI-S) nationwide.clarification to rail agencies regarding the incident reporting process highlighted in figure 1, and for overseeing rail agencies’ compliance with the reporting requirement by conducting inspections to ensure that incidents were properly reported to the TSOC. TSI-Ss also conduct assessments of surface transportation systems, including passenger rail systems, and oversee compliance with other applicable transportation security policies, directives, standards, and agreements. At the headquarters level within the Office of Security Operations, the Compliance Programs Division is responsible for assisting TSA management and surface inspection officials in the field by providing guidance and subject matter expertise in ensuring compliance by The TSI-Ss are responsible for providing regulated entities with security requirements. Six regional security inspectors-surface (RSI-S) within the Compliance Programs Division are responsible for providing national oversight of local surface inspection, assessment, and operational activities. TSA has not provided consistent oversight of the implementation of the passenger rail security reporting requirement, leading to considerable variation in the types and number of rail security incidents reported. This variation is compounded by inconsistency in compliance inspections and enforcement actions, due in part to limited utilization of oversight mechanisms at the headquarters level. Since the rail security incident reporting regulation went into effect in December 2008, local TSA inspection officials, who are the primary TSA points of contact for rail agencies, have not received clarifying guidance from TSA headquarters regarding how rail agencies should implement the reporting regulation. Although the regulation identifies 10 broad types of rail security incidents that must be reported to the TSOC, 7 of the 19 rail agencies we spoke with noted that there are several grey areas within these incident types that can be open to interpretation. In the absence of clarifying guidance from TSA headquarters, local TSA inspection officials have provided rail agencies with inconsistent interpretations of the regulation’s reporting requirements. Some variation is expected in the number of rail security incidents that rail agencies reported because of differences in agency size, geographic location, and ridership. For example, we analyzed incident data for 7 of the 19 rail agencies included in our review, and found that the number of incidents reported per million riders ranged from 0.25 to 23.15. Inconsistent interpretation of the regulation by local TSA inspection officials has contributed to this variation. For example, officials from one rail agency we spoke with had been told by their local TSA inspection officials that they were required to report all instances in which a person was hit by a train, because an individual cannot be struck by a train in the right of way without trespassing or breaching security. In contrast, officials from another rail agency told us that their agency does not report all of these incidents because they are most often intentional suicides that are unrelated to terrorism. The local TSA inspection officials responsible for this agency agreed with this interpretation, noting that suicides generally have no nexus to terrorism. Similarly, rail agencies may have received inconsistent feedback from their local TSA inspection officials about reporting incidents involving weapons. The regulation requires that rail agencies report incidents that involve the “discharge, discovery, or seizure of a firearm or other deadly weapon on a train or transit vehicle or in a station, terminal, facility, or storage yard, or other location used in the operation of the passenger railroad carrier or rail transit system.” However, officials from one rail agency stated that if an individual is stopped for fare evasion and is subsequently found to be in possession of an illegal firearm, they would not report the incident to the TSOC because it is a local criminal incident unrelated to terrorism. These officials explained that they would report only incidents that could have a nexus to terrorism, in part because reporting incidents that are unrelated to terrorism could reduce the quality of the data TSA collects. The local TSA inspection officials responsible for this agency have never found it to be in noncompliance for not reporting a weapon, tacitly approving of the agency’s interpretation of the regulation. In contrast, officials at another rail agency said that they report all incidents related to weapons—regardless of their possible nexus to terrorism—because their local TSA inspection officials have instructed them that any firearm found in the system has to be reported. However, these officials stated that because of local gun laws, handguns are seized during the course of routine law enforcement activities, and are generally incidental to the original criminal offense. While they do report these local criminal incidents to the TSOC as directed by their local TSA inspection officials, the rail agency officials stated that it is unclear to them why it is necessary to do so if they have no nexus to terrorism. Clarification about which incidents should be reported could help address the confusion among rail agencies, and improve consistency in incident reporting. Before the final rule was issued in November 2008, rail stakeholders raised concerns about the types of incidents required to be reported in commenting on the notice of proposed rulemaking. Specifically, some rail stakeholders noted when commenting on the proposed rule that the regulation’s definition of reportable events was too broad and would result in an overload of information that would divert attention from truly significant threats and dilute the effectiveness of the reporting system. Rail stakeholders requested that TSA clarify the reporting requirements, but in the preamble to the final rule, TSA stated that the agency would not further define or limit the scope of the reporting requirement, because doing so would reduce the data that TSA received, which could be used for broader trend analyses in order to anticipate or prevent an attack. TSA has maintained this position, and as a result, has not developed clarifying guidance at the headquarters level regarding the reporting requirement. However, local TSA inspection officials, headquarters level compliance officials, and rail agency officials that we interviewed stated that additional written guidance could help ensure that the regulation is implemented more consistently. According to Standards for Internal Control in the Federal Government, information should be communicated in a way that allows officials to carry out their responsibilities. In October 2011, we also reported that providing officials with guidance that contains specific criteria and definitions would provide greater assurance that decisions are made consistently. For the aviation mode, TSA has established written guidance for reporting security incidents. TSA’s operational directive for reporting aviation security incidents includes attachments that, among other things, identify the types of incidents that are to be reported, based on the immediate security threat of different types of incidents. With regard to passenger rail, however, TSA has maintained the agency’s position as detailed in the preamble to the final rule, as described above, and has not taken actions to develop clarifying guidance regarding the types of incidents that should be reported under the regulation. Providing similar guidance to local TSA inspection officials responsible for rail agencies could help to ensure that these officials are interpreting the regulation consistently across different field offices. These actions could also better position TSA to consistently collect rail security incident information, which may facilitate its efforts to conduct trend analysis and also help TSA to “connect the dots” to identify potential threats to passenger rail systems. TSA monitors passenger rail agency compliance with incident reporting requirements through compliance inspections and related enforcement activities at the local level, but TSA has not utilized its limited oversight mechanisms at the headquarters level as intended for ensuring consistency in these activities. Local TSA inspection officials conduct inspections of rail agencies to ensure compliance with the incident reporting requirement—that is, to ensure that rail agencies are properly reporting significant security concerns to the TSOC. In addition to monitoring compliance, inspections offer local TSA officials opportunities to provide rail agencies with feedback regarding their implementation of the regulation. TSA inspection officials also may take enforcement action against a rail agency that TSA finds to be not in compliance. Within TSA headquarters, the Compliance Programs Division within the Office of Security Operations is responsible for ensuring consistency in the application of all regulatory priorities that are to be implemented by the field and for monitoring and overseeing operational and field activities intended to support TSA’s national rail security programs and objectives. Our analysis of TSA’s inspection data from January 1, 2011, through June 30, 2012, shows that the frequency of local TSA inspections of compliance with the reporting regulation varies among rail agencies. TSA’s rail security inspection policies and guidance do not specify how often inspections should be conducted, instead recommending that inspections be driven by reportable events, with local discretion used to ensure a reasonable number of inspections are performed. According to senior TSA compliance officials, this means that inspections can be initiated in response to a particular incident that local TSA officials become aware of, as opposed to being scheduled at regular intervals. According to PARIS data, from January 1, 2011, through June 30, 2012, of the 19 rail agencies we spoke with, 7 agencies had been inspected at least 18 times, or an average of once per month. However, 3 agencies had not been inspected, including a large metropolitan rail agency. Information in the text box below provides an example of this rail agency’s experience with TSA compliance activities. Average monthly inspections for this time period ranged from about eight inspections to no inspections, and there was also variation in the regularity with which inspections occur. For example, although 1 agency was inspected 4 times during the time period we reviewed, 3 of these inspections were conducted on the same day. In contrast, another agency was inspected a total of 11 times, with each inspection occurring in a different month. TSA Had Not Inspected a Major Rail Agency On the basis of our review of the TSOC’s database, we found that one major rail agency had not reported any incidents to the TSOC from January 1, 2011 through June 30, 2012. According to officials from this rail agency, the agency did not report any incidents because the rail agency had not clearly identified who in the agency was responsible for reporting incidents to the TSOC. Further, the local TSA inspectors responsible for this rail system had not conducted any compliance inspections to determine whether the system was meeting its requirement to report rail security incidents, according to PARIS inspection records. The regulation requires rail agencies to allow TSA inspectors to conduct inspections, copy records, and perform tests to ensure that rail agencies are meeting their rail security incident reporting responsibilities. Local TSA inspection officials told us, however, they did not have sufficient access to the rail agency’s police records and personnel to complete these inspection activities and therefore were unable to determine whether rail security incidents have actually occurred in the system. Given the passenger volume of this rail system, the local TSA officials stated that it was highly unlikely that no rail security incidents had occurred. According to local news sources, several security incidents had occurred on the system during 2011 that, according to the regulation, should have been reported to the TSOC. For example, an Internet search we conducted in September 2012 indicated that in 2011, local news reported on a suspicious item found in one of the rail system’s stations that resulted in a delay of service. Local TSA inspection officials stated that they did not pursue enforcement action against the rail system for incidents that should have been reported, nor did they request assistance from TSA’s Surface Compliance Branch in obtaining access to the rail system’s incident documentation. These local TSA inspection officials also explained that they are working on improving their relationship with the rail agency and their access to the agency’s incident records. TSA’s policies also describe a variety of activities that may constitute an inspection. According to senior TSA compliance officials, these broad policies on how to conduct inspections contribute to inconsistent approaches across TSA field offices. For example, according to TSA policy, inspections could range from a phone call to the rail agency to inquire whether the agency reported a specific incident to more rigorous, regularly scheduled, on-site inspections of rail agencies’ internal incident management systems. However, for an inspection official to inquire about whether an agency reported a specific incident by phone, that official must first become aware of the incident through other means, such as a media report, whereas on-site inspections could allow TSA inspection officials to identify incidents that did not result in media reports, but should have been reported to the TSOC under the regulation. Further, senior TSA compliance officials told us that some local TSA inspectors may be hesitant to conduct regular on-site inspections or find rail agencies not in compliance for incident reporting because doing so could make rail agencies less willing to participate in other important voluntary security activities, such as TSA’s Baseline Assessment for Security Enhancement (BASE) and the TSA-led Visible Intermodal Prevention and Response Program. However, variations in the rigor and frequency of inspections highlight the need for enhanced oversight of these activities at the headquarters level to help ensure that rail agencies are reporting security incidents as required by the regulation. In addition, TSA has inconsistently applied enforcement actions against rail agencies for not complying with the regulation. TSA’s progressive enforcement policy includes the following steps, in order of severity, following a finding of not in compliance: (1) on-the-spot counseling, (2) administrative action—notice of noncompliance, and (3) civil penalty action.compliance that resulted in on-the-spot counseling or a notice of noncompliance for failing to report certain types of incidents that other agencies may not report as a matter of standard practice, such as weapons discovered during the course of routine criminal activity. For example, one rail agency received a notice of noncompliance for failing to report an incident involving a knife that was discovered in an individual’s possession after law enforcement officials intervened in a verbal altercation on a train. In contrast, as discussed above, officials from another rail agency said that they would not report routine criminal incidents involving weapons, including firearms and other deadly weapons such as knives, and had discussed this policy with their local TSA inspection officials. While the agency had been inspected, the local TSA officials had never issued a finding of noncompliance related to not reporting incidents involving weapons. TSA inspection officials have also taken an enforcement action against a rail agency for failing to report an incident that was not required to be reported. Specifically, one rail agency received a notice of noncompliance for failing to report a suspicious item discovered in the public area of one of its bus garages. However, according to a senior TSA compliance official, rail agencies are not required to report incidents involving buses or bus facilities, and therefore TSA officials should not take enforcement actions against rail agencies for failing to report bus incidents. In some cases, rail agencies have received a finding of not in According to senior TSA compliance officials, inconsistent inspection and enforcement actions occur, in part because TSA has limited oversight mechanisms at the headquarters level, and has not utilized them as intended to monitor or oversee the rail security compliance and inspection activities in the field. Standards for Internal Control in the Federal Government provides that internal controls should be designed to ensure that ongoing monitoring occurs in the course of normal operations. TSA established the regional security inspector-surface (RSI-S) position as a primary oversight mechanism at the headquarters level for monitoring compliance inspections and enforcement actions to help ensure consistency across field offices. However, according to TSA officials, the RSI-S is not part of the formal inspection process and has no authority to ensure that inspections are conducted consistently. The RSI-S also has limited visibility over when and where inspections are completed or enforcement actions are taken because TSA lacks a process to systematically provide the RSI-S with this information during the course of normal operations. As a result, TSA has limited assurance that the RSI-S will be able to provide oversight of local passenger rail inspection and enforcement activities. For example, with regard to the situation discussed in the text box above, the RSI-S responsible for that rail agency was not aware that the agency had not reported any incidents to the TSOC and had never been inspected by the local TSA inspection officials. The text box below provides another example of the challenges that TSA faces in ensuring consistency across local TSA offices. TSA Efforts to Streamline Amtrak’s Compliance Activities Face Challenges In 2010, Amtrak worked with an RSI-S to streamline the reporting and inspection process, but TSA has faced challenges implementing this process across all its field offices. As the only nationwide passenger rail agency, Amtrak has been regularly inspected by multiple TSA field offices in locations that Amtrak services. According to Amtrak and TSA officials, these inspections are duplicative and cause confusion because incidents may be inspected for compliance by multiple TSA field offices, each with potentially different interpretations of the regulatory requirement. For example, one local TSA office found Amtrak to be not-in-compliance for not reporting an incident that another TSA office had told Amtrak did not need to be reported. To ensure that that the regulation was being applied consistently throughout its operations, Amtrak notified the RSI-S of these inconsistencies between different field offices, and worked with the RSI-S to establish a centralized incident reporting and inspection process. Under this new process, according to Amtrak and TSA officials, all rail security incidents occurring on Amtrak nationwide should be reported to TSOC by Amtrak’s National Communications Center in Philadelphia, Pennsylvania, rather than by the local Amtrak officials where the incident occurred. In addition, according to Amtrak and TSA officials, all TSA compliance inspections should be conducted by the local TSA field office in Philadelphia. According to these officials, the centralized reporting and inspection process has been implemented effectively by the Philadelphia field office. Specifically, between one and three times per month, a TSA official from the Philadelphia office checks compliance by randomly selecting security incidents from Amtrak’s centralized incident monitoring system to determine whether they have been properly reported to the TSOC. However, although Amtrak and the RSI-S have implemented this reporting approach with the Philadelphia TSA office, other local TSA offices have continued to conduct compliance inspections of Amtrak. According to PARIS data, from January 2011 through July 2012, Amtrak was inspected 145 times. Of these, 116 were carried out by local TSA offices other than the Philadelphia office. According to senior TSA compliance officials, TSA headquarters has not taken actions to ensure that other field offices adhere to this centralized inspection approach, and TSA’s mechanisms to monitor or oversee the rail security compliance and inspection activities in the field are limited. In the absence of a process to systematically monitor the inspection and enforcement activities of TSA field offices, it is unlikely that the RSI-Ss or compliance officials at the headquarters level would become aware of inconsistencies in compliance and enforcement activities in the field, unless the inconsistencies were specifically brought to their attention. However, even when compliance officials have become aware of issues related to inconsistent application of compliance or enforcement measures in the field, according to senior TSA compliance officials, no action has been taken by the Office of Security Operations at the headquarters level to ensure consistency among field offices. TSA inspection and compliance officials agreed that TSA could take steps to ensure more consistent application of compliance inspections and enforcement actions among TSA surface inspectors. By enhancing the existing oversight mechanisms at the headquarters level to systematically monitor and oversee compliance inspections and enforcement actions, as intended, TSA could improve its visibility over activities in the field, helping to ensure that local TSA inspection officials are consistently overseeing the regulatory reporting requirement. Such actions could further reduce inconsistency in the number and type of incidents that rail agencies report to the TSOC, which could improve TSA’s ability to use the incident information for trend analysis to identify potential threats, as discussed below. TSA’s incident management data system, known as WebEOC, has incomplete information, is prone to data entry errors, and has other limitations which inhibit TSA’s ability to search and extract basic information. These weaknesses in WebEOC hinder TSA’s ability to use rail security incident data to identify security trends or potential threats. In addition to these data weaknesses, TSA has conducted limited analysis of rail security incident information, in part because TSA does not have a systematic process for identifying trends or patterns in rail security incident information. When TSA learns about an incident that may not have been properly reported to the TSOC (through a compliance inspection or other means), there is no established process to ensure that WebEOC is updated to include that incident. As a result, WebEOC has incomplete incident information, which hinders TSA’s ability to identify security trends and patterns. For example, over the course of 19 months, five similar incidents involving a suspicious item occurred in different stations of one rail agency. Although the rail agency did not report these incidents to the TSOC, the rail agency’s internal intelligence group recognized a pattern, and developed an intelligence brief that it then disseminated to relevant rail stakeholders, including TSA. Upon receipt of this intelligence brief, local TSA inspection officials responsible for this rail agency issued a notice of noncompliance to the agency for not reporting two incidents highlighted in the brief. In this case, the local TSA inspection official responsible for the agency reported these two incidents to the TSOC, but did not subsequently report the other three related incidents for inclusion in WebEOC. Similarly, of the 18 findings of noncompliance that were a result of failure to report an incident, 13 were not subsequently reported to the TSOC. Because TSA has no established process to help ensure TSA inspection officials or rail agencies notify the TSOC or update WebEOC with incident information that was not properly reported, WebEOC does not contain a record of these unreported rail security incidents. Standards for Internal Control in the Federal Government calls for agencies to take actions to help ensure that data are complete and accurate. Developing a process for ensuring the inclusion of incidents discovered during compliance inspections that were not immediately reported to the TSOC could provide TSA with a more comprehensive picture of security incidents to better position it to identify any trends or patterns. In addition, we identified data entry errors and limitations in WebEOC, which inhibit TSA’s ability to search and extract certain information. Further, the guidance provided to officials responsible for entering incident information does not help prevent these errors because it allows for variation in the WebEOC data and assumes that the official responsible for entering the data fully understands the data entry options. As a result, the TSOC could not provide us with certain information about the rail security incident data, such as the number of incidents reported by incident type (e.g., suspicious item or bomb threat) or the total number of rail security incidents that have been reported to the TSOC. Without the ability to identify this information on the number of incidents by type or the total number of incidents, TSA faces challenges determining if patterns or trends exist in the data, as the reporting system is intended to do. Additionally, because WebEOC does not contain a specific data field to identify the agency affected by the incident, TSA could not provide us with the total number of incidents reported by a particular agency.TSOC officials agreed with our findings and noted that these errors and limitations in WebEOC have complicated TSA’s ability to use the data to identify security trends or potential threats. For example, TSA attempted to analyze the frequency of rail tunnel breaches occurring in the U.S. rail system, as directed by the conference report accompanying the DHS Senior appropriations act for fiscal year 2012.TSA intelligence analyst, the rail security incident information from WebEOC was inadequate for conducting this analysis, and as a result, TSA had to request information from rail agencies and industry associations to complete the analysis. However, according to a senior We also found that WebEOC data entry errors occur, in part, because of problems in the data entry process and limitations in WebEOC, including inaccurate categorization of incident characteristics in key data fields, such as the “Incident Type” and “Type of Entry” fields. For example, we analyzed 1 month of the data provided by TSA, which included a total of 152 passenger rail security incidents. We reviewed the “Incident Type” data field for these incidents, and found that 106 (70 percent) were characterized as “Not Applicable” or “Other Rail Incidents.” While this alone does not indicate that these incidents were mischaracterized, we found that 25 of these incidents should have been characterized under other available options, including “Firearm or Deadly Weapon,” “Bomb Threat,” or “Suspicious Activity,” among others. TSA officials agreed that the options for the “Incident Type” data field could often result in errors, and that these errors contributed to TSA’s inability to provide the number of security incidents reported by incident type. With regard to the “Type of Entry” data field, TSA provided data extracted from WebEOC using the “Mass Transit” and “Rail” categories within this data field in response to our request for all of the passenger rail incidents reported from January 2011 through June 2012. However, because the WebEOC data entry options did not distinguish between passenger rail and freight rail, TSA could not provide a dataset that included only incidents reported by passenger rail agencies. Further, because TSA officials responsible for entering the incident data were not provided guidance that included definitions of the data entry options, incidents reported by the passenger rail agencies in our scope were sometimes categorized as “Mass Transit” and other times as “Rail.” As a result of our review, TSOC officials recognized that the options available under the “Type of Entry” data field were a key limitation of the WebEOC system resulting in data entry errors. In July 2012, officials at TSOC removed “Rail” as an option within “Type of Entry,” and replaced it with two options—“Passenger Rail” and “Freight Rail.” TSOC officials also developed additional guidance for the individuals responsible for entering the data, which can be accessed directly from WebEOC. This guidance addresses the data entry options for the “Type of Entry” data field, providing definitions of each of the surface transportation modes included as options. TSA’s actions to create new data entry options and guidance for the “Type of Entry” data field are positive steps toward improving the categorization of rail security incident data. However, TSOC officials have not taken similar actions to address issues that exist with other data fields in WebEOC, including the “Incident Type” data field. The WebEOC data entry guidance that TSA has provided officials in the TSOC for data fields other than “Type of Entry” does not help prevent data entry errors from occurring because it allows for variation in the WebEOC data and assumes that the official responsible for entering the data fully understands the data entry options. For example, the stated purpose of the guidance is to ensure that all necessary elements of an incident are captured “while maintaining each unique style.” Further, the guidance states that the data fields such as “Incident Type” are “self- explanatory” and provides no additional information on how to enter the data or choose among different options. We have previously reported on the importance of clear data entry guidance to help ensure that TSA is collecting consistent data that will allow the agency to better “connect the dots” with regard to potential terror threats to U.S. transportation systems. Further, Standards for Internal Control in the Federal Government states that information should be communicated to officials within an agency in a way that allows them to carry out their responsibilities. Additional guidance that contains clear definitions of data entry options could help TSA to reduce data entry errors in other data fields and improve users’ ability to search and extract basic information from the system, ultimately improving TSA’s ability to analyze the rail security incident information. The weaknesses in the incident information notwithstanding, TSA has made limited use of the rail security incident information it has collected from rail agencies, in part because it does not have a systematic process for conducting trend analysis. As a result, TSA is missing an opportunity to identify potential security trends and patterns in the incident information, and develop recommended security measures to mitigate threats, as intended. Although TSA does not have a systematic process for identifying trends and patterns using the WebEOC rail security incident information, opportunities exist to identify trends from the information, despite the data weaknesses discussed above. In one example, the freight rail industry, through the Railway Alert Network— which is managed by the Association of American Railroads, a rail industry group—identified a trend where individuals were reportedly impersonating federal officials. In coordination with TSA and FRA, the Railway Alert Network subsequently issued guidance to its member organizations designed to increase awareness among freight rail employees and provide descriptive information on steps to take in response. The Railway Alert Network identified this trend through analysis of incident reporting from multiple freight railroads. In each case, the incident had been reported by a railroad employee. These incidents had also been reported to the TSOC. Similarly, in response to a specific request from freight rail stakeholders, TSA’s Office of Intelligence and Analysis, which is responsible for analyzing threat information, used WebEOC incident information to identify the frequency and timing of shootings at freight trains. However, other products developed by the Office of Intelligence and Analysis and other DHS components that address domestic rail security incidents do not contain trend analysis of reported rail security incidents and are instead generally limited to descriptions of specific incidents. For example, TSA produces a series of periodic reports called the Global and Regional Intelligence Digest that provides descriptive reports of select transportation security incidents (for all transportation modes), with minimal accompanying analysis. Similarly, other products may contain intelligence information designed to inform rail stakeholders, but are based on sources other than the rail security incident data reported by rail agencies to the TSOC. Senior TSA intelligence officials we spoke with agreed that TSA does not have a systematic process for analyzing the rail security incident information, and is not using the information to conduct long-term trend analysis, though agency officials said they would like to do so in the future. In the absence of a systematic process for conducting trend analysis, TSA officials said that the agency primarily relies on internal TSA officials to notice trends when they receive daily incident report summaries from the TSOC, which are detailed summaries of the most significant incidents reported each day, across all modes of transportation. However, TSA officials said that the agency has not identified any trends in passenger rail incidents as a result of these summaries. As a result, officials from rail agencies we spoke with generally found little value in the reporting process, because it was unclear to them how, if at all, the information was being used by TSA to identify trends or threats that could help TSA and rail agencies develop appropriate security measures. The notice of proposed rulemaking, final rule, and the Privacy Impact Assessment associated with collecting the incident information in WebEOC state that TSA’s purpose for collecting and maintaining the incident information is to help TSA “connect the dots.” In these documents, the agency said it would “connect the dots” by pulling together seemingly disconnected or disparate reports of suspicious or unusual rail security incidents through trend analysis that may allow TSA to anticipate and prevent an attack, and determine whether to encourage or require rail agencies to implement particular security measures. Without a process for systematically conducting trend analysis of the rail security incident data, it will be difficult for TSA to use the incident data it collects from agencies. As a result, TSA may continue to miss opportunities to identify security trends, such as the freight rail security trend identified by the Railway Alert Network, or to develop recommended security measures. The foiled terrorist plots against the New York and Washington, D.C., passenger rail systems in 2009 and 2010, respectively, show the continued threat to passenger rail security and underscore the importance of tracking and analyzing security incident information to identify possible indicators or precursors of terrorist activity. TSA’s incident reporting regulation, issued in 2008, was intended to allow TSA to “connect the dots” to identify significant incidents, and discern rail security threats and trends. However, TSA has not used the incident information as it was intended. Using the incident information to conduct trend analysis would better position TSA to anticipate a future attack, and encourage or require rail agencies to implement more targeted security measures. Key to the effectiveness of this effort is collecting consistent, accurate, and complete incident information from rail agencies. While some variation is expected among rail agencies in the number and types of rail security incidents reported, written guidance disseminated to rail agencies and local TSA inspection officials—clarifying the types of incidents that should be reported to the TSOC—and enhanced mechanisms for oversight of compliance and enforcement activities could help ensure that the regulation is implemented consistently. Such actions could also help improve consistency in TSA’s compliance activities, thereby improving the reporting process and facilitating TSA’s ability to use the incident information for trend analysis that may identify potential threats. In addition, incomplete information, data entry errors, and limitations in WebEOC hinder TSA’s ability to use rail security incident data to identify security trends or potential threats. TSA has taken some steps toward addressing some of the weaknesses in WebEOC, but additional actions could improve the completeness and accuracy of the information in the database. A process for updating the database when incidents that had not previously been reported are discovered through compliance activities and additional guidance for TSOC officials who enter the information would help TSA to reduce data entry errors and improve users’ ability to search and extract information from the system, ultimately improving TSA’s ability to analyze the rail security incident information. The weaknesses in the incident information notwithstanding, without a systematic process in place for regularly conducting trend analysis, TSA has missed opportunities to use the data in its incident reporting system as it was intended—to identify trends or patterns in the incident information that could help TSA and rail agencies develop targeted security measures that could strengthen rail security. To help ensure that the rail security incident reporting process is consistently implemented and enforced, we recommend that the Administrator of TSA take the following two actions: develop and disseminate written guidance for local TSA inspection officials and rail agencies that clarifies the types of incidents that should be reported to the TSOC, and enhance and utilize existing oversight mechanisms at the headquarters level, as intended, to provide management oversight of local compliance inspections and enforcement actions. To help fulfill TSA’s stated purpose for collecting rail security incident information and improve the accuracy and completeness of the incident data in TSA’s incident management system, WebEOC, we recommend that the Administrator of TSA take the following three actions: establish a process for updating the database when incidents that had not previously been reported are discovered through compliance activities; develop guidance for TSOC officials that includes definitions of data entry options to reduce errors resulting from data entry problems; and establish a systematic process for regularly conducting trend analysis of the rail security incident data, in an effort to identify potential security trends that could help the agency anticipate or prevent an attack against passenger rail and develop recommended security measures. We provided a draft of this report to DHS for comment. In written comments received December 4, 2012, DHS concurred with the recommendations and identified actions taken, planned, or under way to implement the recommendations. DHS’s written comments are summarized below and reproduced in appendix V. The Department of Transportation’s Director of Audit Relations stated in an e-mail received on December 6, 2012, that the department had no comments on the report. Amtrak’s audit liaison stated in an email received on November 16, 2012, that Amtrak had no comments on the report. In its written comments, DHS concurred with our recommendation that TSA develop and disseminate written guidance for local TSA inspection officials and rail agencies that clarifies the types of incidents that should be reported to the TSOC. DHS stated that TSA’s Office of Security Operations and its Office of Security Policy and Industry Engagement will work together to develop written guidance for passenger rail agencies clarifying the types of incidents that should be reported to the TSOC. TSA plans to disseminate the guidance to passenger rail agencies. If implemented, these actions would address our recommendation and could help reduce confusion among rail agencies and improve consistency in incident reporting. In response to our recommendation that TSA enhance and utilize existing oversight mechanisms at the headquarters level, as intended, DHS concurred with the recommendation and stated that while several mechanisms and layers are in place for oversight and management of local inspection and enforcement actions, TSA recognizes that there are opportunities for improving oversight. According to DHS, existing oversight mechanisms include RSI-Ss, who serve as technical specialists, oversee and implement transportation security policy and programs, and conduct field office audits and visits, among other things. DHS also stated that its Office of Chief Counsel coordinates enforcement actions with RSI- Ss, local field offices, TSA’s Office of Compliance Programs, and TSA’s Office of Security Policy and Industry Engagement. DHS stated that to improve headquarters oversight, RSI-Ss have recently been granted case review privileges in PARIS—which is used to record all TSA inspection activities—along with any findings and actions taken. DHS stated that this will allow the RSI-Ss greater visibility on all surface inspections, investigations, and recommendations for enforcement actions entered into PARIS by enabling the RSI-Ss to provide written recommendations in PARIS prior to inspection approval. Because RSI-Ss have recently been granted this access, it is too soon to determine the extent to which this action will address our recommendation. In response to our recommendation that TSA establish a process for updating its WebEOC database when incidents that had not been previously reported are discovered through compliance activities, DHS concurred and stated that TSA is currently establishing a business process to ensure the relevant databases are complete. According to DHS, the WebEOC system will be adjusted to permit inputting of records that are discovered through compliance activities. We will continue to monitor the agency’s efforts to implement our recommendation. DHS also concurred with our recommendation that TSA develop guidance for TSOC officials that includes definitions of data entry options to reduce errors resulting from data entry problems. DHS stated that the TSOC had completed implementing this recommendation by updating the guidance with respect to input options. However, the updated guidance that TSA sent to us clarifies that incident logs in WebEOC need to indicate that an incident was reported by phone. The guidance does not provide definitions for data entry options, as we recommended, and we therefore continue to believe that additional guidance is necessary for the officials responsible for inputting the incident information into WebEOC. In response to our recommendation that TSA establish a systematic process for regularly conducting trend analysis of the rail security incident data, in an effort to identify potential security trends, DHS concurred and stated that TSA will develop a process to review suspicious activities and incidents in the mass transit and passenger rail areas in order to identify trends that might represent a threat to transportation. We will continue to monitor the agency’s efforts to implement our recommendation. We are sending copies of this report to the Secretaries of Homeland Security and Transportation, the TSA Administrator, Amtrak, appropriate congressional committees, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4379 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are acknowledged in appendix VI. Officials we met with from eight high-volume rail agencies generally stated that foreign rail attacks (such as those described in appendix IV) served as potent reminders of potential terror threats against rail, but they did not lead the rail agencies to make significant changes in their security measures. Nonetheless, agencies have used these incidents to inform security enhancements. Specifically, these agencies reported making changes to their security measures, in part as a result of lessons learned from foreign attacks. These changes were related to: Public awareness campaigns. These include publicity posters and announcements over public address systems within rail stations that alert passengers and rail agency employees to report suspicious items or behaviors to police. For example, officials from one rail agency we spoke with reported making changes to its public awareness campaign following the attacks in Madrid and London. These changes included instituting a regional transit security awareness program, including periodic audio announcements reminding passengers to be aware of potential threats, in coordination with the Federal Transit Administration’s Transit Watch Program. Other rail agencies reported that the attacks described in appendix IV emphasized the importance of having informed riders that can act as a “force multiplier” when it comes to noticing suspicious activity. Armed mobile tactical teams. These are police teams similar to SWAT teams that patrol rail systems or that are intended for rapid deployment in the event of a terror attack or related incident. Officials from one high-volume rail agency reported that the 2008 attack in Mumbai led it to immediately increase training in responding to “active shooter” scenarios by its existing mobile tactical teams. Officials from other high-volume rail agencies we interviewed also reported that they established mobile tactical teams or increased the training of their existing patrols following the 2008 Mumbai attacks. Motorized emergency response vehicles. These are small battery- operated vehicles intended to help first responders reach injured or stranded passengers when they cannot be quickly reached by a rescue train (if, for example, rails have been damaged by a terror blast or electrical outage). Officials from one agency we interviewed reported that it deployed these response vehicles directly in response to lessons learned from the London attack, during which first responders used such vehicles to rescue injured Underground rail passengers. Closed-circuit television (CCTV). CCTV refers to a visible or covert video system intended for only a limited number of viewers. In CCTV, the picture is viewed or recorded, but not broadcast. According to officials from two high-volume rail agencies we interviewed, the July 2005 attacks in London demonstrated the utility of CCTV coverage for forensic investigation. A United Kingdom government analysis reported that the cameras helped police determine the identity of the bombers. Officials from four high-volume rail agencies we interviewed stated that while they increased the number of CCTV cameras in their rail systems, this did not occur immediately following the London attacks. Rather, the London attacks reinforced the importance of CCTV camera coverage as a key security measure. The Transportation Security Administration (TSA) and officials from eight high-volume passenger rail agencies we interviewed identified several different mechanisms they use to obtain and share passenger rail security-related information, including information on lessons learned from foreign rail attacks (such as those described in appendix IV) and security measures implemented or considered by other U.S. rail stakeholders. Many of these mechanisms have also been discussed in our previous reports on information sharing and rail security issues. The key mechanisms that officials from the eight high-volume rail agencies we interviewed cited using to obtain and share passenger rail security-related information are summarized in table 1. This report addresses the following questions: To what extent has the Transportation Security Administration (TSA) overseen and enforced the passenger rail security incident reporting requirements? To what extent has TSA analyzed passenger rail security incident information to identify security trends and potential threats against passenger rail systems? Appendix I of this report also includes information on how selected rail agencies applied lessons learned from foreign rail attacks to enhance their rail security measures. Appendix II includes information on key mechanisms rail agencies use to obtain rail security-related information. To address these questions, we examined TSA’s rail security incident reporting process. We focused on TSA’s regulation for rail security incident reporting, which requires passenger rail agencies to report rail security incidents to the Transportation Security Operations Center (TSOC). We reviewed the notice of proposed rulemaking and final rule that describe the purpose and justification of the incident reporting requirement, as well as TSA policy documents, manuals, and guidance concerning the rail security incident reporting process. We also interviewed cognizant TSA officials at headquarters and in the field regarding their roles in the incident reporting process. To obtain rail industry perspectives on the rail security incident reporting process, we conducted visits at, or teleconferences with, 19 of the top 50 passenger rail systems across the nation, by passenger rail ridership. See table 2 for a list of passenger rail systems we interviewed. We selected these passenger rail systems to reflect varied levels of ridership and geographic dispersion. Because we selected a nonprobability sample of passenger rail systems, the information obtained from these visits and interviews cannot be generalized to all rail systems nationwide. However, we determined that the selection of these rail systems was appropriate for our design and objectives and that the selection would provide valid and reliable evidence. The information we obtained provided illustrative examples of the perspectives of various passenger rail stakeholders about the rail security incident reporting process, and corroborated information we gathered through other means. Further, we interviewed rail industry representatives from the American Public Transportation Association and the Association of American Railroads to obtain their perspectives on rail security issues. We selected these associations because they represent the majority of the passenger and freight rail systems in the United States. To assess the extent to which TSA has overseen and enforced the rail security reporting requirement, we interviewed officials from the selected rail systems discussed earlier on how they have implemented this requirement, including the guidance they have received from TSA on the types of incidents to report to the TSOC. We interviewed TSA headquarters officials from the Compliance Programs Division within the Office of Security Operations and local TSA officials from five field offices, including transportation security inspectors-surface (TSI-S) and assistant federal security directors-inspections (AFSD-I), regarding the guidance they provide to rail agencies on incident reporting and how they ensure rail agencies’ compliance with the regulation. We selected these five field office locations because they had oversight responsibility for many of the rail agencies included in our scope. We also interviewed one TSA regional security inspector-surface (RSI-S) regarding his role in the rail security incident reporting process. Because we selected a nonprobability sample of TSA’s field offices and officials, the results from these interviews cannot be generalized to all TSA field offices; however, the information we obtained provided us with an overview of the role of TSA surface inspectors in the rail incident reporting process and corroborated information we obtained through other sources. We examined documentation on TSA’s inspection processes for monitoring rail systems’ compliance with the incident reporting requirement, including the Transportation Security Inspector Inspections Handbook, the National Investigations and Enforcement Manual, and the Compliance Work Plan for Transportation Security Inspectors. We also reviewed a TSA operational directive related to reporting aviation security incidents to TSA. We chose January 2011 as the starting point for our analysis because it was 2 full years after the regulation became effective, which would allow rail agencies and TSA a period of adjustment. The regulation went into effect in December 2008. June 2012 was the end of our data collection period. WebEOC by conducting visits to the TSOC and interviewing TSOC officials to discuss their role in incident reporting and the mechanisms in place to ensure data quality. We also reviewed WebEOC documentation to identify how passenger rail security incident data are collected and managed, and how data quality is ensured. While we determined that the information in WebEOC was sufficiently reliable for the purposes of providing information on differences in the number and types of rail security incidents reported by selected rail agencies to the TSOC, we identified issues with data entry and data quality, which are discussed in this report. In addition, we obtained data from TSA’s Performance and Results Information System (PARIS) for January 2011 through June 2012 on TSA’s compliance inspections and all records related to enforcement actions taken under the passenger rail security incident reporting requirement. We analyzed the data to identify the content and frequency of TSA inspections conducted and enforcement actions taken under the incident reporting regulation. We ascertained the reliability of compliance data derived from PARIS by interviewing TSA officials from the Compliance Programs Division and reviewing documentation on controls implemented to ensure the integrity of the data in PARIS, and found the compliance data sufficiently reliable for our purposes. We also evaluated TSA’s efforts to oversee and enforce the incident reporting requirement against criteria in Standards for Internal Control in the Federal Government. To assess the extent to which TSA has analyzed rail security incident information, we interviewed TSA officials from the TSOC, the Office of Intelligence and Analysis, the Office of Security Operations, and the Office of Security Policy and Industry Engagement regarding their roles and responsibilities. We reviewed available documentation and analyses that TSA prepared containing rail security incident information. We also examined the WebEOC incident management database to identify any limitations in the database that could present challenges for analyzing the rail security incident data, and we discussed these limitations with relevant TSA officials. We also interviewed officials from the rail agencies noted earlier about their views on the information and analyses they receive from TSA on rail security incidents. We also obtained information on how selected rail agencies applied lessons learned from foreign rail attacks to enhance their rail security measures and how rail agencies obtain and share passenger rail security- related information, including information on lessons learned from foreign rail attacks. To do this, we reviewed TSA documentation describing TSA’s security strategy for the mass transit and passenger rail systems, such as TSA’s Mass Transit and Passenger Rail Annex, and we discussed the rail security actions outlined in the annex with TSA officials. In addition, we reviewed rail security reports and interviewed an official from the Mineta Transportation Institute (MTI). We met with MTI because the organization’s database on attacks against surface transportation, including passenger rail, was cited by TSA as the most comprehensive and up-to-date of existing databases. On the basis of information we obtained from MTI, and discussions with MTI and TSA officials, we found the quality of the methods used to develop these reports sufficient for use as a source in this report. We also interviewed security officials from selected passenger rail systems regarding their key security measures. During visits to passenger rail systems, we toured stations and other facilities such as control centers, and observed security practices. We also interviewed officials from other federal agencies including the Central Intelligence Agency and the Department of Transportation’s Federal Transit Administration and Federal Railroad Administration regarding their roles in passenger rail security, and we interviewed government officials involved with securing passenger rail in the United Kingdom. We also reviewed our prior reports on passenger rail security and information sharing as well as studies and reports conducted by outside organizations related to passenger rail, such as the Department of Homeland Security Office of the Inspector General. According to the Mineta Transportation Institute (MTI), from September 12, 2001 through December 31, 2011, 838 attacks occurred worldwide against passenger and commuter rail systems, resulting in 1,372 fatalities. Most of these attacks occurred in South Asia (Pakistan, India, and Thailand) and Russia. For purposes of our review, we focused on recent passenger rail attacks that occurred in the following locations: Madrid, Spain; London, England; Mumbai, India; and Moscow, Russia. In this section, we summarize the basic facts of these attacks, using reports and information from the Department of Homeland Security (DHS), the Transportation Security Administration (TSA), open source, MTI, and others. Other attacks may have occurred at these locations, both before and after those cited. On March 11, 2004, 10 bombs exploded on three trains on Madrid’s commuter rail system during the morning rush hour, killing 191 people and wounding more than 1,500 others. The bombs were placed in backpacks and detonated by cell phones. According to DHS’s report on the attack, those responsible were from a terrorist group associated with al-Qaeda. According to DHS, by the end of March 2004, authorities had arrested 22 people in connection with the attack. The following month, Madrid law enforcement located a safe house associated with the suspected bombers. As authorities entered the apartment, the suspected terrorists inside detonated explosives, killing themselves and a police officer. Officers subsequently found backpacks filled with of explosives and detonators in the wreckage. On July 7, 2005, four suicide bombers detonated improvised explosive devices during the London rush hour on three Underground (subway) trains and on a double-decker bus, killing a total of 52 people and injuring about 700. All four bombers were also killed in the attacks. The three Underground attacks occurred within moments of one another and the bus bombing occurred approximately 1 hour later. The bombers traveled together from a commuter rail station north of London to the King’s Cross Underground station, from which they departed to their respective attack destinations. A second series of attacks was attempted 2 weeks later, on July 21. However, the explosives failed to detonate. According to DHS, no terrorist group has claimed responsibility. After a police investigation of the attacks, three additional suspects were charged with conspiracy in the identification and reconnaissance of potential terrorist targets in London. However, all three were acquitted on those charges in April 2009. On July 11, 2006, a series of seven explosions occurred on a single rail line of Mumbai’s commuter railway. In all, 190 people were killed and 625 were injured across all the incidents. In September 2006, Indian police said that the attacks were executed by Lashkar-e-Taiba. Starting on November 26, 2008, and continuing for the next 2 days, terrorists attacked various locations in the Mumbai area including a passenger rail station and hotels catering to Western tourists. The attackers used assault weapons, small arms, grenades, and explosives. One of the first attacks occurred at the Chhatrapati Shivaji rail terminus, one of the busiest train stations in the country. Two gunmen entered the passenger hall and opened fire, killing 59 and injuring 104. The terrorists then dispersed throughout the city attacking another eight locations, killing at least an additional 129 and injuring more than 223 others. According to DHS, like the attacks on July 11, 2006, the terrorists were also from Lashkar-e-Taiba. Nine terrorists were killed during the course of the attacks, while one was captured alive. On March 29, 2010, two suicide bombers attacked trains at two stations in the Moscow Metro during the morning rush hour, killing 40 and injuring 58 others. The first explosion occurred on a train as it pulled into Lubyanka station. The second explosion occurred at the Park Kultury station as passengers were boarding a train. Both the Lubyanka and Park Kultury stations are transfer stations and may have been chosen by the attackers in an effort to target the greatest number of people. Russian officials attribute the attack to Chechen separatists. Stephen M. Lord, (202) 512-4379 or [email protected]. In addition to the contact named above, Jessica Lucas-Judy (Assistant Director), Eric Hauswirth, Adam Hoffman, Tracey King, Elizabeth Kowalewski, Kelly Rubin, and Jonathan Tumin made key contributions to this report. | Terrorist attacks on foreign passenger rail systems, which include rail transit and intercity rail, have underscored the importance of collecting and analyzing security incident information to identify potential vulnerabilities. Within the federal government, TSA is the primary agency responsible for overseeing and enhancing passenger rail security, and has several programs to fulfill this responsibility. In 2008, TSA issued a regulation requiring U.S. passenger rail agencies to report all potential threats and significant security concerns to TSA, among other things. GAO was asked to assess the extent to which (1) TSA has overseen and enforced this reporting requirement and (2) TSA has analyzed passenger rail security incident information to identify security trends. GAO reviewed TSA policy documents, guidance, and incident data from January 2011 through June 2012, and interviewed federal officials and security officials from 19 passenger rail agencies. GAO selected these agencies, in part, because of their ridership volume. The results of these interviews are not generalizable but provide insights. GAO recommends, among other things, that TSA (1) develop guidance on the types of incidents that should be reported, (2) enhance existing oversight mechanisms for compliance inspections and enforcement actions, (3) develop guidance to reduce errors from data entry problems, and (4) establish a process for regularly conducting trend analysis of incident data. TSA concurred and is taking actions in response. |
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Mr. Chairman and Members of the Subcommittee: We are pleased to have this opportunity to discuss matters related to deceptive mail marketing practices, which have been used by various organizations and individuals to induce consumers to purchase goods and services or send money for misrepresented purposes. My statement will include a brief summary of our previous testimony on the extent and nature of problems that consumers experienced primarily with mailed sweepstakes material. Also, I will discuss our most recent efforts to obtain updated information that could indicate the extent and nature of problems that consumers may have experienced with various types of mailed material that have been used to deceive, mislead, or fraudulently induce them into purchasing goods or services. This type of mail, known as deceptive mail, includes sweepstakes and other types of mailed material, such as lotteries and chain letters. Finally, I will provide information on initiatives in which various federal agencies and other organizations have participated to address consumers’ problems with deceptive mail marketing practices and help educate consumers about potential problems that could occur with such practices. Our most recent work on deceptive mail was done in response to your November 1998, request as well as an October 1998, request from the Permanent Subcommittee on Investigations and the Subcommittee on International Security, Proliferation and Federal Services, Senate Committee on Governmental Affairs. We are also providing copies of our statement to the chairs of the two Senate subcommittees. Mr. Chairman, as we agreed, the primary objective for our most recent work was to obtain updated available information on the extent and nature of consumers’ problems with various types of deceptive mail. Also, we obtained updated available information on efforts by various federal, state, local, and nongovernmental organizations to address consumers’ deceptive mail problems and educate them about possible problems that could occur with deceptive mail marketing practices. In addition, through an outside contractor, we conducted a survey to obtain opinions from the U.S. adult population about specific types of deceptive mail. We did our work from November 1998 through July 1999 in accordance with generally accepted government auditing standards. We obtained comments on a draft of this testimony from the Federal Trade Commission (FTC) and the U.S. Postal Service, including the Postal Inspection Service and the Consumer Advocate. We included their comments where appropriate. We also arranged for the various state, local, and nongovernmental organizations that provided us information to review relevant sections of this testimony. We incorporated their technical comments where appropriate. Additional information about our approach is included in attachment I to this statement. As you are aware, Mr. Chairman, since the summer of 1998, much attention has been focused on consumers’ problems with deceptive mail. Various activities, including specific legislative proposals and hearings, have raised congressional and public awareness about problems that some consumers have experienced as a result of deceptive mail marketing practices. A recent example of such an activity was the May 1999 approval by the Senate Governmental Affairs Committee of proposed legislation entitled “Deceptive Mail Prevention and Enforcement Act” (S. 335), which was introduced in February 1999, by Senator Susan Collins. In her introductory remarks, Senator Collins indicated that the proposed legislation was generally designed to help ensure that organizations that used various types of promotional mailed material, such as sweepstakes, were as honest and accurate as possible in their dealings with consumers. Provisions in the proposed legislation (1) authorized financial penalties against organizations that did not comply with proposed requirements, (2) authorized specific law enforcement actions, including the issuance of subpoenas, that the Postal Inspection Service could use in combating deceptive mail marketing practices; and (3) provided assurance that the proposed legislation would not preempt state and local laws that were designed to protect consumers against deceptive mail marketing practices. For a congressional hearing held in September 1998, we provided testimony in which we discussed information about consumers’ problems with specific types of deceptive mail and some initiatives that were intended to help educate consumers about potential deceptive mail problems. We found that comprehensive data indicating the full extent of consumers’ problems with mailed sweepstakes material and cashier’s check look-alikes were not available. However, FTC and the Postal Inspection Service had some data on complaints that could indicate the nature of consumers’ problems with deceptive mail. A sample of complaints from FTC showed that in many instances, consumers were required to remit money or purchase products or services before being allowed to participate in sweepstakes. Information about specific Postal Inspection Service cases that had been investigated largely involved sweepstakes and cash prize promotions for which up-front taxes, fees, or insurance were required before consumers could participate in sweepstakes promotions. In our previous testimony, we discussed two initiatives that were intended to address consumers’ problems with deceptive mail. The initiatives included (1) Project Mailbox, which was established to help educate consumers and appropriately deal with organizations and individuals that attempted to defraud consumers through the use of mass mailings; and (2) a multi-state sweepstakes subcommittee that was designed to facilitate cooperation among states in dealing with companies that attempted to defraud consumers through the use of mailed sweepstakes material. With your permission, I would like to provide the Subcommittee a full copy of our previous testimony for inclusion into the record of today’s hearing. Comprehensive data that could indicate the full extent of consumers’ problems with deceptive mail were not available. Various officials from the agencies and organizations we contacted told us that such data were unavailable mainly because consumers oftentimes did not report their problems and no centralized database existed from which comprehensive data could be obtained. Due to the overall lack of comprehensive data, we contracted for a survey to obtain perspective on the extent to which consumers believed that they had received specific types of mailed material that appeared to them to be misleading or deceptive. Also, we identified two federal agencies—FTC and the Postal Inspection Service—that maintained some data that could provide insight into the nature of consumers’ problems with deceptive mail. However, these data may include some duplicative complaints because some consumers who filed complaints may have done so with both agencies. To obtain perspective on American consumers’ opinions about specific types of deceptive mail, we contracted with International Communications Research (ICR), a national market research firm, to perform a statistically generalizable sample of adults 18 years of age or older in the continental United States. The results of the survey, which was conducted in November 1998, indicated that 51 percent of the survey respondents believed that within the preceding 6 months, they had received mail involving sweepstakes or documents resembling cashier’s checks, known as cashier’s check look-alikes, that appeared to be misleading or deceptive. However, 45 percent of the respondents said they had not received such mail and the remaining 4 percent were not sure, did not remember, or did not know. Additional analysis of survey results indicated that the higher the educational levels of respondents, the more likely they were to believe that they had received these types of deceptive mail. The percentages of respondents who believed that they had received such mail were about: 43 percent for respondents with a high school education or less; 56 percent for those with some college education; and 62 percent for those with a completed college education or higher. A similar trend was identified for respondents and their income levels in that at higher income levels, respondents were more likely to believe that they had received such mail. The percentages by income level included about: 32 percent for respondents whose annual income was less than $15,000; 52 percent for respondents whose annual income ranged between $15,000 and $49,999; and 62 percent for respondents whose annual income was $50,000 or more. For our updated work efforts, various officials and representatives of the agencies and organizations from which we obtained information again believed that the most appropriate source of consumer complaint data would be FTC’s Consumer Information System (CIS). According to FTC officials, the purpose of CIS, which was first established around February 1997 and became fully operational in September 1997, was to collect and maintain various data related to consumers’ complaints. FTC officials told us that CIS data are used primarily by law enforcement organizations and officials to assist them in fulfilling their law enforcement duties. The CIS database contained a total of about 200 categories within which consumers’ complaints were included. The categories covered a wide range of topics such as (1) creditor debt collection, (2) home repair, (3) investments, (4) health care, and (5) leases for various products and services, such as automobiles and furniture. For the period October 1, 1997, through March 31,1999, our analysis indicated that CIS included a total of 48,122 consumer complaints for which the methods of initial contact with consumers were identified. Such methods included mail; telephone; fax; printed material, such as newspapers and magazines; and the Internet. Of the 48,122 complaints, the largest number, 18,143, or about 38 percent, indicated that consumers were initially contacted through the mail. Of the 18,143 complaints, we found that in 10,145, or about 56 percent, of these complaints, companies had requested individual consumers to remit money. The total amount of money requested by the companies was reported to be about $88.2 million. Also, our review of the 18,143 consumer complaints showed that 2,715, or about 15 percent, of the consumers reported that they had remitted money to the companies. The total amount of money these consumers said they had paid was about $4.9 million. The amounts of money individual consumers said that they had paid ranged from less than $1 to over $1 million. Of these 2,715 complaints, about: 50 percent were less than $100; 35 percent were between $100 and $999; 10 percent were between $1,000 and $4,999; and 5 percent were $5,000 or more. The largest reported amount of money paid by a consumer was $1,734,000. Available CIS information indicated that this complaint involved a consumer’s concerns about a credit bureau referring inaccurate information to a debt collection agency. In reviewing the 18,143 complaints in which consumers were initially contacted through the mail, we identified five CIS categories that included the highest number of consumer complaints, which totaled 10,776 complaints, or about 59 percent. The five categories included Telephone: pay per call/information services, which can involve consumer complaints about calls to publicly available telephone numbers, such as 1- 900 numbers, for which consumers incur per-minute charges in return for information or entertainment. Also, complaints can involve unauthorized charges on consumers’ telephone bills, also known as “cramming” (3,487 complaints). Telephone: carrier switching, also known as “slamming,” in which companies would switch consumers’ telephone services from one company to another without consumer authorization (1,051 complaints). Prizes/sweepstakes/gifts, which can oftentimes involve consumer complaints about mailed material that solicit advance fees for consumers to be able to participate in a sweepstakes or contest (2,859 complaints). Credit bureaus, which can generally involve consumer complaints about the methods by which such bureaus maintain and disseminate credit information (2,025 complaints). Third party debt collection, which can involve consumer complaints about methods used by various companies or individuals to collect debts owed by consumers (1,354 complaints). For the five CIS categories, we found that a total of 10,355 complaints, or about 96 percent, included comments that could provide insight into the nature of problems that consumers had experienced with deceptive mail. We randomly selected 20 consumer complaints from each of the 5 categories for a total of 100 complaints. A discussion of the types of comments in the five categories and some examples follow. Two of the five CIS categories involved problems that consumers reportedly experienced with mailed material that involved various telephone services, including pay-per-call and specific information services as well as slamming and cramming. Generally, consumers’ comments in these two categories focused on complaints about unauthorized actions by companies in providing various telephone services, including (1) switching telephone services from one company to another without consumer authorization, (2) charging consumers for services they never requested, and (3) charging for services that consumers claimed were cancelled. For the prizes/sweepstakes/gifts category, consumer comments focused on complaints about companies’ requirements for participating in sweepstakes. According to FTC, various requirements, such as advance payments, fees, or purchases of products, should not be required before consumers may participate in sweepstakes. Also, consumers complained about being required to call specific telephone numbers for which they were charged fees. In the credit bureaus category, the comments included consumers’ complaints about inaccurate information on their credit reports. Also, consumers expressed concerns about such issues as denial of credit and dissemination of credit information to companies and individuals without permission. For the third party debt collection category, consumer comments focused generally on harassment that consumers reportedly experienced from debt collectors. Such harassment included being called nasty names, receiving numerous telephone calls, and being treated without dignity. Also, some consumers disputed owing specific debts or the amounts of the debts. The Postal Inspection Service maintained two databases—the Fraud Complaint System (FCS) and the Inspection Service Data Base Information System (ISDBIS)—that included information related to consumers’ problems with deceptive mail. FCS was designed to collect and maintain consumer complaint information about various types of alleged fraudulent activities, including those involving deceptive mail marketing practices. ISDBIS was designed to be a case-tracking system that recorded information related to specific cases that postal inspectors used as they investigated specific organizations or individuals involved in various mailing activities that were allegedly intended to defraud consumers, businesses, and the federal government. To gain a better understanding of how consumer complaints about deceptive mail were included in FCS, we obtained information about the overall process through which consumers could file complaints with the Postal Service. According to Postal Inspection Service officials, if consumers have concerns or wish to file complaints about material that they have received through the mail, consumers may visit or call their nearby Postal Inspection Service offices or postal facilities, which included post offices, stations, or branches. If consumers’ concerns are related to mailed material that they believe is deceptive, misleading, or fraudulent, postal employees are expected to refer consumers to the Postal Inspection Service. The methods of these referrals generally include providing consumers with the telephone number or address of the appropriate local Postal Inspection Service office, the Internet website address of the Postal Inspection Service, or a Postal Inspection Service mail fraud complaint form. Also, Postal Inspection Service officials told us that in some cases, to provide additional assistance to consumers, postal employees may offer to forward the questionable mailed material directly to the Postal Inspection Service. We visited a total of 15 postal facilities to observe how postal employees referred consumers to the Postal Inspection Service. The facilities included post offices and stations in the metropolitan areas of Dallas, Texas; Los Angeles, California; and Washington, DC. At the facilities, we asked postal employees working at counters how to handle mail believed to be deceptive. At 8 of the 15 facilities we visited, postal employees appropriately referred us to the Postal Inspection Service. At the 7 remaining facilities, postal employees either referred us to organizations other than the Postal Inspection Service or were unable to provide any guidance. For example, two postal employees referred us to a national toll- free 1-800 number (i.e., 1-800-ASK-USPS). According to postal officials, consumers could reach the Postal Inspection Service through 1-800-ASK- USPS. We made three calls to 1-800-ASK-USPS to determine whether consumers could reach the Postal Inspection Service through this number. During one call, the responding customer service representative provided us with the telephone numbers of both the local consumer affairs office and Postal Inspection Service office. During the remaining calls, the representatives either provided us the telephone number for the local consumer affairs office or the address of the Direct Marketing Association (DMA), which we were told could remove consumers’ names from mailing lists. We obtained FCS data for an 18-month period, (i.e., October 1, 1997, through March 31, 1999). The data we obtained focused on two of the four complaint categories within FCS—fraud and chain letters—because postal officials told us that these categories were most likely to include relevant information about consumers’ problems concerning deceptive mail. Our analysis of FCS data indicated that the Postal Inspection Service had received 16,749 consumer complaints regarding fraud and chain letters. Complaints in the fraud category totaled 7,667, or about 46 percent, of the total complaints in these two categories, and 9,082 complaints, or about 54 percent, were included in the chain letter category. According to FCS data, no monetary losses were reported for the 9,082 complaints in the chain letter category. However, for the 7,667 complaints in the fraud category, a total of about $5.2 million in monetary losses was reported by consumers. These losses were reported in 2,976, or about 18 percent, of the 16,749 fraud and chain letter complaints. Also, the 2,976 complaints that cited losses amounted to about 39 percent of the 7,667 complaints in the fraud category. The remaining 4,691 fraud complaints, or about 61 percent, cited no monetary losses. For the 2,976 fraud complaints that cited monetary losses, the amounts of money individual consumers said that they had paid ranged from less than $1 to over $365,000. Of these complaints, about: 55 percent were less than $100; 29 percent were between $100 and $999; 15 percent were between $1,000 and $29,999; and 1 percent were $30,000 or more. The largest monetary loss reported by a consumer was $365,432. However, available FCS information was insufficient to describe the nature of the consumer complaint associated with this loss. Similarly, we attempted to determine the nature of other consumer complaints in the fraud and chain letter categories using a random sample of 50 complaints with comments from each category for a total of 100 complaints. For these complaints, we found that the comments were unclear or lacked sufficient detail to provide insight into the nature of consumers’ deceptive mail problems. We recently learned from a Postal Inspection Service official that additional fraud complaints were contained in a third FCS category called “consumer complaint program.” According to the official, for the period October 1, 1997, through March 31, 1999, the category included a total of about 48,000 complaints, which generally involved such matters as fraud, bad business practices, or misunderstandings between consumers and companies. Although the Postal Inspection Service was unable to specifically identify how many of these complaints involved fraud, officials determined that about 4,000, or about 8 percent, of these complaints were associated with active mail fraud investigations. The officials, however, could determine neither the number of investigations involved nor whether these complaints led to such investigations. We obtained information from ISDBIS that focused on fraud against consumers. For fiscal year 1998, our analysis identified a total of 1,869 ISDBIS cases, which included 1,333 cases that carried forward into fiscal year 1998 from fiscal year 1997, and 536 cases that were opened during fiscal year 1998. The cases involved various types of allegedly deceptive mail marketing practices, including investment schemes, lotteries, fraudulent charity solicitations, work-at-home schemes or plans, and advance fee loan schemes. By the end of fiscal year 1998, 576 cases had been closed, of which 293, or about 51 percent, involved four top deceptive mail marketing practices or schemes. The four were (1) lotteries, (2) telemarketing, (3) investment schemes, and (4) work-at-home plans. During fiscal year 1998, the Postal Inspection Service initiated various law enforcement actions resulting from investigative cases involving the four top deceptive mail schemes. According to ISDBIS data, a total of 911 enforcement actions were taken, which included arrests, convictions, and other actions. Of the total actions taken, 480, or 53 percent, involved arrests and convictions. Also, ISDBIS data for sweepstakes showed that a total of 43 actions were taken. For our most recent work, we obtained updated information on the two initiatives that we discussed in our previous testimony, namely Project Mailbox and the National Association of Attorneys General (NAAG) multi- state sweepstakes subcommittee. Also, we obtained updated information from various federal, state, and local agencies and nongovernmental organizations about their recent efforts to help educate and make consumers more aware of the potential problems that could result from deceptive mail marketing practices. These efforts involved activities that were initiated by various organizations, including FTC, the Postal Inspection Service, state Attorneys General offices, and nongovernmental organizations, such as the American Association of Retired Persons (AARP) and NAAG. Project Mailbox was established to help educate consumers and appropriately deal with organizations, companies, and individuals that attempted to defraud consumers through the use of mass mailings. In fiscal year 1998, FTC, the Postal Inspection Service, and Attorneys General offices for various states initiated 203 law enforcement actions that targeted specific organizations, companies, and individuals that allegedly attempted to deceive, mislead, or defraud consumers through various mail marketing practices. The practices included a wide range of schemes, including not only sweepstakes, prize promotions, lotteries, advance fee loans schemes, and government look-alike mail, but also such schemes as guaranteed scholarships, vacation and travel packages, and fraudulent charity solicitations. For the 203 law enforcement actions, FTC, the Postal Inspection Service, and various state Attorneys General offices provided us some information on 101, or about 50 percent, of the actions, which provided perspective on these actions. These federal and state organizations estimated that a total of about 841,000 consumers had purchased products and/or services from the organizations, companies, or individuals that were the targets of the law enforcement actions. Also, an estimated total of about $424 million was identified as sales to consumers or funds consumers had paid to the targeted organizations, companies, or individuals. We have no information on the extent to which deceptive mail problems may have been involved with the total number of consumers identified and the payments made. However, FTC, the Postal Inspection Service, and various state Attorneys General offices estimated that about 10,400 consumer complaints led to or initiated the 101 law enforcement actions. In February 1999, NAAG’s Subcommittee on Sweepstakes and Prize Promotion convened a hearing in Indianapolis, Indiana. The purpose of the hearing was to gather information about sweepstakes promotions and create consensus on the best approaches for deterring and punishing those who participate in fraudulent sweepstakes activities. Witnesses at the hearing included representatives of the direct mail marketing industry, individual consumers from various states, federal government representatives, and experts from the academic community. Based on information discussed at the hearing and lessons learned from years of investigations and litigation, the subcommittee generally recommended that the sweepstakes industry adopt specific voluntary practices to ensure that consumers are not misled. Some of the recommended practices included (1) clearly disclosing the odds of winning the sweepstakes or contest, (2) not representing or implying that ordering a product increases a consumer’s chance of winning, and (3) having a standard, simple, uniform means for entering sweepstakes both for consumers who place orders and those who do not. FTC, the Postal Inspection Service, and various state, local, and nongovernmental organizations have either completed or initiated efforts to help educate consumers and raise their awareness about problems that could result from deceptive mail. These efforts range from the establishment of a national toll-free hotline to the publication of consumer awareness articles. FTC has initiated or participated in activities to help consumers deal with deceptive mail marketing practices. For example, FTC: established, on July 7, 1999, a national toll-free hotline (i.e., 1-877-FTC- HELP or 1-877-382-4357) that consumers could use to file complaints on various topics, including deceptive mail. According to FTC, the hotline is intended not only to make FTC more accessible to consumers who wish to file complaints but also to make consumer complaint data available to law enforcement agencies in the United States and Canada. maintains a website through which consumers may obtain information that can help them address potential problems associated with deceptive mail. This information covers topics ranging from prize offers to magazine subscription scams to receipts of unordered merchandise. In addition, FTC officials told us that FTC has continued to work with other organizations, such as NAAG, to encourage these organizations to share consumer complaint information with FTC, so that more comprehensive data on consumer complaints can be centrally collected and maintained in FTC’s Consumer Information System (CIS). CIS fraud consumer complaint data are made available to various law enforcement organizations through FTC’s Consumer Sentinel website. According to Postal Inspection Service officials, the Inspection Service’s efforts to educate consumers are important to its continuing fight against deceptive mail marketing practices. These efforts range from national to local activities that are designed to help consumers avoid being victimized by deceptive mail marketing practices. For example, the Inspection Service: mailed out postcards in May 1993, to about 210,000 households in the United States, informing consumers that they had won prizes and asked consumers to call a telephone number. However, when consumers called the number, they reached the Inspection Service and were warned against responding to the postcards because similar solicitations are often used by companies to scam consumers. is developing another postcard mailing to alert consumers to potential problems that could be caused by deceptive mail and telemarketing and identify a national hotline through which consumers may file complaints. The postcards are to be distributed to about 114 million households nationwide in October 1999. distributed in December 1994, a video news release that was sent to various television news stations throughout the United States. The video included information on how consumers could identify whether elderly relatives were having problems in handling mailed material from organizations. is developing a video that will include information to help consumers avoid both problems with deceptive mail and other types of deceptive marketing practices via the telephone. The video is scheduled for distribution to about 16,000 public libraries around October 1999. In addition, according to Postal Service field officials, the Service has and continues to help educate consumers and raise their awareness about deceptive mail practices. In many instances, postal field personnel work with their local postal inspectors to prepare news releases and make presentations before consumer groups. Officials in the state and local organizations that we contacted cited the following examples of their efforts to help educate consumers about deceptive mail. Representatives from the Connecticut Office of the Attorney General have conducted half-day consumer education sessions for groups of senior citizens to provide them information about deceptive mail. Since January 1, 1999, the office has sponsored 4 sessions with about 1,000 consumers in attendance. Since January 1999, staff from Florida’s Division of Consumer Services have spoken to consumer groups, many of which involved senior citizens, about fraud-related issues. These efforts focused on telemarketing fraud, but have also involved discussions about deceptive mail, including sweepstakes. In April 1999, local consumer affairs staff from Montgomery County, Maryland, conducted an adult education class focusing on consumers’ rights and responsibilities, but information was also provided on sweepstakes and fake award notification letters. In the spring of 1999, the administrator of the Office of Consumer Affairs in Alexandria, Virginia, made a presentation on pyramid schemes received through the mail that pay commissions for recruiting distributors, not for making sales. The presentation was made to both staff in Alexandria’s Office of Aging and local consumers. Various nongovernmental organizations, including DMA, AARP, and Arizona State University, reported that to help educate consumers, these organizations offered conferences and seminars as well as distributed information on deceptive mail marketing practices. Representatives of the organizations identified several examples, which included DMA prepares and distributes action line reports on deceptive mail problems, as well as other marketing issues. These reports are distributed to approximately 800 to 900 consumer affairs professionals and press contacts who are encouraged to share the reports with consumers. A recent action line report, dated July 11, 1999, established a special Sweepstakes HelpLine, which is intended to help various caregivers, such as adult children, who care for elderly relatives; consumer affairs personnel; and social service professionals address problems some people may have with sweepstakes. AARP has conducted 26 training seminars throughout the United States that were attended by about 1,300 law enforcement professionals. The seminars were held during 1998 and provided the professionals with information on deceptive mail, including sweepstakes, prize promotions, and foreign lotteries. Arizona State University, in cooperation with AARP and the Office of the Arizona Attorney General, hosted a conference entitled “New Directions: Seniors, Sweepstakes and Scams.” The conference, which was held in October 1998, was designed for individuals who have been and continue to be involved in consumer education and awareness efforts. Among the conference attendees were representatives from FTC, the Postal Inspection Service, and NAAG. Information on deceptive mail marketing practices was presented and attendees were encouraged to share this information with consumers. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or the members of the Subcommittee may have. For future contacts regarding this testimony, please contact Bernard L. Ungar at (202) 512-8387. Individuals making key contributions to this testimony included Gerald Barnes, Anne Hilleary, Lisa Wright-Solomon, Anne Rhodes-Kline, and George Quinn. In developing the scope and methodology for our work, we first obtained a general description of the term “deceptive” as it could be applied to mailed material. According to FTC, mailed material would generally be considered deceptive if the material included a representation or practice or if the material omitted information that caused a consumer to be misled and eventually suffer some loss or injury, despite the fact that the consumer behaved reasonably under the circumstances. Both FTC and the Postal Inspection Service identified various types of mailed material that have been used to induce consumers to remit money, pay upfront fees, or purchase goods or services through deceptive means. However, in many cases, the promised goods or services were not delivered or were not of the quality that consumers may have reasonably expected to receive. Some examples included lotteries from foreign countries or from states that did not have authorized lotteries. chain letters that required consumers to remit payments to participants in the chain letter scheme for which substantial financial returns were promised but never delivered. mailed material that involved various types of consumer credit schemes, such as loans, credit repair offers, and credit card solicitations, for which advance fees were required. requests for charitable donations from organizations that were not legitimate charities. mailed material that looks as if it has been distributed or endorsed by a government agency, also referred to as government look-alike mail. In some instances, mailed material may be illegal in that it violates specific postal or other statutes. For example, chain letters that request money or other items of value and promise a substantial return to the participants are generally illegal. Such letters are considered a form of gambling and sending them through the mail violates section 1302 of Title 18 of the U.S.Code, the Postal Lottery Statute. To obtain updated information about the extent and nature of consumers’ problems with deceptive mail, as well as consumer education efforts, we attempted to contact the 17 federal, state, and local agencies and nongovernmental organizations that we contacted for our September 1998 testimony. In our earlier work, we identified these agencies and organizations as those which had been involved in dealing with consumers’ complaints about questionable or deceptive mail marketing practices involving mailed sweepstakes material and cashier’s check look-alikes. The 17 agencies and organizations included 2 federal agencies—FTC and the Postal Inspection Service—as well as other state and local government agencies and nongovernmental organizations such as state attorneys general offices for such states as Florida and West Virginia; local government offices that handled consumer protection issues; and various nongovernmental organizations including (1) American Association of Retired Persons; (2) National Consumers League, which established National Fraud Information Center; and (3) Direct Marketing Association. Based on our most recent work efforts, we obtained information from 12 of the 17 agencies and organizations, which are listed in attachment II to this statement. At the 12 agencies and organizations, we interviewed officials and reviewed documents to obtain available information about the extent and nature of consumers’ deceptive mail problems and consumer education efforts. Also, we obtained and analyzed consumer complaint data from FTC and Postal Inspection Service databases. In addition, during the course of our work, we obtained from FTC, the Postal Inspection Service, and 45 state attorneys general offices information on specific law enforcement actions involving organizations, companies, and individuals that attempted to defraud consumers through the use of deceptive mail. To obtain information about the consumer complaint process at the Postal Service, we interviewed postal headquarters officials in the Postal Inspection Service and the Postal Service’s Office of Consumer Advocate. Also, we interviewed postal officials at various field locations in different parts of the country who were knowledgeable about the consumer complaint process. Specifically, we spoke with consumer affairs and marketing officials in postal district offices and inspectors in Postal Inspection Service offices located in the metropolitan areas of Dallas, Texas; Los Angeles, California; and Washington, DC. In addition, to obtain insight into how the consumer complaint process was implemented, we visited 15 postal field facilities, including post offices and stations, that were located in the metropolitan areas of Dallas, Texas; Los Angeles, California; and Washington, DC. These locations were selected mainly because staff from our Dallas Regional Office, as well as headquarters staff, were available to conduct face-to-face meetings with appropriate postal field employees. In addition, we had an outside contractor conduct a survey to obtain opinions from the U.S. adult population about specific types of deceptive mail. Through the survey, we attempted to determine whether survey respondents had received any mail delivered by the U.S. Postal Service within the last 6 months involving sweepstakes or documents resembling cashier’s checks that the respondents believed were in any way misleading or deceptive. We contracted with International Communications Research (ICR) of Media, Pennsylvania, a national market research firm, to administer our survey question, which was worded as follows. “We would like to ask you a question concerning mail delivered by the U.S. Postal Service. Within the last 6 months, have you received any mail delivered by the U.S. Postal Service involving sweepstakes or documents resembling cashier’s checks that you believe were in any way misleading or deceptive?” A total of 1,014 adults (18 and older) in the continental United States were interviewed between November 18 and 22, 1998. The contractor’s survey was made up of a random-digit-dialing sample of households with telephones. Once a household was reached, one adult was selected at random using a computerized procedure based on the birthdays of household members. The survey was conducted over a 5-day period, including both weekdays and weekends, and up to four attempts were made to reach each telephone number. To ensure that survey results could be generalized to the adult population 18 years of age and older in the continental United States, results from the survey were adjusted by ICR to account for selection probabilities and to match the characteristics of all adults in the general public according to such demographic groups as age, gender, region, and education. Because we surveyed a random sample of the population, the results of the survey have a measurable precision or sampling error. The sample error is stated at a certain confidence level. The overall results of our survey question regarding the public’s opinion about misleading or deceptive mail are surrounded by 95 percent confidence levels of plus or minus 4 percentage points or less. The practical difficulties of conducting any survey may introduce nonsampling errors. As in any survey, differences in the wording of questions, in the sources of information available to respondents, or in the types of people who do not respond can lead to somewhat different results. We took steps to minimize nonsampling errors. For example, we developed our survey question with the aid of a survey specialist and pretested the question prior to submitting it to ICR. We did our work from November 1998 through July 1999, in accordance with generally accepted government auditing standards. We did not verify consumer complaint data obtained from FTC and Postal Inspection Service nor did we verify data provided by FTC, Postal Inspection Service, and state Attorneys General offices on specific law enforcement actions. Name of agency/organization Federal government agencies: Federal Trade Commission (FTC) U.S. Postal Inspection Service State government agencies (Offices of Attorneys General): Connecticut Florida Local government agencies: Citizen Assistance (Consumer Affairs) for City of Alexandria Consumer Affairs Division for Montgomery County Nongovernmental organizations: American Association of Retired Persons (AARP) Arizona State University (Gerontology Program) Direct Marketing Association (DMA) National Association of Attorneys General (NAAG) National Consumers League (NCL)/National Fraud Information Center (NFIC) U.S. Public Interest Research Group (USPIRG) Washington, D.C. Washington, D.C. 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To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed matters related to deceptive mail marketing practices, focusing on the extent and nature of consumers' problems with deceptive mail and the initiatives various federal agencies and other organizations have made to address deceptive mail problems and educate consumers. GAO noted that: (1) examples of deceptive mail include sweepstakes, chain letters, cashier's check look-alikes, work-at-home schemes, and fraudulent charity solicitations; (2) officials in various agencies and organizations said that comprehensive data on the full extent of consumers' deceptive mail problems were not available mainly because consumers often did not report their problems and no centralized database existed from which such data could be obtained; (3) however, data GAO collected from various sources suggested that consumers were having substantial problems with deceptive mail; (4) based on a GAO sponsored November 1998 statistically generalizable sample of the U.S. adult population, GAO estimates that about half of the adult population believed that within the preceding 6 months, they had received deceptive mailed sweepstakes material or cashier's check look-alikes; (5) officials from the Federal Trade Commission (FTC), Postal Inspection Service, and state Attorneys General offices estimated that in fiscal year (FY) 1998, about 10,400 deceptive mail complaints led to or initiated about 100 law enforcement actions; (6) for the period October 1, 1997, through March 31, 1999, FTC received over 18,000 deceptive mail complaints, of which about 2,700 reported consumer payments of about $4.9 million; (7) also, the Postal Inspection Service received over 16,700 complaints on fraud and chain letters, of which about 3,000 reported consumer fraud losses of about $5.2 million; (8) the Inspection Service also had over 1,800 open investigative cases on deceptive mail during FY 1998; (9) various federal agencies and other organizations have undertaken efforts to address consumers' deceptive mail problems and educate them about such problems; (10) for example, FTC established a national toll-free hotline for receiving deceptive mail and other complaints; (11) one joint effort was Project Mailbox, which involved such organizations as FTC, Postal Inspection Service, and various state Attorneys General; and (12) these organizations initiated over 200 law enforcement actions against companies and individuals that used the mail to allegedly defraud consumers. |
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The nonprofit sector is diverse and has a significant presence in the U.S. economy. Of the estimated 1.7 million tax-exempt organizations in fiscal year 2008, about 69 percent were religious, charitable, and similar organizations, or private foundations and were referred to as 501(c)(3) organizations, and about 8 percent were social welfare organizations. Nonprofit organizations provide services in a wide variety of policy areas such as health care, education, and human services. As we have previously reported, the federal government is increasingly partnering with nonprofit organizations because nonprofit organizations can offer advantages in delivering services compared to government agencies—they are more flexible, they can act more quickly, and they often have pre-existing relationships with local officials and communities. Nonprofit organizations have provided a wide range of direct long-term assistance and recovery services to those affected by the Gulf Coast hurricanes including job training, counseling, and housing. Nonprofit organizations have contributed significant support—financial and non- financial—to post-Katrina and Rita recovery efforts. At the end of 2009, FEMA officials in Louisiana reported that more than $24 million in donated dollars, volunteer hours, and goods had been leveraged through long-term recovery groups to provide permanent housing and address other unmet needs. In addition, some nonprofit organizations provided technical and support services to those nonprofit organizations that rendered direct recovery services to Gulf Coast residents. For example, as of 2007, the Louisiana Family Recovery Corps (LFRC) had provided more than $20 million in programs, initiatives, and activities in the Greater New Orleans area since the storms. In its 2005-2008 retrospective, the Louisiana Disaster Recovery Foundation reported awarding grants totaling nearly $29 million to nonprofit organizations involved in Louisiana’s recovery process. Organizations such as the Mississippi Center for Nonprofits had a well- established communications infrastructure with hundreds of nonprofits within the state of Mississippi before the 2005 storms and used this network following the hurricanes to disseminate grant and technical information, provide vital resource referrals, and communicate available training workshops for nonprofit service providers. The Louisiana Association of Nonprofit Organizations (LANO) was similarly positioned in the state of Louisiana. According to its officials, LANO serves more than 1,000 nonprofit organizations throughout the state of Louisiana. One of LANO’s field offices is located in New Orleans in a building that it shares with approximately 30 other nonprofit organizations, many of whom are providing recovery assistance to residents of the surrounding neighborhoods which are among the poorest in the Metropolitan New Orleans area. Table 1 below provides examples of some of the nongovernmental partners that helped to build the capacity of direct service providers involved in the Gulf Coast recovery by providing human resources, guidance, training, funding, and technical assistance. One of the primary mechanisms the federal government uses to provide support to nonprofit organizations is federal grants. Federal grants are forms of financial assistance from the government to a recipient for a particular public purpose that is authorized by law. Federal grant funds flow to the nonprofit sector in various ways. For example, some grant funds are awarded directly to nonprofits, while others are first awarded to states, local governments, or other entities and then awarded to nonprofit service providers. Federal grant funding may also be awarded to nonprofit subgrantees through contracts. Federal laws, policies, regulations and guidance associated with federal grants apply regardless of how federal grant funding reaches the final recipients. Nonprofit organizations in Louisiana and Mississippi provided numerous human recovery services to Gulf Coast residents following Hurricanes Katrina and Rita, and several of those services, including housing, case management, and mental health services were supported either directly by the federal government or indirectly through other organizations receiving federal support. The federal government relied on both pre-existing as well as newly developed funding programs when supporting nonprofit organizations. For example the federal government used well-established grants such as the Temporary Assistance for Needy Families, Community Development Block Grant, and the Social Services Block Grant to provide financial and human recovery assistance to Louisiana and Mississippi residents. Nonprofit as well as Louisiana and Mississippi state officials also identified additional federal funding programs that were in place before the storms that were used to assist in human recovery services such as the Department of Housing and Urban Development’s (HUD) workforce housing grants, Entitlement Cities, and the Low-income Home Energy Assistance Program; FEMA’s Community Disaster Loans; and the Low Income Housing Tax Credit program. There were also several newly created grants with emergency supplemental funds designed to provide human recovery assistance to hurricane-affected areas. Some of these grants include the Department of Health and Human Services’s (HHS) Primary Care Access and Stabilization Grant and HUD’s Disaster Housing Assistance Program. See table 2 for descriptions of selected federal funding programs that provided assistance to victims of the Gulf Coast hurricanes. Louisiana and Mississippi differed in how funds from these programs were distributed. Louisiana created organizations like the nonprofit LFRC and the state-level Louisiana Recovery Authority to serve as custodians and distributors of some of its federal funding, while Mississippi took advantage of provisions in the National Community Service Trust Act to establish a state-level commission to oversee the state’s community service block grants. Using federal funding programs such as those shown in table 2, nonprofit organizations have provided a wide range of recovery services to residents affected by Hurricanes Katrina and Rita including housing, long-term case management, and a variety of counseling services (including crisis management and substance abuse). According to nonprofit officials in both Louisiana and Mississippi, as of early 2010, Gulf Coast residents continue to need services in these areas. CDBG funds are being used by Providence Community Housing, a collaborative effort of Catholic housing and social service organizations in the New Orleans community, to build, rebuild, or repair 7,000 units of affordable houses and apartments over a 5- year period that began in 2006. Some nonprofit officials also told us that long-term case management services were still widely needed. For example, according to officials with the Lutheran Episcopal Services in Mississippi, as of the summer of 2008, this nonprofit had provided case management services for several years to Katrina-affected residents in the Mississippi Gulf Coast region through the efforts of approximately 60 case managers who worked with clients throughout Mississippi. Some nonprofits in our review were instrumental in helping other nonprofits access available federal funds in order to deliver much needed services. The United Methodist Committee on Relief (UMCOR), for example, also served as the umbrella grants manager for Katrina Aid Today (KAT), a national consortium of nine subgrantees. The consortium was required to provide matching funds and was able to put up $30 million of in-kind funds, while FEMA channeled foreign donations of $66 million over a 2-year period. At the completion of its grant-funded activity in March 2008, KAT had enabled case management services for approximately 73,000 households. As the umbrella grants manager, UMCOR provided financial compliance monitoring, technical assistance and training to the nine consortium members. Nonprofits such as Louisiana’s Odyssey House and Mercy Family Center also provided crisis, mental health, and substance abuse counseling made possible as the result of federal funds. In addition, according to officials from the Catholic Charities Archdiocese of New Orleans, their organization contracted with the Louisiana State Office of Mental Health and the resulting Louisiana Spirit hurricane recovery project, funded by FEMA, helped provide intervention and mental health services to its clients. The National Response Framework (NRF) designates the FEMA Voluntary Agency Liaison (VAL) as the primary liaison to the nonprofit community. VALs are responsible for initiating and maintaining a working relationship between FEMA, federal, state, and local agencies and nonprofit organizations. VALs also advise state emergency agencies on the roles and responsibilities of nonprofit organizations active in the recovery. The FEMA VAL system is staffed by a combination of permanent federal employees as well as temporary and term-specified employees whose work focuses on a specific disaster. Among the permanent FEMA employees are 10 regional VALs—one for each FEMA regional office— along with an additional 2 VALs in the Caribbean Area and Pacific Area offices. FEMA also has five VAL staff based at headquarters whose role is to provide the overall VAL program and policy development, the national perspective, training and development to states and regions, support services in the field, coordination with other DHS and FEMA entities with nonprofits as stakeholders, and oversight of the FEMA Donations and Volunteer Management Program including the National Donations Management Network. FEMA also deploys Disaster Assistance Employees, reservists who can be called up to carry out the VAL role in local communities following a specific disaster and, depending on the size of the disaster, typically serve for a period of approximately 50-60 days with a maximum of 50 consecutive weeks in a calendar year. As of March 31, 2010, FEMA had 90 disaster assistance employees in its reserve VAL cadre. In addition, after the Gulf Coast hurricanes, FEMA hired 40 “Katrina VALs,” of which 10 are remaining in Louisiana as of May 24, 2010. These are term-limited federal employees hired locally who are designated to specifically address Katrina-related issues and 10 remain based on FEMA’s need for their continued work. FEMA is not planning to retain these individuals after Katrina-related work is finished. FEMA’s VAL program received general approval from state, local, and nonprofit officials we spoke with. Several nonprofit officials told us that VALs were instrumental in helping initially set up and guide the operation of long-term recovery committees. Officials from state Voluntary Organizations Active in Disasters (VOAD) in Louisiana and Mississippi spoke highly of the respective regional VALs and said they were involved with the VOADs on a regular basis helping coordination between the VOADs and nonprofits. And officials from various nonprofit organizations cited how useful they found the VAL coordination. For example, VALs helped extend the federal government’s reach to the nonprofit sector by also working with state-level intermediaries, such as the Louisiana Family Recovery Corps (LFRC) and the Mississippi Commission for Volunteer Service (MCVS), whose responsibilities included the coordination of nonprofit service providers active in the recovery effort. The LFRC was created in 2005 following the Gulf Coast hurricanes and was designated by the Louisiana legislature in 2007 as the state’s coordinator for human resources. The MCVS is the state’s office of volunteerism through statute and is an affiliate of the federal Corporation for National and Community Service (CNCS) and was designated by the Governor of Mississippi to coordinate the general activities of the nonprofit sector and oversee the implementation of FEMA’s Phase I and Phase II Disaster Case Management Pilot program specifically. Officials from the Mississippi Center for Nonprofits and the Mississippi Interfaith Disaster Task Force said they had good working relationships with the FEMA VALs. Further, officials from state entities such as the Louisiana Recovery Authority characterized their partnership with FEMA VALs as successful and one of the best examples of local coordination they encountered. In November 2005, the President issued an executive order establishing the Office of the Federal Coordinator for Gulf Coast Rebuilding (OFC) with the broad mission of supporting recovery efforts following Hurricanes Katrina and Rita. OFC was created as a response to the unprecedented rebuilding challenges presented by these storms as well as concerns regarding the lack of coordination in the government’s initial response to these events. Although the OFC was originally scheduled to expire in November 2008, the President extended it several times until the office closed on April 1, 2010. In previous work on OFC, we identified four key functions performed by the office, which provides a useful framework for understanding how the office provided support for nonprofits working on Gulf Coast recovery. Nonprofits were directly involved in three of these four OFC functions. First, OFC helped nonprofits to identify and address obstacles to recovery. These obstacles included both challenges facing specific organizations as well as broad problems facing entire communities of which nonprofits were a part. An example of the former occurred when OFC worked with MCVS and FEMA to address contracting challenges involving FEMA’s Disaster Case Management Phase II pilot program. An example of the latter is OFC’s sponsorship of a series of forums and workout sessions, which brought together a diverse group of stakeholders including numerous nonprofits, foundations, and faith-based organizations to discuss impediments to recovery and try to identify potential solutions. The topics of these sessions have included crime, education reform, and economic development. Second, OFC supported nonprofits by sharing and communicating a variety of recovery information. One example of this was the joint OFC- FEMA effort known as the Transparency Initiative that began in February of 2008. This Web-based information sharing effort enabled interested stakeholders, including nonprofits, to track the status of selected public infrastructure rebuilding projects (such as a school or hospital) by providing detailed information on the Public Assistance Grants funds allocated for the project and the project’s status. The initiative has received positive feedback from a range of nonprofits involved in Gulf Coast building including Catholic Charities and Tulane University. OFC also worked to provide updates and other information relating to Gulf Coast recovery though a nonprofit outreach strategy, which has changed and developed over time. During the first few years of the OFC’s operation, although the office compiled a listing of many nonprofits involved in recovery and rebuilding activities, it focused its outreach efforts primarily on large, well-known, national nonprofit organizations, such as Catholic Charities, the Southern Baptist Convention, and the United Methodist Committee on Relief. These organizations had the capacity to work with the government and, in many cases, already had pre- existing relationships with federal and state officials. OFC largely relied on these national organizations to relay information to the local level though their various local partners and affiliates. Given this approach, it is perhaps not surprising that many of the nonprofit officials we spoke with in both Louisiana and Mississippi told us that initially they did not have any direct interaction with OFC following the hurricanes. Since 2009, however, several nonprofit and local officials we spoke with in Louisiana and Mississippi said that OFC has conducted considerably more outreach and become much more involved with them and commended the OFC’s current efforts. According to a senior OFC official, in 2009, the office changed its nonprofit outreach to place a heavier emphasis on direct contact with smaller organizations at the grassroots level. Toward that end, the Federal Coordinator frequently visited Louisiana and Mississippi to personally conduct outreach to a variety of smaller nonprofit organizations and subsequently built a database of 300 to 400 nonprofit organizations. A third way OFC assisted nonprofits is through their facilitation of networks and dialogue among a wide range of recovery stakeholders from federal, state, and local governments, other nonprofits, and as well as the private sector. OFC brought a diverse group of stakeholders together to meet each other and discuss issues of common interest through numerous forums and roundtables. In contrast to the workout sessions mentioned above, the primary goal of these meetings was not to focus on a specific set of challenges, but rather to help foster and expand connections among members of the Gulf Coast recovery community and provide a forum for them to share information with each other. Similar to what took place with OFC’s approach toward information sharing with nonprofits, the way the office fostered networking changed over the years. In its final year of operation, OFC moved away from solely relying on formal events like forums and roundtables to increasingly making use of less formal meetings and networking events. For example, the Federal Coordinator at the time said the office placed a high priority on informal and direct interactions with communities on the ground, with whom she and her staff spent more than half of their time. In addition, OFC facilitated connections between nonprofits that were in the process of applying for recovery grants and other organizations that have had prior success in obtaining such funds and were willing to share their knowledge and expertise. Finally, in its last year of its operation, the OFC facilitated meetings between the White House Office of Faith-Based and Neighborhood Partnership centers established within 12 federal agencies including DHS, HUD, and the Small Business Administration (SBA) with local community and faith-based organizations. Additionally, during its last year of operation, OFC worked to ensure that secretaries of federal agencies relevant to disaster recovery established a senior-level advisor to serve as a point person with OFC as well as the nonprofit organizations on the ground. Some of the federal agencies that established this position included DHS, HUD, SBA, HHS, and the United States Department of Agriculture. Other federal agencies also provided important nonmonetary assistance to nonprofit organizations involved in Gulf Coast recovery. Federal agencies provided trained volunteers and volunteer management services to community-based nonprofits to help them meet increased demand for services. For example, CNCS reported that it provided more than $160 million worth of resources, including more than 105,000 volunteers who contributed more than 5.4 million hours to Gulf Coast states recovering from the 2005 hurricanes. Some of the nonprofit officials we interviewed indicated that they had either hired an AmeriCorps worker or Vista volunteer, or were familiar with their work as a result of partnering with them on various recovery projects. Nonprofits such as Rebuilding New Orleans Together were able to take advantage of a waiver that enabled FEMA and CNCS to cover the cost of some volunteer stipends. Federal agencies also provided nonprofit organizations with training and technical assistance that helped them manage federal grant program requirements. For example, nonprofit officials attended a 2008 White House sponsored conference designed to highlight and strengthen the role of faith-based and community-based organizations in disaster relief and preparedness. The conference, held in New Orleans, Louisiana, offered workshops hosted by federal agencies including the Departments of Justice, Agriculture, Labor, HHS, HUD, Education, Homeland Security, Commerce, and Veteran’s Affairs; the Agency for International Development; and SBA. These workshops provided technical assistance and training designed to help faith-based and community-based nonprofits understand the federal grant process as well as provide networking opportunities with the federal government. The rules and requirements that typically accompany federal grants along with the limitations of many nonprofits’ financial and administrative capacity made it difficult for some organizations to access federal funding to deliver recovery services. Our previous work has shown that many nonprofits struggle to accomplish their mission because they lack the resources that would allow them to better manage their finances and strengthen their administrative or technology infrastructure. We have recently reported that federal grants typically do not provide support for these types of overhead costs, which include administrative or infrastructure costs. In light of this gap, officials from several nonprofits told us that they believed the record keeping, documentation, and reporting requirements of federal grants were too complicated and cumbersome. Nonprofit organizations’ perceptions of federal accountability requirements sometimes also served as an impediment to obtaining funding from the federal government because officials at these organizations perceived compliance with federal grant requirements to be too resource-intensive and not worth meeting the requirements that accompanied such funds. Officials at one nonprofit raised concerns about what they characterized as the “massive” documentation required by the state to justify reimbursements for costs incurred in implementing federal grant programs. According to these nonprofit officials, paperwork sometimes had to be submitted repeatedly and state officials, who were supposed to facilitate communication between federal agencies and nonprofit service providers, did not always know what documents were required. Further, these officials stated that the preparation of the required reimbursement documentation consumed approximately 30 hours of staff time each month and that did not include the time required to comply with other reporting requirements under the grant. According to some state recovery officials, the fear of being audited or being found noncompliant with program regulations caused many nonprofits to shy away from federal disaster assistance, much to the detriment of the state which relies on nonprofits to provide services after a disaster. One nonprofit official, who chose not to apply for federal funds, explained that even if he had the resources to hire the additional staff to fill out all the federal grant paperwork, he would rather put those resources into a direct service, such as rebuilding damaged homes in the community. While recognizing the burdens that may accompany meeting federal grant requirements, it is also important to acknowledge the potential value of such requirements in helping minimize fraud, waste, and abuse and ensuring fiscal accountability to the American taxpayer. Nonprofit officials we spoke with were also concerned with the distribution of federal grant funds. Officials from several nonprofits reported that some federal grant awards were late, putting additional strain on the limited resources of smaller community-based organizations. For example, funding for the FEMA Phase II pilot program for disaster case management was not awarded until July 2008 in Mississippi and October 2008 in Louisiana although the funding period began in June 2008. Phase II grantees had already hired staff and began delivering case management services in anticipation of grant funding being available. As a result, some nonprofits had difficulty meeting expenses while they waited for grant funding to be awarded. As we have previously reported, many of the smaller case management organizations were unable to find alternative resources to pay the case managers hired in June and had to lay off caseworkers while awaiting for federal funding to be made available. On the other hand, larger organizations such as Catholic Charities sometimes had to wait up to 1 year to receive reimbursement for as much as $1 million in grant funds without having to take such actions. In recognition of the widespread devastation that resulted from the 2005 hurricanes and to address the challenges associated with navigating the federal aid process, Congress passed legislation to amend several assistance programs that helped nonprofit organizations deliver federally supported recovery assistance to residents of the Gulf Coast. Most notably, provisions in the Post-Katrina Emergency Management Reform Act of 2006 expanded eligibility requirements for nonprofit organizations to receive FEMA grant assistance, which enabled some nonprofit organizations to receive financial assistance to rebuild their storm- damaged facilities to better serve their clients. Congress also passed special legislation that provided additional cash assistance to hurricane victims through the TANF block grant. In order to deploy more highly trained workers to impacted communities, CNCS waived state matching requirements for sponsoring AmeriCorps workers in Louisiana and counted the cost of housing them as an in-kind match for sponsoring AmeriCorps workers. These program waivers made it easier for nonprofits with limited financial resources to sponsor AmeriCorps workers. In February 2009, President Obama created the President’s Advisory Council for Faith-Based and Neighborhood Partnerships in order to bring together leaders and experts in fields related to the work of faith-based and neighborhood organizations. The council was designed to make recommendations to the government on how to improve partnerships. In March 2010, the council issued its first report which, while not focused on Hurricane Katrina and Rita recovery efforts, included recommendations that could be useful for long-term disaster recovery. For example, the report recommended providing greater flexibility for the coordination and integration of government funds designated for specific program activities. The report went on to suggest that federal agencies develop rules and regulations to encourage coordination and integration of programs and services, and that agencies be mandated to be receptive to requests for rulemaking changes that were aimed at facilitating coordination and integration. In addition, the council recommended that in order to ease the burden on nonprofit social service agencies, agencies remove barriers to service provision such as matching fund requirements, burdensome reporting and regulations, and slow payments and reimbursements. While some recovery officials and nonprofit representatives we spoke with held generally favorable opinions about the usefulness of the assistance provided by FEMA VALs, they identified opportunities for improvement in the areas of training and information sharing. A senior FEMA official told us that, following Hurricane Katrina, the need for VALs considerably outstripped the supply then available in the VAL cadre requiring FEMA to hire temporary VALs without much experience. In addition, ensuring continuity presented a challenge as FEMA experienced a large turnover among VALs in the first year after the disaster. FEMA officials acknowledged that inconsistent performance among VALs was partly due to frequent changes in assigned staff as Disaster Assistance Employee staff was rotated in and out of VAL positions in the months immediately following the storms. However, they noted that this became less of a concern as time passed and more experienced VALs were brought on board and as VALs were hired from the local population and therefore able to remain in their roles for longer periods. FEMA offered several independent study disaster training courses for VALs, including one that is directly related to VAL duties entitled “The Role of Voluntary Agencies in Emergency Management.” FEMA also provided some basic in-person training to VALs in the field, but this training was provided on an ad hoc basis primarily by a single regional VAL. This official provided training for two different regions (a total of 13 states) as well as recovery training to VALs in Louisiana and Mississippi following Hurricanes Katrina and Rita while also handling his regular regional VAL duties. We have previously reported that VALs could benefit from additional training on federal programs and resources. For example, we found that FEMA did not provide training for VALs on Public Assistance Grant policies and recommended that the agency provide role-specific training to VAL staff, including instruction on the Public Assistance Grant program and the policies and opportunities that apply for nonprofit organizations. FEMA has taken steps to respond to our recommendation as well as address other training issues in its VAL program. These include changes that FEMA is making that address our previous report recommendation that FEMA provide role-specific training to VALs. For example, FEMA has issued a VAL Handbook, which provides a written guide on essential VAL activities and procedures, and has been revising its VAL training for the past year. It expects to complete three VAL-specific courses by the end of 2010. One of the courses FEMA officials are working on is an introductory VAL course, for which they are holding focus groups with regional VALs and voluntary agencies for their input. FEMA expects to pilot this course in the fall of 2010. FEMA is also developing a volunteer management course for which they are pulling subject matter experts from the National VOAD, recovery committees, and from state and local officials. The VAL program’s expectation is that the revised VAL training program will be incorporated into a larger FEMA initiative involving credentialing of disaster workers. FEMA officials also acknowledged that VALs would benefit from a mechanism through which they can more effectively share information and best practices that are drawn from a variety of different sources (such as VALs, local recovery partners, and the National VOAD). GAO’s guidance on internal controls encourages agency management to provide effective internal communications as one way to promote an appropriate internal control environment. This guidance suggests agencies establish mechanisms to (1) allow for the easy flow of information down, across, and up within the organization, and (2) enable employees to recommend improvements in operations. Consistent with this concept, FEMA has taken steps to improve information sharing in its VAL program. More specifically, FEMA is developing a knowledge repository known as the VAL Community of Interest on an internal DHS network site. Once operational, FEMA officials expect the site to function as a repository of resources, planning, and best practices that will facilitate information sharing and be readily available to the entire VAL community, even when they are deployed in the field. Collaboration is essential for an effective partnership between the wide range of participants involved in the disaster recovery process. The National Response Framework (NRF) defines the roles of federal, state, local, tribal governments; the private sector; and voluntary organizations in response to disasters. The NRF, which became effective in March 2008, designates 15 emergency support functions that address specific emergency disaster response needs. We have previously reported on the importance of defining roles and responsibilities in both response and recovery. FEMA acknowledges that recent disasters highlight the need for additional guidance, structures and leadership to improve support and management of recovery activities. As we have recently reported, the federal government has taken steps to strengthen the nation’s disaster recovery process. In 2006, Congress required FEMA to develop a national disaster recovery strategy for federal agencies involved in recovery. In response to this mandate, FEMA and HUD are leading a diverse group of federal agencies and other organizations to develop the National Disaster Recovery Framework (NDRF). Among the NDRF’s objectives is to define the federal, state, local, tribal, nonprofit, private-sector, and the individual citizen’s roles in disaster recovery. To date, the NDRF working group has facilitated various meetings as well as developed a Web site for input from federal, state, tribal and local government leaders; recovery-assistance providers; nonprofit organizations; private sector representatives; and interested citizens. The group has developed a draft framework, which includes details about expected roles and responsibilities of nonprofits in disaster recovery. In addition, at the President’s request, the secretaries of DHS and HUD are co-chairing a Long-Term Disaster Recovery Working Group composed of the secretaries and administrators of 20 federal departments, agencies, and offices. This working group was established at the end of September 2009 and joined the NDRF effort started by FEMA in August 2009. This effort to examine lessons learned from previous catastrophic disaster recovery efforts includes areas for improved collaboration and methods for building capacity within state, local, and tribal governments as well as within the nonprofit, faith-based, and private sectors. The working group is charged with developing a report to the President, which will provide recommendations on how to improve long-term disaster recovery. The National VOAD is leading a parallel effort to establish a National Nonprofit Relief Framework (NNRF) intended to complement the NRF and NDRF by providing detailed guidance on nonprofit organization roles and responsibilities, programs, polices, and interagency protocols. FEMA is also involved in this effort and, according to information provided by FEMA officials, this document will serve as a major source of program coordination information for both government and non-governmental organizations involved in all phases of emergency management. According to these officials, the NNRF will help fill a planning void that currently exists regarding what is known about the disaster response and recovery capacity of the nonprofit sector. A final version of the NNRF is expected to be issued in December 2010. In addition to the guidance that frameworks like the NDRF and NNRF can offer, cooperative agreements provide another mechanism that can further clarify the roles and responsibilities of specific nonprofits involved in recovery activities. Several nonprofit and federal officials we spoke with identified such agreements or memorandums of understanding established between FEMA and specific nonprofit organizations as a tool to clarify expectations and avoid confusion that can arise in the wake of a disaster. These cooperative agreements could provide a road map for federal- nonprofit partnerships by outlining the functional capabilities and resources of each partner, and by outlining implementation strategies for delivering critical recovery services. Such agreements could also help avoid duplication of efforts among the various disaster recovery players and expedite recovery efforts. We provided a draft of this report to the Secretary of Homeland Security for review and comment. DHS concurred with the report but did not provide us with formal written comments. The department did provide several technical clarifications that we incorporated as appropriate. We also sent drafts of the relevant sections of this report to cognizant officials from the nonprofits involved in the specific examples cited in this report and incorporated their comments 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 date of this letter. We will then provide copies of this report to other interested congressional committees; the Secretary of Homeland Security; the Administrator of the Federal Emergency Management Agency; and federal, state, local, and nonprofit officials we contacted for this review. This report also is 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) 512-6806 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. To address our first objective on how the federal government has worked with nonprofit organizations to facilitate Gulf Coast Recovery following Hurricanes Katrina and Rita in 2005, we first conducted a systematic review and synthesis of GAO and other reports to identify (a) the range of federal programs used to support Gulf Coast recovery; (b) the types of nonprofit organizations that provide federally-supported recovery assistance; and (c) the types of service delivery mechanisms federal agencies used when working with nonprofit organizations. For this objective we also interviewed officials involved in recovery efforts from federal, state, and local governments, as well as officials from nonprofit organizations, to help us refine our understanding of the range of federal government relationships with nonprofit organizations active in Gulf Coast recovery. To address our second objective describing steps taken by the federal government to address challenges encountered when working with nonprofits to deliver recovery services, we conducted interviews with federal, state, local, and nonprofit officials and obtained supporting documentation of federal actions where appropriate. We focused our review on Louisiana and Mississippi because these two states sustained the most damage from Hurricanes Katrina and Rita and thus accounted for a large portion of the federal funding made available to Gulf Coast states for recovery. In addition, given their role in disaster recovery, we placed a focus on the activities of two components of the Department of Homeland Security—the Federal Emergency Management Agency and the Office of the Federal Coordinator for Gulf Coast Rebuilding—in describing how the federal government has worked with nonprofits on Gulf Coast recovery. We selected a variety of individuals and organizations in order to capture a wide range of perspectives including (a) the range of types of nonprofit organizations active in Gulf Coast recovery, (b) the broad range of federally supported recovery services delivered to residents of the affected areas, (c) the range of service delivery mechanisms used to deliver services, and (d) individuals and organizations identified through our literature review, informational interviews, and/or referrals received during the course of our work. In total, we interviewed federal, state, local, and nonprofit officials from the following 48 agencies and organizations. While findings from our interviews cannot be generalized, this approach allowed us to capture important variability within the various sectors. Corporation for National and Community Service, Washington, D.C. Federal Emergency Management Agency (FEMA) Headquarters, Washington, D.C. FEMA Louisiana Transitional Recovery Office, New Orleans, La. FEMA Mississippi Transitional Recovery Office, Biloxi, Miss. FEMA Region IV, Atlanta, Ga. FEMA Region VI, Denton, Tex. Office of the Federal Coordinator for Gulf Coast Rebuilding, Washington, D.C. Louisiana Department of Social Services, Baton Rouge, La. Louisiana Recovery Authority, Baton Rouge, La. Louisiana Serve Commission, Baton Rouge, La. Mississippi Department of Human Services, Jackson, Miss. Mississippi Office of the Governor, Office of Recovery and Renewal, Jackson, Miss. Office of Emergency Preparedness, City of New Orleans, New Orleans, La. Office of Intergovernmental Relations, City of New Orleans, New Orleans, La. America Speaks, Washington, D.C. Annunciation Mission, Free Church of the Annunciation, New Orleans, La. Back Bay Mission, United Church of Christ, Biloxi, Miss. Baptist Association of Greater New Orleans, New Orleans, La. Baptist Community Ministries, New Orleans, La. Broadmoor Development Corporation, New Orleans, La. Catholic Charities Archdiocese of New Orleans, New Orleans, La. Greater Light Ministries, New Orleans, La. Greater New Orleans Disaster Recovery Partnership, New Orleans, La. Hope Community Development Agency, Biloxi, Miss. Israelite Baptist Church, New Orleans, La. Katrina Relief, Poplarville, Miss. Louisiana Association of Nonprofit Organizations, Baton Rouge and New Orleans, La. Louisiana Family Recovery Corps, Baton Rouge, La. Louisiana Voluntary Organizations Active in Disaster, Baton Rouge, La. Lutheran Episcopal Services in Mississippi, Jackson, Miss. Mississippi Center for Nonprofits, Jackson, Miss. Mississippi Commission for Volunteer Service, Jackson, Miss. Mississippi Gulf Coast Community Foundation, Gulfport, Miss. Mississippi Interfaith Disaster Task Force, Biloxi, Miss. Mississippi Voluntary Organizations Active in Disaster, Jackson, Miss. Rand Gulf States Policy Institute, New Orleans, La. Rebuilding Together New Orleans, New Orleans, La. Recovery Assistance, Inc., Ministries, Biloxi, Miss. Restore, Rebuild, Recover Southeast Mississippi (R3SM), Hattiesburg, Miss. Salvation Army, Jackson, Miss. St. Bernard Project, Chalmette, La. The Advocacy Center, New Orleans, La. Trinity Christian Community, New Orleans, La. Tulane University Center for Public Service, New Orleans, La. United Methodist Committee on Relief/Katrina Aid Today, New York, N.Y. United Way for the Greater New Orleans Area, New Orleans, La. Volunteers of America of Greater New Orleans, New Orleans, La. Waveland Citizens Fund, Poplarville, Miss. We conducted this performance audit from February 2008 through July 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We requested comments on a draft of this report from the Department of Homeland Security (DHS). DHS concurred with the report but did not provide formal written comments. However, the department had several technical clarifications that we incorporated as appropriate. We also provided drafts of relevant sections of this report to state, local, and nonprofit officials involved in the specific examples cited in this report, and incorporated their comments as appropriate. In addition to the contact named above, Peter Del Toro (Assistant Director); Michelle Sager (Assistant Director); Jyoti Gupta; Kathleen Drennan; Anthony Patterson; and Jessica Thomsen made key contributions to this report. | Residents of the Gulf Coast continue to struggle to recover almost 5 years after Hurricanes Katrina and Rita devastated the area in August and September of 2005. In many cases the federal government coordinates with, and provides support to, nonprofit organizations in order to deliver recovery assistance to impacted residents. A better understanding of how the federal government works with nonprofit organizations to provide such assistance may be helpful for recovery efforts on the Gulf Coast as well as for communities affected by major disasters in the future. GAO was asked to describe (1) how the federal government has worked with nonprofit organizations to facilitate Gulf Coast recovery following the 2005 hurricanes and (2) steps the federal government has taken to address challenges to strengthen relationships with nonprofits in the future. Toward this end, GAO reviewed the applicable disaster recovery literature and relevant supporting documents. GAO also interviewed officials from federal, state, and local governments as well as a wide range of nonprofit officials involved in Gulf Coast recovery. The federal government used a variety of direct and indirect funding programs to support the delivery of human recovery services by nonprofit organizations following Hurricanes Katrina and Rita in areas such as housing, long-term case management, and health care. These programs included well-established grants such as the Department of Health and Human Services' (HHS) Temporary Assistance for Needy Families and its Social Services Block Grant, as well as the Department of Housing and Urban Development's (HUD) Community Development Block Grant. Programs established in the wake of the 2005 hurricanes also provided funding to nonprofits offering recovery services. These included HHS's Primary Care Access and Stabilization Grant and HUD's Disaster Housing Assistance Program. The federal government also supported nonprofit organizations through coordination and capacity building. For example, the Federal Emergency Management Agency (FEMA) used Voluntary Agency Liaisons (VAL) to help establish and maintain working relationships between nonprofits and FEMA as well as other federal, state, and local agencies. The Office of the Federal Coordinator for Gulf Coast Rebuilding in the Department of Homeland Security provided a variety of assistance to nonprofits including problem identification, information sharing, and networking. Other federal agencies also worked to bolster the capacity of nonprofits by providing temporary staff, training, and technical assistance to nonprofit organizations. The federal government is taking steps to address several challenges and strengthen its relationship with nonprofit organizations providing recovery assistance. For example, nonprofit officials GAO spoke with cited challenges with the federal disaster grant process including what they viewed to be complicated record keeping and documentation procedures as well as other requirements to obtain aid. A report issued earlier this year by the President's Advisory Council for Faith-Based and Neighborhood Partnerships recognized the need to ease the administrative burden on nonprofits and contains specific recommendations for action. In an effort to make it easier for nonprofits with limited financial resources to obtain the services of AmeriCorps workers, the Corporation for National and Community Service waived the usual matching requirements in the wake of the 2005 hurricanes. In addition, FEMA is taking steps to address challenges regarding the training of its VAL staff. Following an earlier GAO recommendation that VALs could benefit from additional training regarding federal recovery resources, FEMA issued a VAL handbook and is developing several VAL training courses that it expects to implement by the end of 2010. Finally, although there has been a lack of specific guidance regarding the role of nonprofits in disaster recovery, the federal government has taken steps to address this gap. FEMA and HUD have led a multi-agency effort that resulted in the development of a draft National Disaster Recovery Framework. Among other things, this framework contains specific information about the roles and responsibilities of nonprofits in disaster recovery. GAO is not making new recommendations in this report but discusses the implementation status of a relevant prior recommendation. |
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Over the past decade, VA’s system of health care for veterans has undergone a dramatic transformation, shifting from predominantly hospital-based care to primary reliance on outpatient care. As VA increased its emphasis on outpatient care rather than inpatient care, it was left with an increasingly obsolete infrastructure, including many hospitals built or acquired more than 50 years ago in locations that are sometimes far from where veterans live. To address its obsolete infrastructure, VA initiated its CARES process— the first comprehensive, long-range assessment of its health care system’s capital asset requirements since 1981. CARES was designed to assess the appropriate function, size, and location of VA facilities in light of expected demand for VA inpatient and outpatient health care services through fiscal year 2022. Through CARES, VA sought to enhance outpatient and inpatient care, as well as special programs, such as spinal cord injury, through the appropriate sizing, upgrading, and locating of VA facilities. Table 2 lists key milestones of the CARES process. We have previously reported that a range of capital asset alignment alternatives were considered throughout the CARES process, which adheres to capital planning best practices. Moreover, there was relatively consistent agreement among the DNCP prepared by VA, the CARES Commission appointed by the VA Secretary to make alignment recommendations, and the Secretary as to which were the best alternatives to pursue. Although the Secretary tended to agree with the CARES Commission’s recommendations, the extent to which he agreed varied by alignment alternative. In particular, the Secretary always agreed with the commission’s recommendations to build new facilities, enter into enhanced use leases, and collaborate with the Department of Defense and universities, but was less likely to agree with the CARES Commission’s recommendations to contract out or close facilities. The decisions that emerged from the CARES process will result in an overall expansion of VA’s capital assets. According to VA officials, rather than show that VA should downsize its capital asset portfolio, the CARES process revealed service gaps and needed infrastructure improvements. We also reported that a number of factors shaped and in some cases limited the range of alternatives VA considered during the CARES process. These factors included competing stakeholder interests; facility condition and location; veterans’ access to facilities; established relationships between VA and health care partners, such as DOD and university medical affiliates; and legal restrictions. The challenge of misaligned infrastructure is not unique to VA. We identified federal real property management as a high-risk area in January 2003 because of the nationwide importance of this issue for all federal agencies. We did this to highlight the need for broad-based transformation in this area, which, if well implemented, will better position federal agencies to achieve mission effectiveness and reduce operating costs. But VA and other agencies face common challenges, such as competing stakeholder interests in real property decisions. In VA’s case, this involves achieving consensus among such stakeholders as veterans service organizations, affiliated medical schools, employee unions, and communities. We have previously reported that competing interests from local, state, and political stakeholders have often impeded federal agencies’ ability to make real property management decisions. As a result of competing stakeholder interests, decisions about real property often do not reflect the most cost-effective or efficient alternative that is in the interest of the agency or the government as a whole but instead reflect other priorities. In particular, this situation often arises when the federal government attempts to consolidate facilities or otherwise dispose of unneeded assets. Through the CARES process, VA gained the tools and information needed to plan capital investments. As part of the CARES process, VA modified an actuarial model that it used to project VA budgetary needs. According to VA, the modifications enabled the model to produce 20-year forecasts of the demand for services and provided for more accurate assessments of veterans’ reliance on VA services, capacity gaps, and market penetration rates. The information provided by the model allowed VA to identify service needs and infrastructure gaps, in part by comparing the expected location of veterans and demand for services in years 2012 through 2022 with the current location and capacity of VA health care services within each network. In addition to modifying the model, VA conducted facility condition assessments on all of its real property holdings as part of the CARES process. These assessments provided VA information about the condition of its facilities, including their infrastructure needs. VA continues to use the tools developed through CARES as part of its capital planning process. For example, VA conducts facility condition assessments for each real property holding every 3 years on a rotating basis. In addition, VA uses the modified actuarial model to update its workload projections each year, which are used to inform the annual capital budget process. The CARES process serves as the foundation for VHA’s capital planning efforts. The first step in VHA’s capital budget process is for networks to submit conceptual papers that identify capital projects that will address service or infrastructure gaps identified in the CARES process. The Capital Investment Panel, which consists of representatives from each VA administration and staff offices, reviews, scores, and ranks these papers. The Capital Investment Panel also identifies the proposals that will be sent forward for additional analysis and review, and may ultimately be included as part of VA’s budget request. According to VA officials, all capital projects must be based on the CARES planning model to advance through VHA’s capital planning process. On the basis of CARES-identified infrastructure needs and service gaps, VA identified more than 100 major capital projects in 37 states, the District of Columbia, and Puerto Rico. In addition to these projects, the CARES planning model identified service needs and infrastructure gaps at other locations throughout the VA system. The model is updated annually to reflect new information. VHA’s 5-year Capital Plan outlines CARES implementation and identifies priority projects that will improve the environment of care at VA medical facilities and ensure more effective operations by redirecting resources from the maintenance of vacant and underutilized buildings to investments in veterans’ health care. In VA’s fiscal year 2010 budget submission, VA requested about $1.1 billion to fund 12 VHA major construction projects and about $507 million for VHA minor construction projects. VA has begun implementing some CARES decisions. Specifically, VA is currently in varying stages (e.g., planning or construction) of implementing 34 of the major capital projects that were identified in the CARES process. Eight major capital CARES projects are complete. Although VA is moving forward with the implementation of some CARES decisions, we previously reported that a number of VA officials and stakeholders, including representatives from veteran service organizations and local community groups, view the implementation process as too lengthy and lacking transparency. For instance, stakeholders in Big Spring, Texas, noted that it took almost 2 years for the Secretary to decide whether to close the facility. During this period, there was a great deal of uncertainty about the future of the facility. As a result, there were problems in attracting and retaining staff at the facility, according to network and local VA officials. We also previously reported that a number of stakeholders we spoke with indicated that the implementation of CARES decisions has been influenced by competing stakeholders’ interests—thereby undermining the process. In its February 2004 report, the CARES Commission also noted that stakeholder and community pressure can act as a barrier to change, by pressuring VA to maintain specific services or facilities. In 2007, we reported that VA does not use, or in some cases does not have, performance measures to assess its progress in implementing CARES or whether CARES is achieving the intended results. Performance measures allow an agency to track its progress in achieving intended results. Performance measures can also help inform management decision making by, for example, indicating a need to redirect resources or shift priorities. In addition, performance measures can be used by stakeholders, such as veterans’ service organizations or local communities, to hold agencies accountable for results. Although VA has over 100 performance measures to monitor other agency programs and activities, these measures either do not directly link to the CARES goals or VA does not use them to centrally monitor the implementation and impact of CARES decisions. We also reported that VA lacked critical data, including data on the cost of and timelines for implementing CARES projects and the potential savings that can be generated by realigning resources. Given the importance of the CARES process, we previously recommended that VA develop performance measures for CARES. Such measures would allow VA officials to monitor the implementation and impact of CARES decisions as well as allow stakeholders to hold VA accountable for results. In responding to our recommendation, VA created the CARES Implementation Monitoring Working Group. This working group has identified performance measures for CARES and the group will monitor the implementation and impact of CARES decisions. VA has a variety of legal authorities available to help it manage real property. These authorities include enhanced-use leases (EUL), sharing agreements, and outleases. (See table 3 for descriptions of these authorities.) VA uses these authorities to help reduce underutilized and vacant property. For example, in 2005, in Lakeside (Chicago), Illinois, VA reduced its underutilized property at the medical center by nearly 600,000 square feet by using its EUL authority with Northwestern Memorial Hospital. VA also uses these authorities to generate financial benefits. For example, the VA Greater Los Angeles Healthcare System enters into a number of sharing agreements with the film industry. VA officials told us that these agreements are typically temporary arrangements—sometimes lasting a few days—during which film production companies use VA facilities to shoot television or movie scenes. According to VA officials, these agreements generate roughly $1 million to $2 million a year. However, legal restrictions associated with implementing some authorities affect VA’s ability to dispose of and reuse property in some locations. For example, legal restrictions limit VA’s ability to dispose of and reuse property in West Los Angeles and North Hills (Sepulveda) California. The Cranston Act of 1988 precluded VA from taking any action to dispose of 109 of 388 acres in the West Los Angeles medical center and 46 acres of the Sepulveda ambulatory care center. In 1991, when EUL authority was provided to VA, VA was prohibited from entering into any EUL relating to the 109 acres at West Los Angeles unless the lease was specifically authorized by law or for a childcare center. The Consolidated Appropriations Act of 2008 expanded the EUL restrictions to include the entire West Los Angeles medical center. The Consolidated Appropriations Act of 2008 also prohibits VA from declaring as excess or otherwise taking action to exchange, trade, auction, transfer, or otherwise dispose of any portion of the 388 acres within the VA West Los Angeles medical center. Budgetary and administrative disincentives associated with some of VA’s available authorities may also limit VA’s ability to use these authorities to reduce its inventory of underutilized and vacant property. For example: VA cannot retain revenue that it obtains from outleases, revocable licenses, or permits; such receipts must be deposited in the Department of the Treasury. VA has said that, except for EUL disposals, restrictions on retaining proceeds from disposal of properties are a disincentive for VA to dispose of property. In 2004, VA was authorized until 2011 to transfer real property under its jurisdiction or control and to retain the proceeds from the transfer in a capital asset fund for property transfer costs, including demolition, environmental remediation, and maintenance and repair costs. In our previous work, we reported several administrative and oversight challenges with using capital asset funds. Moreover, VA officials told us that this authority has significant limitations on the use of any funds generated by disposal. For example, VA officials we spoke with reported that the capital asset fund is too cumbersome to be used, and VA does not have immediate access to the funds because they have to be reappropriated before VA can use them. The maximum term for an outlease, according to VHA law, is 3 years; according to VA officials, this time limit can discourage potential lessees from investing in the property. Implementing an EUL agreement can take a long time. According to VA officials, EULs are a relatively new tool, and every EUL is unique and involves a learning process. In addition, VA officials commented that the EUL process can be complicated. According to VA officials, the average time it takes to implement an EUL can range generally from 9 months to 2 years. The officials noted that land due diligence requirements (such as environmental and historic reviews), public hearings, congressional notification, lease drafting, negotiation, and other phases contribute to the length of the overall process. VA has taken actions to reduce the time it takes to implement an EUL agreement, but despite changes to streamline the EUL process, some officials stated that it is still time consuming and cumbersome. VA can dispose of underutilized and vacant property under the McKinney- Vento Act to other federal agencies and programs for the homeless. However, VA officials stated that disposing of property under the McKinney-Vento Act also can be time-consuming and cumbersome. According to VA officials, the process can average 2 years. Under this law, all properties that the Department of Housing and Urban Development deems suitable for use by the homeless go through a 60-day holding period, during which the property is ineligible for disposal for any other purpose. Interested representatives of the homeless submit to the Department of Health and Human Services (HHS) a written notice of their intent to apply for a property for homeless use during the 60-day holding period. After applicants have given notice of their intent to apply, they have up to 90 days to submit their application to HHS, and HHS has the discretion to extend the time frame if necessary. Once HHS has received an application, it has 25 days to review, accept, or decline the application. Furthermore, according to VA officials, VA may not receive compensation from agreements entered into under the McKinney-Vento Act. Despite these challenges, VA has used these legal authorities to help reduce its inventory of unneeded space. In 2008, we reported that VA reduced underutilized space ( i.e., space not used to full capacity) in its buildings by approximately 64 percent from 15.4 million square feet in fiscal year 2005 to 5.6 million square feet in fiscal year 2007. Although the number of vacant buildings decreased over the period, the amount of vacant space remained relatively unchanged at 7.5 million square feet. We estimated VA spent $175 million in fiscal year 2007 operating underutilized or vacant space at its medical facilities. While VA’s use of various legal authorities, such as EULs and sharing agreements, likely contributed to VA’s overall reduction of underutilized space since fiscal year 2005, VA does not track the overall effect of using these authorities on its space reductions. Without such information, VA does not know what effect these authorities are having on its effort to reduce underutilized or vacant space or which types of authorities have the greatest effect. We concluded that further reductions in underutilized and vacant space will largely depend on VA developing a better understanding of why changes occurred and what impact these agreements had. Therefore, we recommended in our 2008 report that VA track, monitor, and evaluate square footage reductions and financial and nonfinancial benefits resulting from new agreements at the building level by fiscal year in order to better understand the usefulness of these authorities and their overall effect on VA’s inventory of underutilized and vacant property from year to year. The officials said that tracking financial benefits will require a real property cost accounting system which VA is in the process of developing. According to VA officials, VA will institute a system in June 2009 that will track square footage reductions at the building level, but the system will not track financial benefits at this level. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to questions from you or other Members of the Subcommittee. For further information on this statement, please contact Mark L. Goldstein at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony were Nikki Clowers, Hazel Gumbs, Edward Laughlin, Susan Michal-Smith, and John W. Shumann. 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. | Through its Veterans Health Administration (VHA), the Department of Veterans Affairs (VA) operates one of the largest integrated health care systems in the country. In 1999, GAO reported that better management of VA's large inventory of aged capital assets could result in savings that could be used to enhance health care services for veterans. In response, VA initiated a process known as Capital Asset Realignment for Enhanced Services (CARES). Through CARES, VA sought to determine the future resources needed to provide health care to our nation's veterans. This testimony describes (1) how CARES contributes to VHA's capital planning process, (2) the extent to which VA has implemented CARES decisions, and (3) the types of legal authorities that VA has to manage its real property and the extent to which VA has used these authorities. The testimony is based on GAO's body of work on VA's management of its capital assets, including GAO's 2007 report on VA's implementation of CARES (GAO-07-408). The CARES process provides VA with a blueprint that drives VHA's capital planning efforts. As part of the CARES process, VA adapted a model to estimate demand for health care services and to determine the capacity of its current infrastructure to meet this demand. VA continues to use this model in its capital planning process. The CARES process resulted in capital alignment decisions intended to address gaps in services or infrastructure. These decisions serve as the foundation for VA's capital planning process. According to VA officials, all capital projects must be based on demand projections that use the planning model developed through CARES. VA has started implementing some CARES decisions, but does not centrally track their implementation or monitor the impact of their implementation on its mission. VA is in varying stages (e.g., planning or construction) of implementing 34 of the major capital projects that were identified in the CARES process and has completed 8 projects. Our past work found that, while VA had over 100 performance measures to monitor other agency programs and activities, these measures either did not directly link to the CARES goals or VA did not use them to centrally monitor the implementation and impact of CARES decisions. Without this information, VA could not readily assess the implementation status of CARES decisions, determine the impact of such decisions, or be held accountable for achieving the intended results of CARES. VA has recently created the CARES Implementation Working Group, which has identified performance measures for CARES and will monitor the implementation and impact of CARES decisions in the future. VA has a variety of legal authorities available, such as enhanced-use leases, sharing agreements, and others, to help it manage real property. However, legal restrictions and administrative- and budget-related disincentives associated with implementing some authorities affect VA's ability to dispose and reuse property in some locations. For example, legal restrictions limit VA's ability to dispose of and reuse property in West Los Angeles and Sepulveda. Despite these challenges, VA has used these legal authorities to help reduce underutilized space (i.e., space not used to full capacity). In 2008, we reported that VA reduced underutilized space in its buildings by approximately 64 percent from 15.4 million square feet in fiscal year 2005 to 5.6 million square feet in fiscal year 2007. While VA's use of various legal authorities likely contributed to VA's overall reduction of underutilized space since fiscal year 2005, VA does not track the overall effect of using these authorities on space reductions. Not having such information precludes VA from knowing what effect these authorities are having on reducing underutilized or vacant space or knowing which types of authorities have the greatest effect. According to VA officials, VA will institute a system in 2009 that will track square footage reductions at the building level. |
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The U.S. export control system for items with military applications is divided into two regimes. State licenses munitions items, which are designed, developed, configured, adapted, or modified for military applications, and Commerce licenses most dual-use items, which are items that have both commercial and military applications. Although the Commerce licensing system is the primary vehicle to control dual-use items, some dual-use items—those of such military sensitivity that stronger control is merited—are controlled under the State system. Commercial communications satellites are intended to facilitate civil communication functions through various media, such as voice, data, and video, but they often carry military data as well. In contrast, military communications satellites are used exclusively to transfer information related to national security and have one or more of nine characteristics that allow the satellites to be used for such purposes as providing real-time battlefield data and relaying intelligence data for specific military needs. There are similarities in the technologies used to integrate a satellite to its launch vehicle and ballistic missiles. In March 1996, the executive branch announced a change in licensing jurisdiction transferring two items—commercial jet engine hot section technologies and commercial communications satellites—from State to Commerce. In October and November 1996, Commerce and State published regulations implementing this change, with Commerce defining enhanced export controls to apply when licensing these two items. State and Commerce’s export control systems are based on fundamentally different premises. The Arms Export Control Act gives the State Department the authority to use export controls to further national security and foreign policy interests, without regard to economic or commercial interests. In contrast, the Commerce Department, as the overseer of the system created by the Export Administration Act, is charged with weighing U.S. economic and trade interests along with national security and foreign policy interests. Differences in the underlying purposes of the control system are manifested in the systems’ structure. Key differences reflect who participates in licensing decisions, scope of controls, time frame for the decision, coverage by sanctions, and requirements for congressional notification. Participants. Commerce’s process involves five agencies—the Departments of Commerce, State, Defense, Energy, and the Arms Control and Disarmament Agency. Other agencies can be asked to review specific license applications. For most items, Commerce approves the license if there is no disagreement from reviewing agencies. When there is a disagreement, the chair of an interagency group known as the Operating Committee, a Commerce official, makes the initial decision after receiving input from the reviewing agencies. This decision can be appealed to the Advisory Committee on Export Policy, a sub-cabinet level group comprised of officials from the same five agencies, and from there to the cabinet-level Export Administration Review Board, and then to the President. In contrast, the State system commonly involves only Defense and State. Other agencies, such as the Arms Control and Disarmament Agency, can be asked to review specific license applications. No formal multi-level process exists. Day-to-day licensing decisions are made by the Director, Office of Defense Trade Controls, but disagreements could be discussed through organizational levels up to the Secretary of State. This difference in who makes licensing decisions underscores the weight the two systems assign to economic and commercial interests relative to national security concerns. Commerce, as the advocate for commercial interests, is the focal point for the process and makes the initial determination. Under States’ system, Commerce is not involved, underscoring the primacy of national security and foreign policy concern. We should note that the intelligence community is brought into the licensing process in different ways. Under both systems, Defense could refer license requests to the National Security Agency, the Defense Intelligence Agency, and other components. According to Defense, license requests for commercial communication satellites are frequently referred to these agencies. Communications satellites that are exported under State-approved technical assistance agreements (including launch technology) are also referred to the interagency Missile Technology Export Committee, which includes the intelligence community. The executive order governing the Commerce system provides for participation by the Director of Central Intelligence as a non-voting member on the Export Administration Review Board and for participation by representatives of the Central Intelligence Agency in the Advisory Committee on Export Policy and the Operating Committee. Scope of controls. The two systems also differ in the scope of controls. Commerce controls items to specific destinations for specific reasons. Some items are subject to controls targeted to former communist countries while others are controlled to prevent them from reaching countries for reasons that include antiterrorism, regional stability, and nonproliferation. In contrast, munitions items are controlled to all destinations, and State has broad authority to deny a license; it can deny a request simply with the explanation that it is against U.S. national security or foreign policy interests. Time frames. Commerce’s system is more transparent to the license applicant than State’s system. Time frames are clearly established, the review process is more predictable, and more information is shared with the exporter on the reasons for denials or conditions on the license. Congressional notification. Exports under State’s system that exceed certain dollar thresholds (including all satellites) require notification to the Congress. Licenses for Commerce-controlled items are not subject to congressional notification, with the exception of items controlled for antiterrorism. Sanctions. The applicability of sanctions may also differ under the two export control systems. Commercial communication satellites are subject to two important types of sanctions: (1) Missile Technology Control Regime and (2) Tiananmen Square sanctions. Under Missile Technology sanctions, both State and Commerce are required to deny the export of identified, missile-related goods and technologies. Communication satellites are not so identified but contain components that are identified as missile-related. The National Security Council left the decision of how to treat such exports to Commerce and State. When the United States imposed Missile Technology sanctions on China in 1993, exports of communication satellites controlled by State were not approved while exports of satellites controlled by Commerce were permitted. Under Tiananmen Square sanctions, satellites licensed by State and Commerce have identical treatment. These sanctions prohibit the export of satellites for launch from launch vehicles owned by China. However, the President can waive this prohibition if such a waiver is in the national interest. Export control of commercial communications satellites has been a matter of contention over the years among U.S. satellite manufacturers and the agencies involved in their export licensing jurisdiction—the Departments of Commerce, Defense, State, and the intelligence community. To put their views in context, we would now like to provide a brief chronology of key events in the transfer of commercial communications satellites to the Commerce Control List. As the demand for satellite launch capabilities grew, U.S. satellite manufacturers looked abroad to supplement domestic facilities. In 1988, President Reagan proposed that China be allowed to launch U.S. origin commercial satellites. The United States and China signed an agreement in January 1989 under which China agreed to charge prices for commercial launch services similar to those charged by other competitors for launch services and to launch nine U.S.-built satellites through 1994. Following the June 1989 crackdown by the Chinese government on peaceful political demonstrations on Tiananmen Square in Beijing, President Bush imposed export sanctions on China. President Bush subsequently waived these sanctions for the export of three U.S.-origin satellites for launch from China. In February 1990, the Congress passed the Tiananmen Square sanctions law (P.L. 101-246) to suspend certain programs and activities relating to the Peoples Republic of China. This law also suspends the export of U.S. satellites for launch from Chinese-owned vehicles. In November 1990, the President ordered the removal of dual-use items from State’s munitions list unless significant U.S. national security interests would be jeopardized. This action was designed to bring U.S. controls in line with the industrial (dual-use) list maintained by the Coordinating Committee for Multilateral Export Controls, a multilateral export control arrangement. Commercial communications satellites were contained on the industrial list. Pursuant to this order, State led an interagency review, including officials from Defense, Commerce, and other agencies to determine which dual-use items should be removed from State’s munitions list and transferred to Commerce’s jurisdiction. The review was conducted between December 1990 and April 1992. As part of this review, a working group identified and established performance parameters for the militarily sensitive characteristics of communications satellites. During the review period, industry groups supported moving commercial communications satellites, ground stations, and associated technical data to the Commerce Control List. In October 1992, State issued regulations transferring jurisdiction of some commercial communications satellites to Commerce. These regulations also defined what satellites remained under its control by listing nine militarily sensitive characteristics that, if included in non-military satellites, warranted their control on State’s munitions list. (These characteristics are discussed in appendix I.) The regulations noted that parts, components, accessories, attachments, and associated equipment (including ground support equipment) remained on the munitions list, but could be included on a Commerce license application if the equipment was needed for a specific launch of a commercial communications satellite controlled by Commerce. After the transfer, Commerce noted that this limited transfer only partially fulfilled the President’s 1990 directive. Export controls over commercial communication satellites were again taken up in September 1993. The Trade Promotion Coordinating Committee, an interagency body composed of representatives from most government agencies, issued a report in which it committed the administration to review dual-use items on the munitions list, such as commercial communication satellites, to expedite moving them to the Commerce Control List. Industry continued to support the move of commercial communications satellites, ground stations, and associated technical data from State to Commerce control. In April 1995, the Chairman of the President’s Export Council met with the Secretary of State to discuss issues related to the jurisdiction of commercial communications satellites and the impact of sanctions that affected the export and launch of satellites to China. Also in April 1995, State formed the Comsat Technical Working Group to examine export controls over commercial communications satellites and to recommend whether the militarily sensitive characteristics of satellites could be more narrowly defined consistent with national security and intelligence interests. This interagency group included representatives from State, Defense, the National Security Agency, Commerce, the National Aeronautics and Space Agency, and the intelligence community. The interagency group reported its findings in October 1995. Consistent with the findings of the Comsat Technical Working Group and with the input from industry through the Defense Trade Advisory Group, the Secretary of State denied the transfer of commercial communications satellites to Commerce in October 1995 and approved a plan to narrow, but not eliminate, State’s jurisdiction over these satellites. Unhappy with State’s decision to retain jurisdiction of commercial communications satellites, Commerce appealed it to the National Security Council and the President. In March 1996, the President, after additional interagency meetings on this issue, decided to transfer export control authority for all commercial communications satellites from State to Commerce. A key part of these discussions was the issuance of an executive order in December 1995 that modified Commerce’s procedures for processing licenses. This executive order required Commerce to refer all licenses to State, Defense, Energy, and the Arms Control and Disarmament Agency. This change addressed a key shortcoming that we had reported on in several prior reviews. In response to the concerns of Defense and State officials about this transfer, Commerce agreed to add additional controls to exports of satellites designed to mirror the stronger controls already applied to items on State’s munitions list. Changes included the establishment of a new control, the significant item control, for the export of sensitive satellites to all destinations. The policy objective of this control—consistency with U.S. national security and foreign policy interests—is broadly stated. The functioning of the Operating Committee, the interagency group that makes the initial licensing determination, was also modified. This change required that the licensing decision for these satellites be made by majority vote of the five agencies, rather than by the chair of the Committee. Satellites were also exempted from other provisions governing the licensing of most items on Commerce’s Control List. In October and November 1996, Commerce and State published changes to their respective regulations, formally transferring licensing jurisdiction for commercial communications satellites with militarily sensitive characteristics from State to Commerce. Additional procedural changes were implemented through an executive order and a presidential decision directive issued in October 1996. According to Commerce officials, the President’s March 1996 decision reflected Commerce’s long-held position that all commercial communications satellites should be under its jurisdiction. Commerce argued that these satellites are intended for commercial end use and are therefore not munitions. Commerce maintained that transferring jurisdiction to the dual-use list would also make U.S. controls consistent with treatment of these items under multilateral export control regimes. Manufacturers of satellites supported the transfer of commercial communications satellites to the Commerce Control List. They believed that such satellites are intended for commercial end use and are therefore not munitions subject to State’s licensing process. They also believed that the Commerce process was more responsive to business due to its clearly established time frames and predictability of the licensing process. Under State’s jurisdiction, the satellites were subject to Missile Technology sanctions requiring denial of exports and to congressional notifications. Satellite manufacturers also expressed the view that some of the militarily sensitive characteristics of communications satellites are no longer unique to military satellites. State and Defense point out that the basis for including items on the munitions list is the sensitivity of the item and whether it has been specifically designed for military applications, not how the item will be used. These officials have expressed concern about the potential for improvements in missile capabilities through disclosure of technical data to integrate the satellite with the launch vehicle and the operational capability that specific satellite characteristics could give a potential adversary. The process of planning a satellite launch takes several months, and there is concern that technical discussions between U.S. and foreign representatives may lead to the transfer of information on militarily sensitive components. Defense and State officials said they were particularly concerned about the technologies to integrate the satellite to the launch vehicle because this technology can also be applied to launch ballistic missiles to improve their performance and reliability. Accelerometers, kick motors, separation mechanisms, and attitude control systems are examples of equipment used in both satellites and ballistic missiles. State officials said that such equipment and technology merit control for national security reasons. They also expressed concern about the operational capability that specific characteristics, in particular, antijam capability, crosslinks, and baseband processing, could give a potential adversary. No export license application for a satellite launch has been denied under either the State or Commerce systems. Therefore, the conditions attached to the license are particularly significant. Exports of U.S. satellites for launch in China are governed by a government-to-government agreement addressing technology safeguards. This agreement establishes the basic authorities for the U.S. government to institute controls intended to ensure that sensitive technology is not inadvertently transferred to China. This agreement is one of three government-to-government agreements with China on satellites. The others address pricing and liability issues. During our 1997 review and in recent discussions, officials pointed to two principal safeguard mechanisms to protect technologies. These safeguard mechanisms include technology transfer control plans and the presence of Defense Department monitors during the launch of the satellites. State or Commerce may choose to include these safeguards as conditions to licenses. Technology transfer control plans are prepared by the exporter and approved by Defense. The plans outline the internal control procedures the company will follow to prevent the disclosure of technology except as authorized for the integration and launch of the satellite. These plans typically include requirements for the presence of Defense monitors at technical meetings with Chinese officials as well as procedures to ensure that Defense reviews and clears the release of any technical data provided by the company. Defense monitors at the launch help ensure that the physical security over the satellite is maintained and monitor any on-site technical meetings between the company and Chinese officials. Authority for these monitors to perform this work in China is granted under the terms of the government-to-government safeguards agreement. Additional government control may be exercised on technology transfers through State’s licensing of technical assistance and technical data. State technical assistance agreements detail the types of information that can be provided and give Defense an opportunity to scrutinize the type of information being considered for export. Technical assistance agreements, however, are not always required for satellite exports to China. While such licenses were required for satellites licensed for export by State, Commerce licensed satellites do not have a separate technical assistance licensing requirement. The addition of new controls over satellites transferred to Commerce’s jurisdiction in 1996 addressed some of the key areas where the Commerce procedures are less stringent than those at State. There remain, however, differences in how the export of satellites are controlled under these new procedures. Congressional notification requirements no longer apply, although the Congress is currently notified because of the Tiananmen waiver process. Sanctions do not always apply to items under Commerce’s jurisdiction. For example, under the 1993 Missile Technology sanctions, sanctions were not imposed on satellites that include missile-related components. Defense’s power to influence the decision-making process has diminished since the transfer. When under State jurisdiction, State and Defense officials stated that State would routinely defer to the recommendations of Defense if national security concerns are raised. Under Commerce jurisdiction, Defense must now either persuade a majority of other agencies to agree with its position to stop an export or escalate their objection to the cabinet-level Export Administration Review Board, an event that has not occurred in recent years. Technical information may not be as clearly controlled under the Commerce system. Unlike State, Commerce does not require a company to obtain an export license to market a satellite. Commerce regulations also do not have a separate export commodity control category for technical data, leaving it unclear how this information is licensed. Commerce has informed one large satellite maker that some of this technical data does not require an individual license. Without clear licensing requirements for technical information, Defense does not have an opportunity to review the need for monitors and safeguards or attend technical meetings to ensure that sensitive information is not inadvertently disclosed. The additional controls applied to the militarily sensitive commercial communications satellites transferred to Commerce’s control in 1996 were not applied to the satellites transferred in 1993. These satellites are reviewed under the normal interagency process and are subject to more limited controls. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions you or other Members of the Committee may have. Antennas and/or antenna systems with the ability to respond to incoming interference by adaptively reducing antenna gain in the direction of the interference. Ensures that communications remain open during crises. Allows a satellite to receive incoming signals. An antenna aimed at a spot roughly 200 nautical miles in diameter or less can become a sensitive radio listening device and is very effective against ground-based interception efforts. Provide the capability to transmit data from one satellite to another without going through a ground station. Permits the expansion of regional satellite communication coverage to global coverage and provides source-to-destination connectivity that can span the globe. It is very difficult to intercept and permits very secure communications. Allows a satellite to switch from one frequency to another with an on-board processor. On-board switching can provide resistance to jamming of signals. Scramble signals and data transmitted to and from a satellite. Allows telemetry and control of a satellite, which provides positive control and denies unauthorized access. Certain encryption capabilities have significant intelligence features important to the National Security Agency. Provide protection from natural and man-made radiation environment in space, which can be harmful to electronic circuits. Permit a satellite to operate in nuclear war environments and may enable its electronic components to survive a nuclear explosion. (continued) Allows rapid changes when the satellite is in orbit. Military maneuvers require that a satellite have the capability to accelerate faster than a certain speed to cover new areas of interest. Provides a low probability that a signal will be intercepted. High performance pointing capabilities provide superior intelligence-gathering capabilities. Used to deliver satellites to their proper orbital slots. If the motors can be restarted, the satellite can execute military maneuvers because it can move to cover new areas. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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A recorded menu will provide information on how to obtain these lists. | GAO discussed the military sensitivity of commercial communications satellites and the implications of the 1996 change in export licensing jurisdiction, focusing on: (1) key elements in the export control systems of the Departments of Commerce and State; (2) how export controls for commercial satellites have evolved over the years; (3) concerns and issues debated over the transfer of commercial communications satellites to the export licensing jurisdiction of Commerce; (4) safeguards that may be applied to commercial satellite exports; and (5) observations on the current export control system. GAO noted that: (1) the U.S. export control system--comprised of both the Commerce and State systems--is about managing risk; (2) exports to some countries involve less risk than to other countries and exports of some items involve less risk than others; (3) the planning of a satellite launch with technical discussions and exchanges of information taking place over several months, involves risk no matter which agency is the licensing authority; (4) recently, events have focused concern on the appropriateness of Commerce jurisdiction over communication satellites; (5) this is a difficult judgment; (6) by design, Commerce's system gives greater weight to economic and commercial concerns, implicitly accepting greater security risks; (7) by design, State's system gives primacy to national security and foreign policy concerns, lessening--but not eliminating--the risk of damage to U.S. national security interests; (8) the addition of new controls over satellites transferred to Commerce's jurisdiction in 1996 addressed some of the key areas where the Commerce procedures are less stringent than those of State; (9) there remain, however, differences in how the export of satellites is controlled under these new procedures; (10) Congress notification requirements no longer apply; (11) sanctions do not always apply to items under Commerce's jurisdiction; (12) the Department of Defense's power to influence the decisionmaking process has diminished since the transfer; (13) technical information may not be as clearly controlled under the Commerce system; and (14) the additional controls applied to the militarily sensitive commercial communications satellites transferred to Commerce's control in 1996 were not applied to the satellites transferred in 1993. |
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